The private banking and wealth management sector is evolving and the market within the Middle East region is no exception. According to Capgemini Research Institute’s World Wealth Report 2021, the population of high-net-worth individuals (HNWIs) in the Middle East region grew by 6.8% to 800,000, while their wealth soared by 10.7% to $3.2 trillion in 2020.
Two years into the pandemic, there is no doubt that 2021 was profitable for private banks and wealth managers as mainstream markets have continued to perform and investors in the region are diversifying further into private and alternative assets. The outbreak of the coronavirus created some exceptional challenges for all industries and in the private banking and wealth management sector, it is driving pre-existing trends as wealth managers are changing the way they deliver advice and serve clients.
“The acceleration in market and competitive wealth management trends, along with the confidence many firms have gained in their remote delivery capability, have set the stage for a strategic reset of firm operating models,” said Deloitte.
Meanwhile, the changes in demographics, technology, environment and social behaviors have set the ground for rapid transformation in the private banking and wealth management industry. Private bankers and wealth managers are being confronted by the task of balancing the traditional approach to risk management with the need to respond quickly to the ongoing health crisis that has created massive changes to their operating environment.
BlackRock said that the pandemic is accelerating digitisation of processes and client propositions, a shift towards centralized portfolio and risk management amid increasing focus on responsible investing while emphasizing the role of wealth managers in supporting socio-economic ecosystems.
One of the biggest emerging trends last year was environmental, social, and governance (ESG). The investment theme is increasingly attracting attention from both investors and lawmakers alike, thanks to the strategy’s promise of utilising a range of non-financial information to better align finance with long-term value and societal values.
“With the proliferation of investment products, digitalisation, the heterogeneous nature of client bases and the need to integrate strong sustainability criteria into their business, the private banker’s role has become even more complex,” said BNP Paribas.
Family offices are also an integral part of a high-end subset of the private wealth management business in the Middle East. Over the years, they have become increasingly important to the region’s entire financial services industry, not just because of the business potential inherent in their massive assets under management (AUM), but also as evidence of the region’s overall wealth management capabilities.
Sustainable investing has come a long way and had over the years gained more interest amongst institutional investors. However, more wealthy individuals are now aware of these issues and want to understand how their investments can drive change against a backdrop in which climate change, good governance, culture and strong accountability are now central to many post-2008/9 global financial crisis conduct frameworks.
The increasingly growing demand for sustainable investing from investors is driving some private banks and wealth management firms to develop sustainable investing strategies as public attention towards the global sustainability agenda is also rising.
BNP Paribas said that clients have become increasingly demanding in the complex world of private banking and wealth management, driven by younger investors such as NextGen and Gen Z clients.
Wealthy individuals and family offices are ideally suited to the kind of approach that the investment theme requires owing to the group’s large pools of capital and multi-generational objectives that support a long-term strategy. Earlier in January, the World Economic Forum (WEF) said in a report that HNWIs and family wealth are uniquely positioned to leverage private capital to drive growth in the ESG sector by supporting long-term societal goals and ambitions.
Compared to institutional investors that may be subject to commercial policies or have limited decision-making due to mandated trusts, HNWIs and family offices can be flexible in how they approach investments in terms of size, geographies and asset classes.
The overwhelming majority of studies in the field of sustainable investing shows that the outbreak of COVID-19 ramped up interest in sustainable investments. McKinsey said that for sustainable investment strategies to succeed in this dynamic operating environment, ESG objectives or considerations must be derived from a financial institution’s overall mandate.
JPMorgan Chase & Co. in May 2021 unveiled its carbon reduction goals for clients in line with the Paris financing commitments as the investment bank is facing mounting pressure from shareholder activists to align its funding activities with their climate change commitments. Meanwhile, Standard Chartered in October 2021 set new targets for reducing its funding to carbon-intensive sectors by 2030, including plans to mobilise $300 billion in green and transition finance as part of the bank’s broader goal to reach net-zero emissions for itself and its clients by 2050.
However, sustainable investing is subjective because there are as many clients as there are sustainability preferences and for impact investments to inject new capital to help solve social and environmental challenges, the private banking and wealth management sector is the most effective option.
Once a laggard in the adoption of technology, wealth management is accelerating digitalisation, deploying artificial intelligence (AI), Big Data, robotics and other technologies to enhance client’s experience and trust, which is central to private banking relationships. Private banking and wealth management firms have remained largely on the sidelines in an industry where digitalisation has transformed much of the financial services and products.
The industry is typically seen as embodying old-fashioned values and providing discrete, tailored service attributes that remain valuable parts of the business, but McKinsey said for many clients, these qualities are “no longer sufficient”. The shift to digitisation is inevitable and industry experts expect it to radically transform the industry in the coming decade.
