Last year ushered in a new titleholder for the wealthiest man on earth: Mexican telecom tycoon Carlos Slim took that honor, knocking Bill Gates and Warren Buffett into second and third place. And the two American icons of wealth could fall further in the ranking if they don't watch their backs: Close behind them are India's Mukesh Ambani — who controls the Reliance group of companies together with his brother Anil — and Lakshmi Mittal, also from India, who sit in fourth and fifth place respectively. Sure, it might not mean much to Buffett or Gates exactly where they fall in a ranking of the world's top billionaires from one year to the next, but the shuffling of positions does highlight an important point for Wall Street: The United States no longer has a monopoly on the richest of the rich.
In fact, emerging-market countries are now minting new millionaires and billionaires at a much faster pace than the United States. Just take the emerging-market four — Brazil, Russia, India and China — so famous for their runaway growth that they earned their own acronym (BRIC) four years ago. According to the Merrill Lynch/CapGemini 2007 World Wealth Report, China now leads the world in sheer number of millionaires — 345,000 at the end of 2006, with 8-percent growth over the year prior. And, as of October 2007, the country had 106 billionaires — seven times the number it had the year prior — according to Shanghai's Hurun Report.
India's population of millionaires, meanwhile, grew 21 percent in 2006 to 100,000. In the same period, Russia's population of high-net-worth individuals (defined as individuals with $1 million or more in liquid assets by the report) rose 16 percent to 119,000, and Brazil's climbed 10 percent to 120,000. At the very top of the list of countries with the fastest growing high-net-worth populations is Singapore, with Indonesia, the United Arab Emirates, South Korea, South Africa, Israel, Czech Republic and Hong Kong also featured in the top 10. So who is managing these individuals' newfound wealth?
Not surprisingly, the financial titans on Wall Street and in Europe aren't letting the new classes of gliteratti elude their embrace. Most of these firms — UBS, Merrill Lynch, Citigroup — have had wealth-management operations in the Middle East and some parts of Asia for 50 to 100 years. Morgan Stanley has been operating in emerging markets for several decades, but has been mostly focused on offshore wealth, and is making its first push in onshore operations this year. But all of the major firms are making new investments and new hires, adding investment offerings and redoubling their efforts at courting these new rich. Indeed, Wall Street's retail-brokerage executives say their wealth-management operations outside the U.S. generate the greatest opportunities for growth. Morgan Stanley's Chinese wealth-management business, for example, has the fastest revenue-growth rate of any of their markets, according to James Gorman, co-president of the firm and head of the Global Wealth Management Group. The firm has increased its investment representative headcount in the private wealth-management business 25 percent over the past two years — five times faster than recent financial-advisor growth in the U.S.
BRINGING HOME THE BACON
That's not to say that the major firms have any intention of neglecting their U.S. operations. In fact, in most cases, these emerging-market investments are good for U.S. financial advisors. They allow the firms to gain access to (or develop greater expertise in) investment opportunities that can then be made available to U.S. clients. It also makes it easier for U.S. advisors to cater to clients who do overseas business or have family in multiple countries.
Federal and state or local regulations and tax treatments in the U.S. can make it difficult for U.S. investors to invest directly in foreign equities, says Robert Miller, vice president of Business Development for Raymond James International Holdings, Inc. But some firms are working to make certain foreign securities available on their U.S. platforms. (Of course, there are always U.S. listed ADRs, as well as mutual funds and ETFs that hold or track foreign stocks.) But, perhaps more importantly, having offices in rapidly growing developing markets can allow firms to offer interesting private equity, real-estate and foreign-exchange opportunities to U.S. clients.
“The knowledge transfer and sharing is quite important,” says Sallie Krawcheck, Chairman and Chief Executive of Citigroup's Global Wealth Management division. “Most broadly, U.S. clients benefit from Citi's global presence in private-equity offerings. Sourcing deals in Asia, for example, requires a local presence, which we have.” She points specifically to the firm's CVC Asia private-equity offering, as well as other CVC private-equity offerings that the firm has had historically, “which have been very successful for our clients.” Another global benefit is in foreign exchange, she says. “Our clients often run businesses with global operations. Being a part of Citi allows them, for example, to enter currency contracts with us and thus stabilize their costs on facilities or labor overseas. We also have many clients who take opportunistic positions in currencies.”
Morgan Stanley offers another example: Because of the firm's positioning in China, it was recently able to offer U.S. investors their first-ever access to the China A Share market (typically limited to Chinese investors) through a closed-end fund, as well as some “unique international real estate investments,” according to Jim Wiggins, spokesman for Morgan Stanley Global Wealth Management.
As for Merrill Lynch, the firm has been working over the past few months on allowing Turkish Lira cash and securities on its platform. The firm also has cross-border teams that serve the needs of international clients who may need access to multiple financial advisors on different continents, or where the skill set required to serve the clients requires a cross-border partnership.
