Wealth management has assumed great significance in today’s economy owing to increasing number of millionaires across the globe. With the amount of wealth increasing in the economies, private investors are seeking profitable schemes and financial products that would provide them with higher returns and increased value over a period of time. This has generated a need for specialised wealth managers who can offer a variety of financial solutions and services to meet the specific needs of the wealthy client segment.
Wealth management industry has evolved over the last two decades witnessing significant changes in the industry trends and pattern. The more knowledgeable customer of today seeks improved services that are more customised and tailor-made for his requirements. This has created growing demand for wealth managers who are more experienced in their specific domains and have the expertise to handle the growing complex needs of the wealthy individuals. Moreover, the wealth managers face immense challenges from growing competition in the industry vying for increasing share of the assets under management. This is a direct consequence of rapid globalisation and market liberalization policy adopted by the economies across the globe.
Dubai is famous for its rising wealth and increasing prominence in trade and service sector. Businesses and entrepreneurs are investing in Dubai owing to the high economic growth and development that has been observed in the past decade. Multinational banks and financial institutions are setting up their presence in Dubai in search of new market segment that is seen in the rising population of wealthy individuals. The growing wealth in the region has created huge demand for wealth managers who can effectively cater to their needs and requirements. Private banking too has assumed great significance in the past few years with banks reporting increased transaction. The study reviews the wealth management industry and provides an insight into the existing trends and patterns in Dubai.
The past two decades have witnessed a tremendous splurge in the spending capacity of the people across the globe. Globalisation of economies and liberalization of markets has led to increasing consumerism. This has not only opened new opportunities for earning but also enhanced scope for increased moneymaking potential. The economies have made it easier for individuals to earn and accumulate wealth that has led to a significant growth in the number of wealthy and highly affluent individuals across the globe. The developing and emerging economies have witnessed voluminous increase in the number of wealthy individuals that has consequently led to rising cost of living and affluent lifestyle pursued by this segment of society. The increasing accumulation of wealth among individuals have resulted in rising property prices, boom in private equity and strengthening of stock markets across the global economies.
The globalisation of economies and liberalization of markets is a critical factor in the growth and development of wealth management industry. It created global opportunities for entrepreneurs providing extensive scope to invest and create more wealth. The traditional family inherited wealthy classes gave way to a budding young segment of entrepreneurs and capitalists who contributed effectively to the rising wealth in nations. The favourable economic climate has been greatly responsible for this trend.
The rapid changes in the market-driving forces and business environment dynamics are visible in the fluctuating nature of stock markets and economic variables that drive the international trade and industries. The growing market complexity and increasing number of financial products are the major factors that created the need for wealth managers. The equity markets being highly volatile and sensitive to market forces made it difficult for financial institutions to provide risk free investment alternatives to the high net worth individuals. The banks and financial institutions created specialized departments that dealt with the wealth management aspects hiring wealth managers who were experienced and knowledgeable of the market trends.
Dubai has witnessed rapid growth in the wealth management industry in the past few years. The economy is experiencing increasing demands for private banking services that has escalated as a result of an explosion in private wealth segment. According to the International Monetary Fund reports the Middle East countries has one of the largest pools of private wealth with US$ 1.5 trillion held in real estate, offshore securities and bank deposits. This boom in economy and rise in private wealth assets is attributed to the rising oil prices and flourishing construction business. Dubai and other Gulf countries saw an influx of capital inflows that led to a boom in the stock market and real estate industry. Survey reports conducted by Merrill Lynch and Capgemini estimate that the market capitalization of Dubai financial market and the Abu Dhabi stock market has increased by 700 percent since the year 2001. An attractive GDP growth rate of 16 percent has attracted foreign investment considerably over the past few years. The report by Merrill Lynch and Capgemini also states that nearly 1.22 percent of Dubai’s population consists of millionaires and the economy is experiencing an annual growth rate of 12.3 percent in the number of high net worth individuals.
