The demographics and demand exist, but are all the services in place to support a mature private banking and wealth management sector in the region?
I believe clients have access to a strong repertoire of top-class wealth management services regionally. At Deutsche Bank we recognize how important it is to offer highly sophisticated potential solutions to support our clients across all asset classes. Many of our clients have long-standing relationships with us and we have been able to support them through various stages of their wealth-cycle. Importantly, we are able to advise clients on both the asset and liability side of their balance sheet and this is in my opinion a key differentiator. Furthermore, in addition to our investment solutions, many clients come to us because of our expertise on the lending side. Our clients are sophisticated and expect a best-in-class holistic approach to address their wealth management needs.
Have events in the past two years affected the demand for optionality in client’s portfolios?
There has certainly been significant demand from our clients for optionality in recent years. Derivatives and specifically options have become a great tool for potentially preserving and protecting our clients’ portfolios. We use them extensively. As a concrete example, we offer a Risk Return Engineering (RRE) approach as a further risk control tool, which allows the investor not only to stay invested and protect their portfolios from sharp declines, but also to take the extra risk needed to generate sustainable and above-average returns in the current low-yield environment. Additional risk overlays and further risk controls will all play an important part in portfolios. Effective risk management of portfolios needs to be complemented by longer-term considerations of portfolio aims and composition. This is an important time to focus on strategic asset allocation as employing market timing in complex processes of change, in my opinion, will not be enough. Hence, a way to potentially reduce risk could be to use options with a sophisticated source of long-term returns.
How frequently do clients ask you to factor ESG considerations into their investments?
This is a topic that more and more clients are looking into and expressing not only interest but a real demand for. ESG considerations have become mainstream as a further dimension to traditional financial statement analysis and increasingly central to the investment universe. One of our ten long-term investment themes is ESG and we highlight four interesting long-term ESG sub-themes (blue economy, resource stewardship, water, and green hydrogen). Incorporating ESG should also allow for a much more holistic decision-making process, facilitating risk identification and enhancing the quality of investment decisions. We therefore conducted a major survey of our clients in 2021 to gain a better understanding of existing investor attitudes to ESG investments. Over 75% of respondents agreed that investments should create positive change in the world.
In May 2021, we announced that we would make ESG the default choice for investment solutions from 2022. We are continuously adding ESG products, converting our traditional multi-asset Discretionary Portfolio Management (DPM) strategies to ones that are ESG compliant, and ensuring that our teams receive regular ESG training. ESG has become an essential component of the way we assess investments. But there may still be a need to make sure biodiversity sits centre-stage in our discussions around ESG. We all need to recognise that biodiversity is an essential factor behind – and a potential mitigator of – issues such as climate change and environmental degradation. Applying education and knowledge will make sure this happens, with improvements in data, taxonomy and standards encouraging further investor interest in this essential area. Last week, the Deutsche Bank Ocean Resilience Philanthropy Fund, the first philanthropic fund of its kind, opened for contributions. The Fund enables ocean conservation efforts to be supported via a dedicated framework that facilitates donations globally. We are also partnering with Ocean Risk and Resilience Action Alliance (ORRAA), Cambridge University, and other renowned organisations to contribute thought leadership through research, publications, and events.
Are the majority of clients in the region ready or happy to use digital only channels?
It depends on a number of factors including age demographic, wealth segment and complexity of service required. Wealth Management for the UHNW segment has always been a relationship business and I don’t see that changing. Many of our clients are already using digital channels for standard services like wire transfers, equity trading and foreign exchange. However, for those clients who require bespoke advice around their corporate assets, lending, hedging or alternative investments, our priority will always be to support them with an experienced and knowledgeable wealth management team. The future success of wealth management firms in an increasingly technology driven world, will be determined by their ability to keep up with the pace of change and deliver digital solutions like robo-and hybrid advisory to meet clients evolving expectations especially in the HNW segment. Therefore, I do expect digital advice models to grow in this region like other markets.
On average, what proportion of HNWI client’s portfolios would you say are focused on international assets?
Our clients are predominantly focused on international assets which are embedded in global investment strategies – one of our core competencies. Clients can benefit from our global footprint that is characterised by local reach and country/region-specific expertise as our teams of Strategists and Portfolio Managers are spread around the globe. This platform is the foundation for delivering global portfolio strategies and investments that are based on in-depth local analysis. It is worth noting that an international scope naturally implies a much broader investment universe and at the same time offers more flexibility when it comes to global diversification. Most investors are looking for an attractive balance between returns/volatility – in this context a broad global diversification is indispensable in our view. Our Strategic Asset Allocation (SAA) strategies based on globally diversified multi-asset portfolios have proven their risk/return trade-off as well as their robustness in achieving return targets.
Are there any unique qualities that make the Middle East a hotspot for private banking & wealth services?
I first started covering clients in the Middle East around 25 years ago and have seen a remarkable transformation and growth of this region over the years. As Head of Gulf Region for Deutsche Bank’s Wealth Management arm, I have witnessed this growth first hand. We have had significant increase in our Assets Under Management (AuMs) and exponential revenue growth over the last year.
Not only are wealth levels are increasing, clients are also becoming more sophisticated and understand the importance of having an internationally diversified strategy. Many families have put governance structures in place and set up family offices to manage their assets. Various third-party reports confirm the trend. According to a 2020 report from BCG, Assets Under Management in the region reached $1.2 Trillion in 2020 representing a 11% YoY growth rate driven by both institutional and private clients. The number of Middle East UHNWIs with assets is predicted to grow by a quarter over the next five years and the region will remain the fourth largest wealth hub in the world according to Knight Frank’s 2021 Wealth Report. In addition, governments in countries like the UAE managed their Covid response incredibly well and this has translated to strong inflows of UHNWIs into cities like Dubai where the global elite are taking advantage residency programs like the Golden Visa. Higher oil & gas prices, although volatile, are still the key drivers of wealth in the region, accounting for 70% of total exports in the GCC according to the World Bank. However, encouragingly we are also seeing growth in other segments such as technology, real estate, tourism, hospitality and aviation. With this backdrop, I believe the Middle East will continue to be a hotspot for our industry.