Krawcheck says Citigroup uses the same approach: “A particular example might be a private bank real-estate client from Hong Kong with children who were educated and are now living in the U.S., and operating parts of the [family] business from the West Coast.” Generally there will be one lead banker for the family, but this banker will split the business with his teammates, she says. “A Smith Barney example could be a U.S. client who is relocating to Asia, and we would team the client with a local professional for services.”
Krawcheck also notes that Citigroup's operations abroad have allowed the firm to offer special perks to certain clients, like organized trips. “One thing that we did for some of our most significant clients was right after Labor Day. We took a group of those clients — no more than 40 from all over the world, including the United States — to China where they met senior leaders, senior regulators, senior government officials that we at Citi, given our presence in China, were able to access — which had enormous impact for the folks who were there.”
Morgan's Wiggins offers another indirect benefit: The growth opportunities in wealth management are overseas, and “U.S. financial advisors benefit from a business that is profitable, growing and thriving. When this is the case, there are more resources to invest in technology and other infrastructure, product development, and of course, employees benefit as shareholders,” he says.
INVESTMENTS ABROAD: BRICKS AND HEADS
Merrill Lynch's current wealth-management investments in Asia are heavily concentrated on India, where it plans to hire more than 300 new advisors over the next two years. The firm is on the ground in New Delhi, Mumbai, Chennai, Bangalore and Kolkata, with offices slated to open this year in Jaipur, Hyderabad, Chandigarh, Ahmedabad and Pune. UBS is also planning a domestic presence in India “subject to getting the necessary regulatory approvals,” says Allen Lo, deputy head of UBS Wealth Management. Morgan Stanley is planning to become a serious presence in India this year as well, starting out in Mumbai, Delhi and Calcutta, and focusing on clients with assets of $1 million or more, according to Leslie Menkes, a Singapore-based managing director for the Wall Street bank's private wealth-management arm. It will be the firm's first “onshore” wealth-management operation. Morgan is seeking to hire 100 private bankers in the country over the next four years, and to grow assets under management to $1 billion in the next three years, Menkes told attendees at a Reuters Wealth Management Summit.
India is a hot spot for investment in wealth-management operations for a number of reasons. First, it is one of the highest growth countries in terms of high-net-worth individuals. Second, it has more local talent than some other emerging markets, according to Ted Wilson of the wealth-management consultancy Scorpio Partners. “There's an enormous middle class in India, and they have an excellent education system and they study extremely hard, so there's a massive pool of highly educated English-speaking talent available,” Wilson explains. It is also a good place from which to serve Middle-Eastern clients, because it has more Shariah-compliant products listed on its Bombay (BSE Index) and National (NSE Index) stock exchanges than do most Muslim countries combined, according to local media reports, including the Asia Times online.
But some of the big firms have opted to manage their Asian and/or global emerging-market retail clients from established operations in Singapore. One private bank with a strong commitment to the possibilities in Singapore is Citi Global Wealth Management International. In April of 2007, Krawcheck nominated Deepak Sharma to head Citi's worldwide operations from Singapore. Sharma was formerly Citi's head of wealth management for Asia and the Middle East. Goldman Sachs also recently relocated David Ryan from Hong Kong to Singapore, from which he will oversee the firm's investment banking, wealth management and private-equity businesses for the Asia region. One reason Singapore is popular with the financial firms is because many very wealthy Middle-Eastern and Indian investors use the city-state as a tax-free haven. But more importantly, Singapore's government is making a huge play for wealth-management businesses, looking to turn the country into a wealth-management hub for Asia and the world akin to Switzerland. It has even created a private-banking training program at Singapore Management University — launching a Master of Science in Wealth Management in 2003.
So far, growth in the other two BRIC countries — Russia and Brazil — has been somewhat slower going. Recently Merrill acquired 10 percent of Russia's TRUST Banking Group, and is considering launching new offices in Moscow and Kiev over the next three years. Prior to that, UBS opened up an onshore wealth-management office in Moscow in the summer of 2006, and Deutsche Bank did the same in 2003. This is partly because Russian wealth is still held largely offshore, according to a white paper titled, “The Private Banking in Russia Survey,” by PricewaterhouseCoopers, which predicts Russia's private-banking sector will grow from 30 to 50 percent annually over the next several years. “As of fall 2006, only between $10 billion and $12 billion in private funds were being managed in Russia, with another $250 billion to $300 billion parked offshore,” according to the PricewaterhouseCooper's study. In general, banks seem to be directing their focus in Russia to establishing corporate and consumer banking and trading operations. Many are waiting for the political climate to improve before establishing private-banking offices.
Likewise, Brazil is at the forefront of a shift toward onshore-private banking in Latin America, but it may take some time. “The onshore trend in Latin America depends on political stability. Brazil and (to a lesser extent) Uruguay will become hubs given their relative political stability,” says Wilson. Raymond James, which has an Argentinian affiliate based in Buenos Aires, is looking to enter the Brazilian marketplace, and is evaluating multiple opportunities and forms of entry. In the meantime, firms like Morgan Stanley have invested in Miami as an offshore base for Latin-American clients. Recently Morgan poached Ernesto A. de la Fe, managing director and head of Latin America; Jon Mallon, regional sales manager; and Eric Newman, Columbia specialist, from Lehman Brothers. It also hired a team of five investment professionals to serve high-net-worth Brazilian clients and institutions in the Latin-American market. They are headquartered in the firm's Miami office.