“This new global wealth is one aspect of the emergence of true globalisation, a process whose frenetic and increasing pace is changing the way that wealth is managed” (Serene Al Masri, 2007). The increasing amount of wealth in economies across the globe is primarily attributed to globalisation and liberalization of markets. The number of banks and financial institution providing wealth management services are rising owing to growing attractiveness of the industry. Money and asset management has become an essential service requirement in most countries across the globe. The traditional pattern of investing and savings has transformed dramatically over the past few years providing the investor with a wide range of alternatives that can suit his requirement. In face of such choices the investor needs to be guided towards products that will attract higher returns. Moreover, the hectic schedule of the wealthy individuals leave little time to concentrate on such matters and it is often feasible to hire the services of a wealth manager who is experienced and knowledgeable about the market trends and can efficiently handle the client assets.
In view of the above context the paper analyses the wealth management industry in Dubai that has emerged as a favoured destination for wealthy people who aim to multiply their wealth through lucrative investment tapping on the vast potential that this economy offers. The discussion provides an overview of the global wealth management industry accompanied by an analysis of the private banking sector and its involvement in wealth management services. The discussion relates to the following objectives of study:
Analysing the characteristics of global wealth management and private banking sector highlighting the wealth management services offered by this sector.
Research the wealth management industry in Dubai and how it compares to services offered in other countries across the globe.
Highlight and focus on the government practices, policies, and regulations that have affected the wealth management industry in Dubai.
1.2 Aims of the research
The overall economic environment affects the mode of operation, product offerings, and brand positioning in any business venture. This applies to the wealth management industry too. Global banks are targeting the Dubai market owing to the great speculation and interest that has been triggered by the rising number of high net worth individuals with tremendous earning potential. The study will focus on the changing business environment that has offset a need for highly specialized segment of wealth managers who can assist the financial institutions in capitalizing on the enormous potential that the wealth management industry has in Dubai. The study highlights the diversity in cultural, social, and economic factors that have influenced the banking and financial sector in the region analysing existing trends and patterns. The study also brings out a comparative picture of the wealth management industry in Dubai with other economies across the globe.
1.3 Statement of objectives
The study seeks to provide a detailed insight into the wealth management industry, analysing the concept of wealth management, role and significance of wealth management in global perspective, and the recent trends in wealth management services. The study then goes on to highlight the wealth management industry in Dubai, explore the existing industry trends, analyse the role of banks and financial institutions in wealth management and provide an understanding of the government policies and regulations that affect the industry in the region. The dissertation narrows down its research objectives to the following areas:
Analyse the features of wealth management and private banking in a global perspective
Examine the trends in wealth management industry in Dubai and how it differs from the other economies across the globe
Provide an insight into the government policies that have shaped the wealth management industry
2. Literature Review
The literature review aims to analyse the wealth management industry and its various aspects in the first section. The subsequent sections concentrate on wealth management industry in Dubai and how it has evolved over the past few years. The chapter also highlights the government policies and regulations that have affected the industry in the region.
2.1 Global wealth management
Money refers to the paper currency that is spent by the individuals across the globe and it plays a key role in the performance of the economy. “It not only facilitates transactions among the millions of economic players in the economy, but it represents the principle mechanism through which central banks attempt to influence aggregate economic activity, including economic growth, employment, and inflation.” (Ritter, 2004) The wealth of a nation is a significant indicator of the country’s economic growth and prosperity. Conversationally, the term wealth of an individual signifies his monetary possessions in excess of his monetary income. The economists refer wealth to be the value of all household resources, financial, and commercial assets that is possessed by an individual. However wealth is not just about assets, “it is also about lifestyle, so it is also important to consider variations in living costs around the world, which serve to define the luxury and privilege a person’s wealth can buy.” (Barclay’s Wealth Insights)
“Wealth management represents a specialization within investment management that addresses the particular concerns of high net worth individuals. It represents an increase in professionalism and technical acumen over 1980s-era classical financial planning” (Jennings and Reichenstein, 2006). The term wealth management is largely referred to as “private wealth management” or “private banking”. This is owing to the highly personal and consultative relationship of private bankers. Moreover, the services provided under this category encompass the individuals and their families in framing suitable schemes for asset management.
