Wealth Management: Pickings get richer

Banks and financial consultants, from the venerable to the brash, are queuing up to handle the cash and investments of a burgeoning elite - those ultra-wealthy citizens at the apex of the economy. David Bain reports.

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Last Updated: 09 Oct 2013

If the 10 years of the Tony Blair government will be remembered around the world for the Iraq war, on the home front it's likely to be for overseeing an unprecedented surge in the number of wealthy individuals in the UK. An inter- esting legacy for a Labour party prime minister, some might say. The power and influence of the nation's billionaires, multi-millionaires and mere millionaires is growing fast - as are their numbers. There are now nearly 500,000 people in Britain with £500,000 or more in the bank, not counting their primary property.

Bankers call these people high net worth individuals (HNWIs), and their numbers grew by 8.1% in 2006, according to the annual Merrill Lynch Capgemini World Wealth Report. But HNWIs are at the bottom of the new wealth pyramid. Those with £15m beyond their primary property - the ultra-high net worth individuals - number more than 5,000. And those right at the tip of the pyramid - the richest 1,000 - have a combined wealth of at least £360bn, according to the Sunday Times Rich List. To become a member of this club, you'll need at least £70m.

Ten years ago, the combined value of the 1,000 wealthiest people was just shy of £100bn - so their wealth has increased by more than 260% in a decade. As the Rich List's creator since 1989 (and author of MT's annual Top 100 Entrepreneurs ranking), Philip Beresford has been ideally placed to observe this wealth explosion. 'UK billionaires, Russian oligarchs or Indian tycoons, they have never had it so good,' he says. Never was so much wealth accumulated by so few in such a short time.

'If Marx or Engels were still alive, they would feel the time was ripe for revolution, so great has the wealth gap become,' adds Beresford. 'But enough of the prosperity has trickled down that the Bolsheviks have been kept at bay.'

For the man and woman in the street, the most blatant examples of the new class of mega-wealthy in Britain are perhaps to be found in the sports and entertainment industries - like the Russian mega-moneyed owner of Chelsea FC, Roman Abramovich. He is the billionaire poster child of 21st-century Britain - the owner of three super yachts, numerous mansions and, of course, a world-famous football team.

Then there are the footballers themselves, the top players earning as much as £150,000 a week. And most of us know that entertainment stars like Simon Cowell, Anne Robinson and the Osbournes earn millions. Magazines such as OK and Hello give us many glimpses of their million-dollar lifestyles. We also know that those working in top financial jobs earn big money - more than 4,000 bankers in the City of London got bonuses of £1m-plus last year.

Less well known, apart from Richard Branson and the Dragons' Den panellists, are the many millionaire entrepreneurs who, at the height of Blair's boom, were selling their businesses for record sums.

The centre of all this is the money metropolis of London - now the world's most expensive city for property, eating out and even contemporary art - where the swelling ranks of the ultra-wealthy have created entire industries to cater to their massive purchasing power and influence. In the financial services industry, thousands of advisers offer their banking and investment services to Britain's rich.

These are lumped together under the term wealth management, embracing anything from a provincial independent financial adviser offering mortgage advice for those with £300,000 going spare, all the way up to the 'family office' - a personal bank, investment management firm and private-client law firm rolled into one, acting for families with, say, £100m or more.

Taking this spectrum into account, there must be at least 150 financial firms in the UK catering to the needs of the rich. Indeed, wealth management represents by far the most fragmented part of the financial services sector.

Highest-profile of these wealth managers are Coutts and Barclays Wealth. Coutts, part of the Royal Bank of Scotland and often referred to as the Queen's bank, has about 63,000 clients, 18,000 of whom are entrepreneurs. It likes customers to have around £500,000 of investable money before it becomes interested. A fair percentage of the country's lottery winners bank with Coutts. So, too, do many of the nation's best-paid footballers; the Beckhams are said to be clients.

Coutts prides itself on its long and illustrious history - it can trace its origins back to the 17th century and has had an HQ on the Strand since 1739. Yet the Queen's bank doesn't see itself as an anachronistic financial services firm that just does personal service and opulent chequebooks well. 'Coutts is absolutely not some Gilbert & Sullivan music-hall pastiche of a wealth management firm,' says Perry Littleboy, the bank's head of marketing and business development.

To prove the point, Coutts enlisted the services of fashion designers Stella McCartney and Osward Boateng to design debit cards. It also backs cutting-edge charities such as Unlock, which helps ex-offenders, and Kids Company.

