It’s hard to believe that only a decade has passed since Thomas Friedman penned The World is Flat. And, notwithstanding today’s geo-political challenges, the world is getting flatter every day.
Today, more wealthy individuals are crossing borders than ever before and families outside the U.S. have increasing connections with the U.S.:
- Their children go to college here
- They have residences here
- Their family businesses cross borders and intersect with the U.S.
- Many invest in our markets
- Their estate plans involve residents here
For many years now, with a few regional interruptions, wealth outside the U.S. has been increasing at a faster pace than within it. According to BCG’s 2015 Global Wealth Report, by 2019, Latin American and Asia Pacific wealth growth is projected to increase by roughly 12% and 10% respectively, versus around 4% for North America. The following chart is instructive:
Yet in spite of this abundantly clear data, many global banks are pulling out of the cross border wealth management business. In 2012, Bank of America sold Merrill Lynch’s international private client business to Julius Baer. In March of this year, RBC Wealth Management decided to close its International Advisory Group, and a few months later Merrill Lynch announced $2.5 million account minimums for new clients in “core” countries and $5 million account minimums for new clients in 21 other countries. Similar moves were made by Morgan Stanley. Barclays, Deutsche Bank and Credit Suisse are all exiting U.S. wealth advisory business.
So, why are so many of the largest banks in the world retrenching from cross border business when the world is flatter and wealthier than ever before?
One reason is that for large banks, wealth management is a scale business; it’s not profitable in markets they can’t dominate with size. Unfortunately for wealthy clients around the world, “post-crisis” global banks are so large now and required to be so heavily capitalized, that it’s difficult to generate requisite returns covering markets where they can’t achieve massive scale. They prefer to focus on markets closer to home where they can do that.
Another reason is the regulatory landscape today is far more complex and difficult for large, layered bureaucracies to navigate. Many of these large firms have experienced difficult anti-money laundering (AML) and other cross-border sales practice issues. Big institutions can also be political targets in foreign countries.
Certainly though, the large firms are aware of the growing pool of wealth abroad. In fact, some are trying to stay in the international advisory business, at least partially, by creating specialized teams that mimic three characteristics of boutique advisory firms: small, focused and experienced.
Wells Fargo formed a financial advisor group called International Client Investment Services which specializes in serving NRCs, and Merrill Lynch has announced similar plans as well. In August, Morgan Stanley began whittling down its NRC business so only 400 of its U.S.-based advisors can work with NRCs. Unfortunately, “boutique units” housed within goliath financial firms don’t usually fare terribly well as their parent owners consider them low on the totem pole.
A Significant Opportunity
In light of the “dis-economies of scale” at work in the large firms, we see a significant opportunity for boutique advisory firms serving NRCs. As mentioned, the enabling characteristics are:
Small: Boutiques don’t need massive scale to be profitable. Simply put, high quality, small teams can often operate with greater speed, agility and effectiveness than large ones, and with more efficient cost structures and a lower profile. Boutique advisors can also work more freely with clients’ other professional advisors (lawyers, accountants) and can respond to and customize solutions for clients faster and more efficiently without having the layered bureaucracy wirehouse cloud hanging over their head. Boutiques also don’t have teams of advisors competing for clients in a given market.
Thanks to today’s ever-expanding technology offering, being a small firm is no longer the barrier to having a robust, state of the art technology platform as it once was. Since launching Snowden Lane Partners, we’ve developed our platform to include multi-currency capabilities, access to international borrowing/lending, FX solutions and complex international trust and estate planning capabilities, including multi-jurisdictional overlays. We expect other specialty boutiques to develop similar capabilities in order to offer similar benefits to their advisors and clients.
Arguably, small size also benefits internal controls around things such as anti-money laundering, foreign corrupt practices, and improper sales practices. More senior oversight is closer to the business and with the relatively smaller number of financial advisors, boutique firms can actually be a more risk-averse home for teams with NRCs.
Focused: Because boutiques are small and because advisors and leadership are owners, they tend to operate with greater focus. Wealth advisory is their only business and as such, decisions to enter new markets are not taken lightly, and decisions to leave are unlikely where partners’ relationships and business interests are at stake. Boutique advisors don’t worry about their business being arbitrarily shut down because it doesn’t meet the scale threshold of a large institution.
Wealth advisors in boutiques can also focus on what they do best: providing superior advice and solutions to their clients, and less on navigating the labyrinth bureaucracy of a big bank. Their clients are not subject to cross selling of bank and proprietary products. As banks continue to withdraw from the international scene, financial advisors with years of experience serving NRCs increasingly find themselves working in a dwindling segment placed at the sidelines of a bank.
Experienced: Experience is perhaps the most important enabling attribute of specialty boutiques, and one that cannot be easily replicated. Boutiques typically only hire experienced advisors and senior leadership can evaluate issues and make decisions far more quickly than at large firms. Typically, these decisions are more informed because leaders are closer to the business.
In terms of the business opportunity at hand, experience tells us that if banks are retrenching from cross border business at a time when the world is flatter and investors outside the U.S. are wealthier than ever, something is askance. That something is that global banks are now so constrained by capital and other regulatory requirements they simply can’t act in the interests of some very good advisors and clients. This presents a great opportunity for small firms with unique capabilities.
The specialized boutique model is simply a more effective enabler of advisors to provide superior client focus, advice and investment solutions. And in the end, that’s what it’s all about: serving clients and their families—whether they reside in this country or outside.
Rob Mooney is CEO of Snowden Lane Partners.