The World Wealth Report 2008 prepared by Capgemini Merrill Lynch defines the market for private wealth in four broad categories:
· Ultra high net worth individuals (NWIs) with over US$ 30 million of investable assets.
· Very high NWIs with over US$ 5 million of investable assets.
· High NWIs with over US$ 1 million of investable assets.
· Mass affluent with assets over US$ 100,000.
The first three categories play a significant role in international wealth management market while the mass affluent section is largely a domestic market.
The concept of wealth management originated in the 1990s in the United States when the wealthy and the high net worth individuals contracted the services of specialized financial institutions to manage their assets and wealth that provided them with scope to invest their money in profitable ventures. The primary focus of such investment was to enable growth of income, manage liquid assets, and minimize risks. The institutions offering such services are banks, financial brokers and dealers, and insurance companies. The services offered by these institutions range from investment advice related to financial planning, tax and legal advice, private banking, investment management, portfolio management, and asset management. This essentially involves investment in stocks, equity, mutual funds, and other financial products.
Previously the wealth management segment encompassed only property, bonds, gold and fixed income. The recent years have witnessed a boom in the number of financial products and alternatives available in the market and wealth management has assumed great significance in the lives of the affluent and high net worth individuals.
Wealth management is comprehensive term used to cover all aspects of financial planning, asset management, private banking, taxation advisory, and portfolio management. Most of these services are highly specialized and customized in nature to suit the requirements of each individual. There has been lot of focus on the size, concentration and growth of wealth management services to cater to the needs of the mass affluent, wealthy, and ultra high net worth individuals. The banks, independent financial advisors, and financial institutions that cater to private clients with investable assets of more than US$ 1 million provide these types of services. The alternatives available to the rich individuals have increased too and they now have more options to invest, spend, and distribute their money. The global wealth management industry has continued to grow strongly and has become the focal business strategy for most global banks. Increasing number of financial products and introduction of new financial planning schemes has changed the wealth management industry outlook considerably. The investors are faced with complex choices and alternatives and find it difficult to decide on a suitable plan for their asset management. The global perspectives are changing with markets swinging more in favour of emerging economies of Asia-Pacific and Middle East.
The significance of wealth has changed dramatically in the last few years with rising opportunities and increasing accumulation of wealth in countries. “The growing proportion of wealthy who have made money rather than inherited it also leads to changes in consumer behaviour.” (Barclays Wealth Insights) There is marked shift in the attitude of the rich individuals in the society. People want to enjoy their money and get the best of everything rather than pass it on to the next generation. These affluent sections of people do not hesitate to borrow or take loans to go on a vacation or spend on sophisticated electronic gadgets. However, these enterprising wealthy individuals also want to maintain control and excise close handling of their assets.
The traditionally wealthy people could be identified by their lavish lifestyle but the profile of the wealthy individual today is more diverse, elusive, and ever changing that poses new challenges for companies who seek to do business with them. There is marked shift in the wealth creation process today. “The barriers to wealth creation are rapidly dissolving around the world, opening up opportunities for individuals from all social backgrounds.” The economies across the world are witnessing increasing shift from manufacturing towards service sector. This sector requires comparatively low investment for business start-up and with advanced technology and Internet revolution individuals are presented with number of alternatives to maximize gains and profits. Online trading and e-commerce potential has provided the aspiring entrepreneurs with new platforms to start their business operations and expand existing business ventures. Globalisation and liberalization of economies play a vital role in generating wealth across the world.