Barclays Wealth, by contrast, has none of Coutt's grand lineage or royal associations. Indeed, the name has been in existence for just over a year, since the UK's third-largest bank decided to amalgamate all its private-client businesses under one name. But it has created a recognisable brand through a massive advertising and public relations campaign, with pithy taglines like 'Wealth. What's It To You?'

Ian Ewart, the firm's global head of marketing, is leading its branding efforts. He believes that being the largest private bank in the UK has been instrumental in its success. 'We have sought and achieved significant standout from the crowd with astute media buying and placement, and this has been amplified through the use of PR to promote our brand story,' he says.

Coutts' Littleboy says his bank does not need to tell the world so much about his brand. 'I don't believe you need to shout from newspapers about the bank to build client loyalty. We have client loyalty because of the products and services we offer.'

But a bit more shouting might be good business sense for many wealth-management firms. Says John Clemens, head of research consultancy Tulip Financial: 'The critical clients for wealth managers are those with £1m or more in liquid assets, who own over half of the UK's £1.2trn in liquid assets. Today, most make investment decisions without any professional advice. Why is this? It's because wealth management spends peanuts on promotion.'

UBS, global leader in wealth management in terms of the amount of assets it manages, has gone all out to acquire wealthy clients through marketing in the UK, with considerable success. After starting from a few UK accounts in offshore centres such as Switzerland in 2003, it is now the third-largest wealth manager in the UK, with £30bn of managed assets. UBS has used its size and considerable expertise in wealth management to win and keep clients.

Monolithic banks like UBS, Credit Suisse and US firms such as JP Morgan, Merrill Lynch and Goldman Sachs bring their considerable leverage in other areas - particularly investment banking - to bear on their relationships with very wealthy clients. These are given private investment banking services, normally available only to corporate clients.

But size isn't everything. Groups such as Cheviot Asset Management (started by ex-UBS private client specialists), Ruffer, and Berry Asset Management make a virtue of their small size and personal service. Cheviot started with virtually zero funds under management just over a year ago and now has £2.5bn or so.

'The wealthy are often attracted to the smaller firms,' says Michael Maslinski, whose management consultancy specialises in wealth management. 'They like the personal service, they know exactly who they are dealing with, and are often presented with less complicated products and services - which many prefer.'

Wealth managers have been peddling products with underlying derivative structures to ensure guaranteed capital returns. Other products offset risk by using currency and interest rates. But complicated elements alienate some clients - as do high fees. 'I got inundated with calls from wealth managers when I sold my business,' said a London-based publisher whose company realised £30m a few years ago. 'Many of them were offering a whole array of products and services - all, of course, with high fees attached. I decided to put most of the money I made into property and gave nothing to wealth managers.'

The Northern Rock episode and worldwide concerns about credit markets have done little to allay concerns about complex investment products among wealthy investors. 'There has been a flight to transparency,' says Maslinski. 'Private bankers are trying to win the trust of clients - trying to turn from a sales mentality to an adviser one - but the recent crisis might have undermined that.'

Recent research from Tulip Financial found that many of the UK's wealthiest investors pay little attention to the investment advice offered by their wealth manager, and in many cases invest in completely the opposite way. Some very wealthy people just deposit their money with their trusted retail bank, as retail billionaire Mike Ashley is said to have done after listing Sports Direct this year. Nine hundred million pounds reportedly went straight into his local branch of the Halifax, before any wealth managers could get their hands on it.

WHAT WEALTH MANAGERS OFFER

- Foreign currency mortgages

The aim is to switch a mortgage into currencies that weaken against the pound to reduce the sterling equivalent of the loan. Typically, mortgages are switched between dollars, sterling, euros and the yen. However, a sharp appreciation of the conversion currency could end up costing the borrower a lot more than a straight, single-currency mortgage.

- Structured products

These investments, sometimes called capital guarantee funds, combine equity and fixed-income products to provide capital protection and appreciation. Protection is guaranteed by investing in zero-coupon (non-interest) fixed-income bonds. The capital guarantee of a fund is about 90% of initial investment. Options, futures and other derivatives provide growth in the fund. There's usually a tie-in of between three and five years, and leaving early is costly.

- Fund of hedge funds

By investing directly in single-strategy hedge funds you can make millions - and lose millions. There are at least 14 hedge fund strategies, but four dominate the market; the largest category is 'equity long/short'. Most merely wealthy people gain exposure by investing in a 'fund of hedge funds' product, which invests in multi-strategies to limit risk. Fees can be high, and they're not easy to understand.

- Elite funds

Some wealth managers offer ultra-high net worth clients 'elite portfolios'. These make use of their firm's relation to its investment banking arm - if it has one. As with many of these products, the managers claim to deliver returns above a certain benchmark. They use quantitative management techniques and computer-driven models to drive returns.

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