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23 March 2020

Stirring the wealth, forces on march

Jaideep Billa, President, Wealth and Private banking, Intellect Design Arena

The total wealth of these million potential customers in MENA has been estimated at $2.3 trillion/iStock

by Kudakwashe Muzoriwa

If a measure of an industry is how well does it serve its local populace then the wealth management industry in MENA and especially GCC countries can at best be described to be in a state of ‘somnolence’.

However, if the measure used is the traditional measure of percentage of addressable assets covered by advice then the industry does much better. However, this state of affairs is not likely to continue. The wealth management industry will stand transformed in the coming years. The forces that will reshape the industry are already stirring.

Their march cannot be stopped. Smart bankers will see the opportunity created by these forces and make use of the first mover advantage to establish a dominant position in the market.

According to a BEMO research paper, of the close to million potential wealth customers in the MENA region, the affluent constitute 83 per cent, the high net worth individuals a further 16.33 per cent and the balance 0.6 per cent are the ultra-high net worth individuals. Approximately 60 per cent of these are in the GCC region.

The total wealth of these million potential customers in MENA has been estimated at $2.3 trillion. The 17 per cent HNW and UHNWI control about 74.3 per cent of the wealth, accounting for $1.7 trillion. The average wealth of this segment therefore comes to $10 million and the average wealth of the balance at $600,000.

Moody’s estimated that as of December 2018, GCC investment managers had nearly $260 billion in assets under management (AUM). This provides a fee yield of $3 to $5 billion, much of it from the HNI and UHNWI that constitute the 17 per cent of the market. Much of the industry’s efforts in MENA/GCC have therefore been directed at serving the 170,000 HNI and UHNWI.

There is very little attention given to the balance 83 per cent that constitute the affluent class. The affluent segment is defined as having savings between $100,000 to $1 million. The mass affluent market in both MENA and GCC is an underserved market. In contrast, India where the mass affluent market is a highly contested and well served market.

The mass affluent in India itself is defined at a much lower bar of having a savings of between $25,000 and $125,000. If the players in India can make profits from this segment clearly, the industry in GCC and MENA is being sluggish in not serving this market enthusiastically. Of course, the industry is full of very smart people who are taking very rational decisions.

There is a reason for focusing on the upper crest. Being a concentrated market, it is easier to make profits here. Relationships suffice. Technology is not a must. Complexities of scale do not exist. To be fair to the industry the competition for the HNI and UHNWI is increasing.

Credit for a dynamic service marketplace for HNI and UHNWI goes to the visionary and dynamic governments in these regions. Governments such as those in Dubai and Abu Dhabi have been quick to spot the merits of the China model and have adopted it within financial services sector in their jurisdictions.

China first presented itself as an attractive market, then encouraged manufacturing bases to be set up within the country and then used that to build a formidable capability to compete on the world stage. Following the China model, the visionary establishments in MENA have set up centres such as DIFC to serve the local populace. These centres have contributed significantly to the competition in the HNI and UHNWI segment.

If we go by Moody’s estimate, then only $260 billion of the potential $2.3 trillion is with investment managers and rest is locked up in real estate. Without quibbling about the exact numbers, it is clear that a sizable wealth exists outside the purview of investment managers. This large gap does provide a fair amount of headroom to grow and private bankers will continue to migrate to these markets.

This inward migration of private bankers will help cement the reputation of centres such as DIFC as financial centres of choice. That in turn will help deepen the market and attract more talent. With passage of time the markets will become super competitive and in search of profits some of this talent will flow to serve the needs of the affluent segment.

The resultant increase in the ‘quality of service’ available to the affluent will, in turn spur the demand for more services. This deepening of the markets will galvanise the mass affluent segments into action. This concentration of skills in the market then is the first force that will shape the future markets.

A second force that is stirring is the slow withdrawal of the welfare state. The GCC region in specific is beset by the shift in energy usage patterns that will further pressure the economies and state finances. States across the GCC are exhibiting foresight and responding prudently. For instance, the policy of Emiratisation—or Tawteen in Arabic—is a key priority of the UAE.

Similar farsighted and seismic changes are afoot in Saudi Arabia. The statistics show that in 2017 more than 80 per cent of employed Emiratis worked in the federal or local government, with fewer than one in ten in the private sector. In addition to this, many Emiratis work for government-owned or semi-government businesses such as local banks.

To use the China simile as the ‘iron rice bowl’ is withdrawn the middle classes will have to plan for their retirement. (‘Iron rice bowl’ is a Chinese term used to refer to an occupation with guaranteed job security). Demand for retirement planning by the mass affluent segment will emerge as an important driver for wealth management services.

 The third force that will reshape the industry is the age demographics. The current median age across GCC is around 27. As this population ages, there would be a greater demand for better access to financial planning tools. The population of the GCC is expected to grow about 20 per cent in the next 15 years.

While the GCC adds about 750,000 people every year, the larger MENA region is adding five to seven million people per year. The welfare systems that have been designed are for the current population and will not be able to take care of a much larger populace. With more people left to fend for themselves there will be a growing need for more widespread financial planning and wealth management.

A fourth emergent force is the changing family and labour structure. As more women move into the workforce the relative affluence of families will grow. Women will have larger say in home finances too. Women look for safety products and being inclined to long term planning make ideal consumers for wealth management services. As they enter workforce, they too will make a demand for better financial services to be provided.

The biggest constraint to providing service to the mass affluent class is the cost of serving them. Robo advisory has been touted as one of the solutions. Robo-advisors operate as asset allocators rather than true wealth managers. While there is no doubt that a robo-advisor or two or three would be successful, but the real winner would be the one who is able to offer true advisory services to the affluent class.

True growth will not be in robo-advisors that dis-intermediate the relationship managers; true growth will be in assisted-advisory where a relationship manager or an advisor is able to use technology to reduce cost of service and serve a much larger number of customers. People want the comfort of talking to people when entrusting their hard-earned savings for management.

Systems that augment the relationship managers and advisors, is where the leaders of tomorrow must invest today. The ones who take the first mover advantage would achieve unassailable position. It takes foresight and not much more to acquire such systems. A typical all-inclusive operating cost of such a system would be around $1 million per year.

Assuming an AUM range of $100,000 to $500,000 per affluent person and a fee of one per cent of AUM, an institution would need between 1000 customers at the higher end and 250 customers at the lower end to break even.

Spread over five years and making approximations about interest costs would mean acquiring 250 mass affluent customers a year at the upper end and 50 customers at a lower end for the system to pay for itself. Not such a daunting challenge if you want to conquer the future; much lesser so, if it is the current private banking providers foraying into wealth management since they can leverage the same platform across both constituencies.

There is no stopping the march of these forces. Those who can read the straws in the wind, and have the courage, to intercept the future through judicious moves today, will command the future.





CPI Financial was established in Dubai in 1999 to meet the needs of an ever-expanding financial community, offering a comprehensive portfolio of market-leading products and services tailor-made for the banking and financial services sectors.

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