The wealth managers operate in an increasingly complex market environment that is influenced by the changing needs of the customers and dynamic economic conditions. Jennings and Reichenstein (2006) observe that a prospective customer directly correlates the private wealth management to a set of factors that influence the type of financial services and the extent of investment. These factors are:
The nature of return and spending requirements of the individual
The amount of risk involved in various financial schemes
The impact of taxation policies on investment
The liquidity needs of the investor
The legal structure and requirements that govern investment trends
The individual needs and requirements
The recent years have witnessed tremendous increase in the number of wealthy individuals and the amount of wealth held by these individuals is also on the rise. The Capgemini World Wealth report states that over the last 3 years the world has witnessed a double-digit growth in emerging markets and strong overall growth in high net worth individuals’ wealth in mature markets. The global financial wealth of high net worth individuals has increased from US$ 37.2 trillion in the year 2006 to US$ 40.7 trillion in the year 2007 with the number of high net worth individuals increasing from 9.5 million to 10.1 million during the same period. (Capgemini-Merrill Lynch World Wealth Report) The developed economies of Canada, France, Germany, Japan, Italy, United States, and United Kingdom continue to hold the top position in terms of choice of destination for potential investors and entrepreneurs. These countries hold the maximum number of wealthy individuals across the globe but emerging economies like China, India, and Middle East countries
The emerging economies of India, China are gaining prominence in this sector largely due to the accelerated GDP growth rates and market capitalization that are the primary drivers of wealth creation. The Hindu Business publication observes “a booming economy, rising stock prices, and an increase in salaries, and spending power have turned the spotlight on the wealth management services.” The number of high net worth individuals is increasing over the world presenting tremendous scope and potential to the financial institutions offering wealth management services. According to the World Wealth Report 2008 by Capgemini Merrill Lynch “world wealth continues to grow broadly, despite fluctuations in markets and economic conditions, and global demographic and economic trends are bringing entirely new segments of clients into the high net worth band all the time.” Changing demographics has initiated many firms to grow and diversify to wealth management services venturing into new markets to tap the growing market needs.
A large number of banking and financial institutions have introduced new products and financial planning schemes for their wealthy clients. These institutions are cashing in on the huge market demand created for wealth management services and generating attractive profits from the collection of fees for mobilizing and managing their wealth. Private banking has become one of the most attractive businesses in the banking sector with profit margins of 35 percent and revenue growth of 14 percent. (McKinsey report on private banking 2007) Private banking continues to be driven by “greater competition following several years of attractive results, increased professionalism within many private banks, high growth in more demanding segments and in more innovative product offerings.” (McKinsey report 2007)
The McKinsey report observes that the ultra high net worth investors and alternative investment products such as commodities, hedge funds, structured products, and real estate has largely driven the boom in private banking sector. This wealthy segment represented 26 percent of the bank’s asset base in the year 2006 as compared to 23 percent in the year 2005. The McKinsey survey also reveals that the banks having maximum exposure to ultra high net worth client segment have been the biggest beneficiaries of this growth.
The global pool of high net worth individuals presents tremendous potential for wealth management firms across the world. New segments of clients are constantly making their way to the high net worth band despite market fluctuations, economic uncertainties. Wealth management firms are re-devising their operational strategy to adapt to growing and changing client needs. ‘HNW clients are demanding comprehensive and tailored services from the multiple firms with whom they do business; wealth managers are waging an impressive response to differentiate themselves. In the ensuing competition, however different types of wealth management firms have begun to vie for the same clients – as well as for those they traditionally has not served.” (Wealth Management spotlight, 2008)
2.2 Wealth management industry in Dubai
The wealth management industry in Dubai is experiencing a huge growth in terms of business potential. The CEO of Ras Al Khaimah observes “the Middle East private banking business is growing by 25 percent a year and the asset value of high net worth individuals in the region has grown by over 29 percent. Liquid wealth held by wealthy individuals in the UAE is forecast to rise dramatically after 2008..” The larger banks are scaling up their private banking divisions in Dubai and opening up new offices and branches to cater to the growing clientele. The banks and wealth management services are recruiting wealth managers who have experience in managing the assets of the already existing wealthy families and the new wealthy class of entrepreneurs in the Gulf.
The wealth in Gulf countries is expected to grow considerably in the next few years owing to increasing oil prices. The growth has pushed up levels of spending by governments on public infrastructure projects and created a powerful investor culture in countries like Dubai that is witnessing a surge in demand for new avenues to channel their increasing wealth. (Barclays Wealth Insights)
“Large family businesses tend to be the dominant economic force within the region, and to date there has been not been the kind of thriving entrepreneurial SME sector that exists in Europe or North America. The businesses that have made most money in the region have tended to be those that have been established for some years, in industries such as construction, property or hotel management” (Stuart Pearce, CEO Qatar Financial Center Authority). The wealth generation is primarily derived from real estate investment and transactions.
