Stakes high in wealth planning for megarich
MANAGING the wealth of high net worth individuals has become a popular target market for established financial services players and new entrants, because the barriers to entry are low and it’s less risky than extending credit. But the playing field has become a lot more competitive and margins are under pressure.
Daniël Kriel, who was appointed CEO of Sanlam Private Wealth in 2005, said increased regulation had benefited clients because it had curbed unscrupulous practices, but it was also making it harder to turn a profit.
As a result, consolidation is taking place as private wealth managers chase volumes to counter shrinking margins.
Surprisingly, Sanlam Private Wealth picked up its private client book when two international banks — ABN Amro and Merrill Lynch — decided they no longer wanted to run such a business in emerging markets.
But, Kriel said, this was precisely where the greatest increase in numbers of high net worth individuals would come from.
“Based on 2013 figures, high net worth individuals in South Africa are expected to increase by 26% and in Australia by 32%, compared with 18% for the UK.”
Sanlam Private Wealth oper- ates in these territories, plus Switzerland.
Kriel’s division bought an established player in the UK and established a green-field private client business in Australia, where the challenges to doing business are unique.
Sanlam Private Wealth now manages R120-billion in South Africa and roughly the same amount split between the UK and Australia, but the local business is more profitable.
Old money tends to be conservative in the UK, with more requests for balanced funds and limited exposure to equities.
In South Africa, clients with a lot more new money tend to be far more aggressive, with the majority invested in equity-only discretionary funds.
“We could learn a lot from the superannuation fund industry in Australia. At the moment there’s A$1.8-trillion in those funds.”
Superannuation is similar to retirement benefits paid by some South African companies for their employees.
Private wealth managers, Kriel said, had had to broaden their product offerings to compete with banks, even offering credit at preferential rates using Sanlam’s broader balance sheet, as well as contracts for difference and derivatives trading. But it’s not only the providers who had had to wise up.
“Australians are only now waking up to the need to diversify globally. While from South Africa over the past five years there has been a steady stream of assets offshore, Australians have also realised the local economy was too skewed to resources and services.”
According to Kriel, 2014 was a record year for Sanlam Private Wealth, growing profitability 30% off what he considered a high base set at the end of 2013.
“This was also a record contribution of this division towards the overall Sanlam results. We’ll continue focusing on growing the UK business, through organic and acquisitive growth.
“However, given our strict expectations of returns on capital, we won’t overpay, which is going to prove difficult in a consolidating market where prices are rising. We also have to try grow the Switzerland-based Summit Trust International business. What we’re grappling with is how to grow a business in a contracting industry.”
The trust industry had taken a huge knock in terms of public perception, particularly in the UK, he said.
“There has been a very successful public relations campaign against misusers of trusts for the purposes of tax avoidance. But most trusts haven’t done anything illegal — they’ve done what was legally acceptable at the time but is now seen as morally unacceptable.
“The purpose of a trust in the first place is to ensure the orderly transfer of wealth from one generation to the next. We have to look at adapting the business model.”
Capturing younger high net worth individuals is the goal.
“In South Africa we have a small pool, of 4 800 dollar millionaires and 600 ultra high net worth individuals with $30-million plus. Those numbers are conservative, though — we have a lot of entrepreneur clients who cannot be ranked by holdings on the JSE. New players like Old Mutual and MMI are entering the space, and Standard Bank is about to relaunch its private client offering.”
There are only so many talented people in the industry, and this also raises costs, with good compliance officers, for example, becoming highly mobile and very expensive.
“An intense focus on service delivery in quite a manual industry and scalability through technology are both contributing to a rising cost base,” Kriel said.
In SA, clients with a lot more new money tend to be far more aggressive