ROUGH SAILING OVERSEAS
Perhaps, not surprisingly, firms are struggling to hire wealth-management talent on a global scale much as they are in the U.S. At a banking-industry conference in July 2007, Justin Ong, a partner at PricewaterhouseCoopers, estimated that private banks would need to hire 5,000 to 8,000 new client-relationship managers (Read: financial advisors and private bankers) in the Asian region alone over the next three years, according to published reports. To deal with the fierce competition for talent that has led to rampant poaching, UBS and Credit Suisse have set up their own training programs, but these aren't keeping up with demand. “UBS has had the most foresight,” says Wilson. “It has the stablest position in Asia/Pacific, and realized the only way to stop cannibalization is to produce its own talent. But it's hard to say who will be lured away from UBS.”
A 2007 PriceWaterhouseCoopers white paper on global wealth management puts it bluntly: “The key to wealth managers achieving their aggressive growth targets is their ability to recruit and retain quality CRMs [client-relationship managers], since the demand for CRMs significantly exceeds their supply. Alarmingly, only 26 percent of CEOs claim to be very confident that they will be able to recruit enough CRMs to fulfill their growth ambitions over the next three years,” write the authors of the paper. As Wilson sees it, for firms looking to gain critical mass in these emerging markets, “The way forward is through acquisition. In terms of timing, no one has the luxury to build up a presence organically.”
Still, executives are largely upbeat. “We do feel the impact of increasing compensation,” says Krawcheck. “But what typically happens is that compensation goes up when the business is good. So a rising-cost environment is also a rising-revenue environment, and that results in growth for the business. The business overall is very, very healthy.”
And barring a global recession brought on by U.S. credit and mortgage trouble, that should continue to be the case.
EMERGING MARKETFAT CATS
NAME: ROMAN ABRAMOVICH
Age: 41 Net worth: 18.7 billion Country of origin: Russia Country of residence: UK & Russia Company name and position: Millhouse LLC /Founder; Chelsea Football Club/Owner How he got rich: Oil and metals, initially, though now his holding company Millhouse LLC has diversified. Made a reported $13 billion by selling Sibneft to Gazprom in 2005. Biggest mistake: Caught cheating. His wife Irina Abramovich divorced him to the tune of £155 million. However, because they divorced in Russia, he saved himself from Ms. Abramovich having a claim on his future earnings, as stipulated by British law.
NAME: MOHAMMED AL AMOUDI
Age: 60 Net worth: $6.9 billion Country of origin: Ethiopia Country of residence: Ethiopia & Saudi Arabia Company name and position: MIDROC/Owner and Chairman; Corral Petroleum Holdings/Chairman How he got rich: Construction, real estate, oil refineries in Sweden and Morocco Biggest mistake: Risking antitrust charges given his extensive investment in Ethiopia, where he owns over 30 different companies.
NAME: JULIO BOZANO
Age: 71 Net worth: $1.9 billion Country of origin: Brazil Country of residence: U.S. Company name and position: Bozano Holdings Ltd/Owner How he got rich: Dubbed “Warren Buffet South” by Business Week in 1996, investment banker Julio Bozano excelled at turning around overstaffed, spendthrift companies, and gained a commanding position during the privatization of the steel business in the early 1990s. Biggest mistake: Failed to grow his financial conglomerate Meridonal to the size at which it could compete with the foreign players, who became very active in the Brazilian market in the late 1990s.
NAME: SUNIL MITTAL
Age: 50 Net worth: $20.9 billion Country of origin: India Country of residence: India Company name and position: Bharti Enterprises/Founder, Chairman and CEO How he got rich: Outsourcing telecom-network operations and IT in order to expand Bharti Airtel, the family mobile-phone business he runs with two siblings, and then launching a successful IPO. Biggest mistake: Not enough work selling the idea of Walmart to Indians, in particular to its small-scale retailers who feel threatened by an influx of box stores. News of a joint venture between Walmart and Bharti Retail provoked protests in cities all over India, and Mittal was burned in effigy.
NAME: ZHANG YIN, ALSO KNOWN AS YAN CHEUNG
Age: 50 Net worth: $3.4 billion Country of origin: China Country of residence: China; holds a U.S. green card Company name and position: Nine Dragons Paper/Founder and Director; American Chung Nam/Founder and Director How she got rich: Recycled paper. She founded a company in America that imports scrap paper to China in the early 1990s. Ten years later she was a giant corrugated-cardboard manufacturer on the Chinese mainland. Biggest mistake: According to the South China Morning Post, naming her 24-year-old son Lau Chun-shun to the board as the company's non-executive director.