The growth in private wealth has attracted large number of private banks and wealth management firms. The wealthy are searching for more investment opportunities that have resulted in widespread changes in the manner of wealth management services offered by the financial institutions and banking sector in Dubai. “Despite a deepening of the investor culture in recent years, the process that investors adopt for asset allocation is not always carefully considered. Investors are moving away from the mentality of just chasing the highest returns and putting all your money in one basket. There is much greater stress now on portfolio diversification and allocation in terms of asset classes, geography and regions, and so on” (Osmah Ibrahim Al Saleh, Executive VP of Investment Dar to Barclays Wealth)
The wealth management firms today realize the importance of assessing client needs and offering them customised product packages that are comprehensive in nature and easy to manage. Most of these wealth management firms are focusing on client experience initiatives to bring a more personalized, family office like service to high net worth client segments and responding to client demands for “improved visibility into embedded risks, holistic analysis of their assets and other benefits” (World Wealth Report, 2008 Merrill Lynch Capgemini). In the Middle East most of the wealth is inherited and the firms realize the cultural and religious constraints that mould the investing culture in this region. The financial products and services offered in this region must comply with the religious and cultural constraints specific to this market.
“The new global wealth is one aspect of the emergence of true globalisation, a process whose frenetic and increasing pace is changing the way that wealth is managed. These new ultra high net worth investors from emerging markets are driving the need for highly sophisticated wealth management that is multi-country, multi-jurisdiction and multi-disciplinary on a level rarely seen in the past and far beyond the comfort zone of many investment managers” (Serene Al Masri, 2007). As the wealth services market continues to mature and become more global in nature, the products and services are becoming increasingly diverse making it difficult for the investors to distinguish between them. In such circumstances the wealth management firms need to make special efforts to provide their clients with customized solutions focusing on their specific needs and requirements.
The Middle East experienced a growth of 11.9 percent in the total number of high net worth individuals in the year 2006 and the overall wealth of this segment grew by nearly 11.6 percent. This region has continued to benefit from rising oil prices and the dependency of developed nations on the fossil fuels available in this region. This has contributed to the extensive economic growth and development and wealth accumulation. The real GDP growth rate reached 11.9 percent in the year 2006 from 9.8 percent in the year 2005.
Wealth management services in Dubai greatly differs from the rest of the world due to its strict adherence and acceptance of the Sharia laws constituting Islamic finance that regulates the investment habits and finance alternatives. The demand for investment in Sharia compliant products is more in this region. The Barclays wealth report states that the region has seen huge development in the Islamic Finance sector in the recent years and this is impacting the asset management sector too with considerable product development taking place. The investors in Dubai prefer to invest in structured financial products, private equity, and derivatives.
Dubai is increasingly attracting investors and its prominence in wealth management services is attracting many multinational banks and wealth managers to explore the vast potential. It is expected that the contribution of Dubai’s GDP will quadruple to more than US$ 15 billion by the year 2015 rising from the current US$ 3.4 billion. The Gulf economies have reaped this benefit from rising oil prices and the increased liquidity that has led to rapid economic growth boosting the region’s banking and finance sector (Australian government website source).
Banking is one of the prime sectors that has benefited from the economic growth. There are currently around 51 banks licensed by the UAE Central Bank of which 23 are national banks and 28 are foreign banks. It is estimated that the regional asset management business in UAE will grow by 23.5 percent per annum in the next five years. The investment pattern too has witnessed significant changes in the past few years in Dubai. With the number of wealthy individuals increasing at a faster growth rate than the global average it is estimated that there will be 250,000 high net worth individuals in UAE by the year 2009. Traditionally the wealthy investors in Dubai approached wealth managers in European and American countries. Post 9/11 the world markets was restricted to a considerable extent to the wealthy population in Dubai. All financial transactions taking place in and out of US markets was being regulated by the United States that led most of the investors to seek local investment alternatives. This created new opportunities for the wealth managers in Dubai and financial institutions woke up to the growing need for private banking and financial services.
