The $200 trillion gold rush that has reshaped global wealth management

Ten years ago, stock markets plunged, major banks faltered, and the global economy teetered on a precipice. Few would have predicted that the ensuing decade would produce an explosion in wealth.
 
But that’s just what happened. An unprecedented infusion of central bank funds into the world’s largest economies bolstered asset prices, making many people richer and exacerbating inequality. Global personal wealth reached a record $201.9 trillion last year, according to Boston Consulting Group Inc.
 
For some banks, this burgeoning affluence brightened an otherwise dreary post-crisis landscape. Giants including UBS, Morgan Stanley, and Bank of America seized the opportunity. With trading desks hamstrung by a flurry of new rules, banks set out to woo the growing ranks of the super rich.

 

But the business of managing the fortunes of the elite was changing as well. The U.S. and Europe cracked down on tax evasion, driving clients to pull tens of billions of dollars out of Switzerland and forcing private banks there to seek new pockets of wealth. Money laundering scandals brought fines and yet more rules. Compliance costs soared, and clients started paying closer attention to fees and the services they received for them. Technology made nimbler, cheaper investing tools possible.
 
Perhaps the biggest force reshaping global wealth management has been the ascent of China. Its economic expansion produced an eruption in private wealth across Asia, where almost 2,000 people become millionaires each day. In 2015 the Asia-Pacific region overtook the U.S. in assets held by millionaires, leaving banks scrambling for talent and office space. Local banks challenged the dominance of established Western wealth managers. As China opens its market to foreign com­panies, an ocean of money is waiting to be tapped.

 
In the Americas, Canadians are feeling the positive impact of the tech boom and new asset classes such as cannabis and crypto­currencies. Funds from rich Latin Americans are flooding Miami in search of political stability and a haven currency. Across the industry, but particularly in the U.S., the super rich’s family offices invest and network like institutions. At the lower end of the wealth spectrum, meanwhile, registered investment advisers and robo-advisers use low-cost funds to take business away from private banks.
 
Looming over this gold rush is the end of the central bank stimulus that drove so much wealth creation. Interest rates are rising in the U.S.; China is seeking to curb a record borrowing binge. Throw in the escalating trade war between the U.S. and China, Britain’s exit from the European Union, and rising nationalism across the globe, and the next decade may prove far more challenging for wealth managers than the last one.

 
In Switzerland, bankers read balance sheets
 
Andreas Arni remembers the heyday of Swiss private banking. As a wealth manager at Credit Suisse Group AG in the 2000s, he spent his days chasing after the fortunes of rich Latin Americans. Money was pouring in from around the world, lured by the promise of Swiss banking secrecy.
 
These days he’s leading about 100 relationship managers chasing a different type of client: Swiss entrepreneurs. These clients aren’t looking to hide money from the taxman, but rather to extract it from their businesses, get help with succession planning, and achieve competitive investment returns. And because their money isn’t stuck in an undeclared account, they will shop around for better and cheaper services elsewhere if they’re not happy.

 
“To serve these clients, you need bankers who understand balance sheets and companies,” Arni says in a conference room at Credit Suisse’s headquarters on Zurich’s Paradeplatz. “Ninety percent of the wealth of entrepreneurs sits within their com­panies. You need to find it and unlock it.”
 
Swiss private banking has been transformed since the U.S. and European governments cracked down on secrecy, imposing billions of francs in fines and requiring banks to disclose information on international clients. Four years ago a Credit Suisse unit pleaded guilty to helping Americans cheat on their taxes, becoming the first global bank in a decade to admit to a crime in a U.S. courtroom. The rising cost of complying with new regulations squeezed profit margins, especially at smaller banks, pushing dozens to close or combine.

 
The survivors adapted by exiting less profitable markets and offering clients access to specialized investments, including infrastructure and real estate, to improve returns. Swiss private banks—apart from Credit Suisse and UBS Group AG—doubled their profits, to 2.8 billion francs ($2.8 billion) in 2017 from two years earlier, according to a KPMG LLP study.
 
Although booming equity markets helped, so did changes in strategy. “The competitiveness in the market due to lower margins and the regulatory environment led to a further professionalisation of the industry,” says Patrick Odier, senior managing partner at Bank Lombard Odier & Co., Geneva’s oldest private bank.

 
Switzerland still attracts the biggest share of the global elite’s fortunes: more than $1.8 trillion in offshore money last year, or 21 percent of the $8.6 trillion market, according to a Deloitte LLP report. But it’s facing tougher competition from Hong Kong, Singapore, the U.K., and the U.S. as the overall market for offshore wealth management has been shrinking.
 
Swiss banks are seeking new clients at home. Those include thousands of closely held, often family-owned businesses. In Switzerland, some $160 billion in assets is tied up in such companies, according to Boston Consulting.
 
UBS and Credit Suisse, which scaled back their trading units after the financial crisis, are increasingly using their capital to finance transactions for private-banking clients. The goal is to persuade rich clients to trade more and bring business such as initial public offerings to the investment bank.

 
“It’s not enough to simply wait for the liquidity event. You constantly have to come up with ideas to add value for them,” says Jean-François Bunlon, head of Swiss domestic clients at HSBC Private Banking SA in Geneva.