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Strategic Growth in the German Wealth Management Market -
Centres of Wealth
Dr Marc Dressler Snr Partner & MD CVA, Berlin
Dr. Cinderella Vassiliadis Associate CVA, Berlin
The German market for sophisticated wealth management seems to have been booming for some time, but that which at first glance appears to be tempting business turns out to be a hard fought battle when one looks more closely. Not every player harvests success. A regional sales concept is very much a part of a profitable growth strategy. Knowledge of the market is not only necessary for the entire market, but also in specialised form for the various regions.
To read the full translated article, published in “diebank“ in 2006 pages 36-43, please click here.
Private Banking – Somewhere between euphoria and realism
So just how profitable is the business of being the bank of wealthy Germans? In the recent past, different studies have been published.
The World Wealth Report by Merrill Lynch/Capgemini generated much excitement by estimating more than 760,000 High Net Worth Individuals (HNWI) in Germany in 2005. But not all consultants and analysts are as confident as the Americans. In a much more detailed study, published in the banking periodical “Die Bank”, the German MD and Senior Partner of Corporate Value Associates (CVA), Dr. Marc Dressler, draws a different picture. Dressler does not want to scare the wealth managers of Germany, some of which have entered the market in a euphoric state. However, the target group size evaluated by him and his team should urge one or two of the players to refine or even completely reconsider their strategy in order to reduce unnecessary risk.
To read the full translated article, published in "Platow Extra" No 122 October 2006 pages 5-7, please click here.
Successful Strategies for a Difficult Market
Dr. Cinderella Vassiliadis Associate CVA, Berlin
Swiss banks have always serviced wealthy Germans. As these banks enter the German market as "on-shore" players, they now face a different challenge in serving these high-net-worth individual (HNWI).
The potential of the German market is high but often over-stated while the difficulties facing the market are usually under-stated.
Much work has been undertaken to estimate the size of the HNWI market in Germany. Generally it is estimated at around 760,000 persons. Upon closer examination, however, we would estimate the market to be much lower at only 250,000. The main difference is the definition of a HNWI. We set a minimum of € 1million of liquid assets. This would therefore exclude real estate investment, which in Germany is very high (usually around two-thirds of the total portfolio). The reason for this exclusion of real estate is that in this type of banking liquid assets drive profitability and we would be overstating the potential of the market if we included the real estate assets. Taking this into account, total onshore liquid wealth of German HNWI is estimated to be around € 600bn and another € 300bn offshore which gives an average value of € 3.6 million per HNWI.
There is very little new wealth being created in the German market so we estimate the future growth rate to be only between 1 to 5%. Most so-called "new wealth" is actually just a redistribution of existing wealth through inheritance rather than true wealth creation. In spite the strong performance of the stock markets in recent years, we still do not see this as driving wealth creation as history has shown there is a clear downside and we can't assume it will lead to further wealth creation. Rather the overall poor performance of the German economy creates a rather pessimistic view of growth potential in this market.
The German market has a number of characteristics that must also be considered when entering the market. For private wealth management the most relevant are:
The above mentioned limited growth potential;
Given the history of the country, there has developed a strong fragmentation of the market in the geography and sources of wealth (e.g. entrepreneurs in the South, trading and shipping in the North, banking in the Centre etc.);
Tough competition from players in other industries (e.g. non-bank financial institutions such as external asset managers, hedge funds or private equity firms or insurance companies or MLP/AWD);
The current lack of sophistication of existing private banking offered by the universal banks due to an indecisive and poor strategic focus on this business (although quality is improving fast and has reached an impressive level in 2006); and
The complex legal and tax system that is regarded as one of the most non-transparent and encumbering systems in the world.
The legal system has presented a particular challenge in wealth management as regulation changes have been frequent and even retroactive creating a high level of uncertainty. While banks are not allowed to give active legal advice to their clients, it is necessary for them to keep abreast of all relevant legal and tax issues which is a demanding and never-ending task.
The German market, therefore, is far from straight forward. Nevertheless, it is a very dynamic and attractive market (the single largest market in the EU) with many players entering or re-evaluating their strategies. In order to achieve sustainable success, banks need to hone their business model. We have identified seven critical success factors that banks would need to adapt to their own capabilities as well as to the market environment. These critical success factors are:
Image/ brand - having a reputation and image of a stable and secure bank with a long tradition in private banking is extremely helpful;
Personal and strategic continuity - it is also important to have a clear strategy with a strong, continuous commitment of management as well as relationship managers that are willing and able to serve the same client for a long-term period;
Geographic and entrepreneurial presence - due to the high fragmentation of the market many banks spread their regional presence in Germany but they also need to offer global access to services and a proven global financial capability;
Critical mass - banks need to obtain a certain level of assets under management, approximately € 50-100bn (per relationship manager around € 150-300m), but many players in Germany have only around € 5-15bn. Depending on the size and offering a smaller size is can be profitable but requires a well balanced business model;
Client management - it is much more efficient to improve existing clients than to attract new ones, but it requires a high level of social empathy and intelligent CRM-tools to get a better understanding of the true needs of the clients. Similarly, prospecting new clients must follow a systematic strategy;
Highly sophisticated employees - identifying, attracting and retaining talented personnel is a major challenge for banks, the market for human resources with social and professional skills is scarce and hence, very competitive; this can lead to extensive training requirements for employees; and
Access to an innovative product offering - offering is more than just the product platform, it is the holistic and tailor-made service model; "best select/ best advice" implies an open architecture, this should nowadays be standard but it is rare to see a bank deliver upon what they expound. Independence and a fair and transparent pricing of the offering are of utmost importance as the clients become more sophisticated and demanding where they will compare banks' offering and expect more.
On top of these success factors, substantial IT-investments have to be undertaken. Global and local transactions, reporting, risk management and connecting different systems require well functioning, efficient IT operations.
Not every bank has the resources to overcome these hurdles. For those who are prepared to do the ground work and are able to present a clear positioning of their unique selling proposition then the German market could be very fruitful.
The potential of the German market is high but often over-stated while the difficulties facing the market are usually under-stated.