The Dubai International Finance Centre or DIFC has triggered massive changes in the way wealth management services are being offered to the clients. The Dubai International Finance Centre or DIFC has triggered massive changes in the way wealth management services are being offered to the clients. Post 9/11 the world markets was restricted to a considerable extent to the wealthy population in Dubai. All financial transactions taking place in and out of US markets was being regulated by the United States that led most of the investors to seek local investment alternatives. This created new opportunities for the wealth managers in Dubai and financial institutions woke up to the growing need for private banking and financial services.
The gradual shift from offshore to onshore and growing demand for investing their assets in local market, real estate, private equity and stocks has increased the number of private banking units offering wealth management services in Dubai. The Gulf countries has the world’s larges pool of private wealth with US$ 1.5 trillion held in real estate, offshore securities and bank deposits.
2.3 Government policies that has affected the wealth management industry in Dubai
The Dubai International Finance Centre (DIFC) is the world’s fastest growing financial hub. It was setup in the year 2004 with the objective of servicing the large untapped financial service market in this region. The Centre has played a vital role in bridging the gap between the existing financial structures in London and New York in the West and Hong Kong and Tokyo in the East. The vision of the DIFC “is to shape tomorrow’s financial map as a global gateway for capital and investment” and its mission “is to be a catalyst for regional economic growth, development and diversification by positioning the DIFC as a globally recognized financial centre” (DIFC).
The DIFC was established to attract increased liquidity into new investment opportunities that can contribute to increased wealth generation and overall economic growth. The Centre has also facilitated the privatisations in the region enabling initial public offerings by privately owned companies. This has greatly assisted in deregulation of financial services market and liberalization policy implementation in Dubai. The DIFC has become a global centre for Islamic finance serving the Islamic communities and an international market of US$ 400 billion.
The DIFC has attracted multinational financial companies like Morgan Stanley, Goldman Sachs, Barclays Capital, Credit Suisse, and Deutsche Bank. Institutions operating in DIFC avail zero percent tax rate on income and profits with no restrictions on foreign exchange and freedom to commit capital transactions without any restriction. The centre focuses primarily on banking and brokerage services, capital markets, re-insurance and captives, Islamic finance, wealth management and ancillary service providers.
The Islamic financial services sector is undergoing rapid growth. The total size of the Islamic banking industry is currently estimated to be USD 800 billion to USD 1 trillion with an estimated global potential of USD 4 trillion. The sectoral growth rate is nearly 15 to 20 percent per annum. The assets under management of Islamic funds are estimated to be between USD 50 billion to USD 70 billion. (Source: DIFC publication)
The Dubai Financial Services Authority (DFSA) is a regulatory body that supervises financial institutions authorised to conduct financial services from the DIFC. This body is empowered to make rules and regulations and also enforce these requirements. It regulates all sectors of the market that includes asset management, capital markets, banking, insurance, and Islamic finance.
3. Research Methodology
The Middle Eastern countries have undergone considerable financial transformation in the last seven years that has created huge opportunities for wealth managers. Dubai has become the business hub attracting increasing number of investors.
The accelerated growth of the country’s GDP and market capitalisation rate are the principal factors behind the rising wealth in the economy. The Merrill Lynch Capgemini wealth report states that the Gulf countries is experiencing a growth of more than 11.6 percent in the amount of wealth held by the high net worth individuals. The number of wealthy individuals is also rising by 11.9 percent but the number of banks offering private wealth management services is yet to fully exploit the industry potential. There are many reasons attributed to this gap. The demographic and economic trends in Dubai present a widely different picture as compared to other global economies.
The dissertation researches the global trends in wealth management and private banking in the recent years and attempts to provide a generalised picture on the definition of high net worth segment of population and industry trends. The wealth management services have expanded enormously providing the investors with wide range of choices and alternatives. Moreover, the concept of personalised and customised wealth management services has grown owing to the rising market complexities and regional variations in investment pattern and structure. The mobility of funds across geographic boundaries has added new dimensions to the way wealth is managed in today’s world. The information provided in this segment of the paper is derived from World Wealth Reports released by reputed research companies like Merrill Lynch and Capgemini. Various online banking journals and publications released by reputed wealth management service providers have been studied to derive the required information. Market survey reports by PriceWaterHouse Coopers and Barclays have been used to obtain the industry data on global wealth management.
