latest-news-headlines Market Intelligence /marketintelligence/en/news-insights/latest-news-headlines/wealth-managers-anxious-about-rich-millennials-as-demands-regulations-shift-43818879 content esgSubNav
In This List

Wealth managers anxious about rich millennials as demands, regulations shift

Podcast

Street Talk Episode 87

Blog

A New Dawn for European Bank M&A Top 5 Trends

Blog

Insight Weekly: US banks' loan growth; record share buybacks; utility M&A outlook

Blog

Banking Essentials Newsletter 2021: December Edition


Wealth managers anxious about rich millennials as demands, regulations shift

Wealth managers and private bankers around the world are racing to adapt to different demands from regulators and a new generation of millionaires, as trillions are set to pass into the hands of millennials in the coming years.

In aggregate, the millennial generation globally will inherit $2.1 trillion over the coming 20 years from billionaire family elders, while Baby Boomer Americans are expected to have passed down $30 trillion to their offspring between 2011 and 2050, according to data compiled by Swiss bank UBS. UBS defines millennials as those born between 1982 and 1998.

The wealth management industry seeks to attract this money, but fears are growing among private bankers that between new technologies giving customers direct control of investments, market regulations such as MiFID II and the different personality characteristics of the young and rich, much of it will slip through their fingers.

Tougher operating environment

The operating environment for financial companies specialized in wealthy clients is becoming increasingly difficult, and profitability at industry level is harder to achieve, said Meghna Mukerjee, a senior analyst on the wealth management team at consultancy AITE Group in London.

The world's top 25 wealth managers and private banks, with a collective 63.2% market share, had a mixed year in 2016, according to the most recent data compiled by the Scorpio Partnership, a London-based research house. While total AUM from high-net-worth clients grew by 3.78% compared to 2015, reaching $13.3 trillion, net new money declined by 0.03% and operating income grew by just 0.04% on average.

Meanwhile, some of Europe's biggest banks have lost business, with Deutsche Bank AG's wealth assets under management declining the most, by 28.29% over 2016, to $227.2 billion. ABN AMRO Group NV, Crédit Agricole Group and HSBC Holdings PLC also saw outflows, as did the U.S.-based JPMorgan Chase & Co. At the same time, Asian banks such as China Merchants Bank Co. Ltd. and Bank of China Ltd. have made significant gains, Scorpio said.

One factor impacting the sector is the changing profile of clients, as younger people want more control over their money and are more careful about the fees their banks charge.

"Their habits are influenced by retail services technology and social media," Mukerjee said. "They are better informed, not as patient and more price-conscious ... they do not want to spend money on bankers."

Another issue is loyalty, or lack of it, she said, with up to 85% of heirs changing banks when they take charge of the family fortune.

"[Millennials] do not believe traditional bankers will understand their needs in a way that somebody more like them will," Mukerjee said, adding that firms are hiring younger relationship managers to overcome this problem. Such attitudes are prevalent among recently rich technology entrepreneurs, many of whom have become millionaires before the age of 30, she said.

Contemporary mores are also driving young investors toward so-called ESG options, which private banks have been slow to take up. ESG is shorthand for environmental, social and governance criteria by which the behavior of a company is measured.

Fiona Reynolds, managing director at Principles for Responsible Investment, an industry association, said an increasing number of private banks are joining her organization to allay the concerns of younger clients, who not only wish to make money but are also worried about environmental protection, economic inequality and discrimination.

"Millennials care about sustainability," she said in an interview. "They recognize that investment has got a role to play."

Asset managers, including those handling private clients, have so far allocated roughly $30 trillion to sustainable investments, she said.

Tougher regulations

The industry is also coming under growing pressure from tougher regulations around financial crime controls and investment transparency, said Tomasz Grzelak, an analyst with Baader Helvea in Zurich. Banks with less than €10 billion in AUM are particularly affected, he said.

The updated Markets in Financial Instruments Directive, or MiFID II, is designed to protect consumers and push for better transparency in financial markets. Rules like this are making it more difficult for companies to structure fees in opaque ways and sell products that are considered too complicated for retail investors, Grzelak said.

Meanwhile, new anti-money laundering requirements are making it "basically impossible" for private banks to keep some of their customers, said Grzelak, leading to a spate of mergers in recent years.

Losing a significant part of its customer base can make a bank less viable and more vulnerable to takeover. In Switzerland, known for its money management industry, the number of private banks declined to 112 in mid-2017 from 179 in 2005, according to figures from KPMG. The country's banks have also faced pressure to divulge information on foreign-held bank accounts and loosen banking secrecy protections.

In London, another world capital of the well-off, money has reportedly been wired offshore in significant amounts after the government passed a new law in January targeting money laundering. So-called unexplained wealth orders allow authorities to freeze assets with a value above £50,000 whose provenance their owners cannot account for.

A GlobalData survey found that 75.3% of wealth managers regard local regulatory changes as a big concern for their business.

The bigger the better

Large firms that have a global network and deep experience with catering to the ultra-rich, such as Credit Suisse Group AG, Julius Bär Gruppe AG and UBS Group AG, are set to be strengthened by the wave of change, while those contenders who aim at "mass affluence" — fortunes below $1 million — are likely to struggle, said Johann Scholtz, a bank analyst with Morningstar in Amsterdam.

"We are not concerned about disruption at the top end," he said, pointing to a "secular" tendency toward greater concentration of wealth globally, longer lifespans and strong emerging market growth, all creating new billionaires. Large amounts of money can cause complications, requiring expert involvement that comes at a price, he said, with services such as accounting, legal advice and investment banking being provided in addition to investment management and lending.