The outbreak of the pandemic forced wealthy clients to accelerate their adoption of digital technologies and seems certain to lead to permanent changes in the behaviour of both firms and investors. “Wealth managers are unlikely to be able to serve modern clients effectively without a digitised operating model,” said McKinsey.
Digitalisation in the private banking and wealth management sector is being driven in part by changes among clients. Though the typical client in a developed market today is around the age of 65 years and is fairly comfortable with digital technology, shifting demographics, evolving client behaviours, the rise in new innovative technologies and emerging disruptive competition are all reshaping the industry.
A coherent digital transformation plan will give firms a head starts in leveraging stronger client relationships, reduced operating costs and enhanced risk management and regulatory compliance capabilities. “The changes are helping firms meet their regulatory obligations, boosting the productivity of relationship managers and lifting compressed margins,” McKinsey added.
The fountain of growth
The growth of “automated wealth managers” or Robo-advisors is revolutionising the wealth management industry with unprecedented force. By leveraging algorithms to offer financial advice for a fraction of the price of a real-life client advisor, Robo-advisors are growing at a rapid pace, doubling their assets under management every few months.
“In 2030, up to 80% of new wealth management clients will want to access advice in a Netflix-style model, that is, data-driven, hyper-personalized, continuous, and, potentially, by subscription,” said McKinsey. The emergence of a tailored and personalised model underpinned by data can be observed across industries and for wealth managers, continuous access and automatic hyper-personalisation are expected to shift the terms of success.
The Middle East private banking and wealth management market had undergone a dramatic shift long before COVID-19 as regulators were embracing Robo-advisors or digital financial advisories. The Central Bank of Bahrain issued directives on Robo-advisory in 2019 as the Gulf state affirms its position itself as a leading digital financial hub.
Saudi Arabia market regulator gave two firms, Wahed Capital and Haseed Investing Company, the green light to test their digital financial advisory services in 2019 as part of the kingdom’s broader financial technologies adoption strategy in line with its economic diversification drive.
“Robo-advisors translate client input into investment logic such as risk or liquidity factors and propose adequate investment opportunities well beyond simply highlighting a handful of ETFs out of a few thousand of possibilities,” said Deloitte.
The Abu Dhabi Global Market’s Financial Services Regulatory Authority issued its regulatory framework for digital investment managers operating in the financial hub in 2019. The move was hailed by rating agency Moody’s which said it safeguards systemic stability through a well-regulated environment for fintechs.
Commercial Bank of Dubai also unveiled its Robo-advisory app CBD Investr in April 2021. The platform offers the bank’s clients access to globally diversified and personalized portfolios of stocks, bonds and other asset classes using low-cost exchange-traded funds. Meanwhile, the regulatory push for open API infrastructures across the Middle East is expected to make it easier for wealth managers to deliver consolidated client views of multiple relationships.
Trends in the Middle East
The Middle East, one of the world’s hotbeds of wealth creation, has seen an acceleration in trends relating to succession planning, alternate investment vehicles such as private equity, wealth preservation and an increased interest in sustainable investing. Swiss wealth manager, Julius Baer, said that there is a substantial shift in client base as women and younger investors are having an increasingly larger role in the wealth manager’s discussions in the region.
Family wealth in the Middle East makes up a sizeable proportion of the region’s non-oil economy and in these challenging times the need for adaptability and action to ensure that potential isn’t wasted, and the future is secured has never been paramount. “As HNW business families in the Middle East are quite young (led by first/second generation), succession planning will become increasingly important as these families grow,” said KPMG.
Though succession demand is low, Middle East HNW families are adopting protocols to regulate succession, conflict resolution, business valuations and other key issues to preserve wealth and ensure a smooth transition between generations. Abu Dhabi issued a new family business ownership governance law in January that prevents selling shares or dividends of family-owned businesses to individuals or companies outside the family. The law also requires prior approval from family partners before a shareholder sells an equity stake to a non-family member.
Family firms in the Middle East are also turning to foundations owing to how they provide a dynamic option that can accommodate a family’s transformation priorities and values. Nina Auchoybur, the Managing Director at Ocorian said that foundations were first introduced in the UAE in 2017 and they have since grown to become an integral part of the Gulf state’s wealth management offering. There are currently more than 170 foundations registered in the UAE.
The proliferation of investment products, digitalisation, the heterogeneous nature of client bases and the need to integrate strong sustainability criteria in business is making the role of private bankers and wealth managers even more complex. Banks must be in a position to offer private clients appropriate and personalised advice on sustainable investment issues.