The dissertation aims to study the demographic and economic trends that have significant impact on the wealth management industry in Dubai. The paper identifies and analyses the industry traits and practices that have shaped the financial products delving into the habits and preferences of the wealthy segment seeking effective management of their assets and income. It has been studied and analysed that the traditional wealthy families are giving way to a new class of high net worth individuals who are young entrepreneurs involved in business segment other than the conventional oil producing business. The wealth generation has now dispersed to areas like real estate, services like hotels and entertainment. The study also analyses the changes that have taken place in private banking sector in Dubai in the past few years. It provides an understanding of the market situations and diversities faced by wealth managers in Dubai. This section of the research makes use of various journals and publications related to the wealth management industry in Dubai and the overall economic and social demographic trends that rule the private banking environment. These online journals form the base of the overall findings in the trends and patterns that set the wealth management industry in Dubai apart from other global economies.
The legal framework is a critical aspect of growth and development in any business.
It provides the skeletal framework for conducting business operations, managing and implementing strategies within the risks and constraints in which they need to operate. The study highlights the policies and regulations enforced by the government to support the wealth management industry. The Dubai government has provided the banks with the necessary infrastructure to enter this market. This move is seen as a significant step in promoting financial services industry in the country. The Dubai International Finance Centre enables multinational private banks to operate in an independent manner. This infrastructure has proved to be an ideal location to service the rising wealth management needs of the high net worth individuals. The information for this section of the paper has been obtained from online journals and publications on Islamic Finance, legal and regulatory policies of the government and the contribution of the Dubai International Finance Centre in promoting wealth management services.
The research content gathered from various journals, newspaper articles, and financial institution reports reflects the current industry trends. The secondary sources of information are reliable and accurate in nature owing to the information derived from principal sources involved in the wealth management industry.
This section analyses the current trends adopted by the financial institutions in Dubai in the private banking and wealth management sector. It provides a comparative study of the practices of the financial institutions in Dubai with their counterparts in United Kingdom and other countries. This will highlight the nature of wealth management services provided in Dubai, its challenges and limitations, and its effectiveness.
4.1 Financial institutions in Dubai
The rapid growth of private wealth in Dubai has led to increased penetration of multinational banks and financial institutions seeking to take advantage of the growing market opportunities. The entry of large number of global private bankers and wealth managers along with the local and regional institutions has given rise to an increasingly competitive market vying for a share of the wealth management needs of the local high net worth individuals. In such circumstances, the private bankers and wealth management firms are conceiving all possible notions to retain their competitive edge by adopting the product differentiation strategy.
4.2 Wealth management practices in UK and other countries
The global high net worth wealth totals nearly US$ 37 trillion and this is expected to reach US$ 51.6 trillion by the year 2011, showing an annual growth rate of 6.8 percent according to the World Wealth Report, 2007 by Merrill Lynch Capgemini. The report states that approximately 9.5 million people globally hold more than US$ 1 million in financial assets that is an increase of 8.3 percent since the year 2005.
This wealth generation is prompted by the real GDP gains and continued growth in market capitalization rates. The rising economies and increasing accumulation of wealth is largely attributed to globalisation and liberalization markets across the world. The recent years have witnessed a strengthening of Asian economies like China and India that featured prominently in the increasing concentration of wealthy individuals across the globe. The global wealth has been increasing despite economic fluctuations that have led to marked changes in the demographic and economic trends with new and emerging markets. A whole new breed of wealthy individuals have emerged as new clients for the wealth management industry. Countries like Africa, Middle East and Latin America witnessed significant increase in the number of high net worth individuals over the past two years. Africa recorded a net increase of 12.5 percent in the number of wealthy individuals in the year 2006 while Middle East and Africa reported an increase by 11.9 percent and 10.2 percent in the same period (World Wealth Report, 2007).
The global wealth management industry has undergone significant changes in the past few years owing to rapidly changing demographic and economic trends discussed in the previous section. Private banking sector too has changed dramatically in the past few years. The multinational banks have ventured out to cater to the rising demands of the increasing segment of high net worth individuals across the globe. Specialized financial products and customised investment solutions are some of the key services being offered by these banks to retain and attract the high profile client segment. The growing market complexities and increasing client awareness fuel the rising demand for global wealth managers who are efficient, knowledgeable and experienced in assessing client needs and framing attractive schemes to invest and manage their wealth.
There are many wealth management firms who are venturing into new markets that is not quite easy task. Widening market boundaries has increased competition in respect to number of firms providing wealth management services. Firms and institutions that are able to deliver products based on specific client needs and requirements have a competitive edge over the rest in the industry. There are many realms of services that need to be investigated and researched before providing a customized package to the clients. Moreover, the increased access to information and existing services has made the client aware of the industry trends and possibilities. The wealth managers today need to be well equipped and specialized in their field of operation to cater to such a client base.
Technology has increased investor access to the capital markets and opened new channels of investing that are inexpensive and convenient. The penetration of the Internet into homes and offices has made online banking and investment options easier for the clients seeking investment options. The investor has now extensive financial information available at his fingertips to decide on the best possible alternative.
According to the PricewaterhouseCoopers’ 2007 wealth management survey, the CEOs of private banks and wealth managers expect the assets under management to increase by 23 percent per annum in the next few years. The report also states that the private banking and wealth management businesses will grow at 30 percent annually in the next few years. “More clients, and greater share of current clients’ wallet is key to meeting these ambitious expansion targets” (Bruce Weatherhill, PwC 2007). The wealth managers consider gaining increased share of clients’ wallet as more effective expansion and growth strategy as compared to growth through acquisition. The PwC report observes that at present 50 percent of the wealth managers hold nearly 40 percent of the investable assets of the high net worth individual clients. This is expected to increase to almost 80 percent of the wealth managers holding approximately 40 percent of the clients’ investable wealth. This is largely attributed to the growing number of players in the private banking and wealth management services. The clients find it difficult to distinguish between the wide range of services and products offered by these firms. Moreover, the clients want their money’s worth when they are paying for the services of a wealth manager demanding knowledgeable advisors who can explain their investment choices in detail and support recommendations with fact based analysis.
As McKinsey and Company point out in their private banking survey report, 2007 “the winning institutions will be those that are able to –
Adapt their service to the needs of each segment (including the ultra high net worth segment)
Deliver true value to clients rather than just perceived value
Invest consistently in growth throughout the cycle
Develop a distinctive talent model and proposition
Effectively broaden the product range
Successfully tap high growth markets”
The graph below illustrates the worldwide growth percentage in high net worth people in the year 2006.
Source: World Wealth Report, 2007 – Merrill Lynch and Capgemini
Countries like Singapore and India witnessed a high growth percentage of 21.2 percent and 20.5 percent respectively in the number of high net worth individuals in the year 2006. The Middle Eastern countries experienced a 15.4 percent growth rate in the same period. These are some of the emerging economies that have gained prominence in the wealth management industry over the last few years.
The global wealth and asset investment pattern has also witnessed significant changes in the last few years. The high net worth investors are generally well informed of the present and future economic and market trends that have deep impact on the invested wealth. These investors tend to reallocate their portfolios to capitalize on the market trends. A global study on the allocation pattern of financial assets in the past few years reveals that nearly 65 percent of the investable wealth is allocated in equities, fixed income products, and bank deposits. The remaining percentage of wealth is allocated to real estate investments and alternative investment products that include hedge funds, derivatives, foreign currencies, commodities, and private equity or venture capital funds.
Source: World Wealth Report, 2007 – Merrill Lynch and Capgemini
However, investment trends in the last year suggest that more investors are seeking to reallocate wealth in real estate due to higher returns and growing opportunities. Investments in real estate provided these investors with a low risk alternative due to continuous rising prices of real estate. The World Wealth Report states that the global investments in real estate totalled US$ 900 billion in the year 2006. But this may be short-lived due to the fluctuating real estate markets at present triggered by economic slump and rising inflation.