Rich individuals require specialised advisory and planning services in order to manage their wealth efficiently. This has led to the creation of wealth management service providers, either within large banks or as stand-alone organisations. Until recently, wealth management was concentrated in the West. This is changing rapidly with the pendulum swinging to the East and Africa, for the first time, is becoming a serious market. Cinderella is getting ready to go to the ball. Sherelle Jacobs reports.
In 2011, for the first time in history, there were more millionaires in the Asia Pacific than in North America, according to consulting group Capgemini and the Royal Bank of Canada’s (RBC) recent World Wealth Report. Whereas the number of high-net-worth individuals (HNWI) in Asia-Pacific increased by 1.6% to 3.37m, the number in North America decreased by 1.1% to 3.35m. Less well known is the fact that the report also reveals interesting things about the African wealth management sector. In 2011, the number of HNWI in Africa grew by 3.9%, more than twice the rate of growth in Asia. Africa also had the second-highest regional rate of growth after Latin America.
Wealth management is a highly specialised and sophisticated service offered to individuals who are exceptionally affluent. This involves analysis and suggestions on how, when and where to invest, tax regulations in different jurisdictions, the setting up of trusts, handling estates, planning, holding and disposing of shares and stocks, making strategic purchases including works of art, rare and expensive vehicles and other products and so on.
Wealth management services tend to be concentrated where large numbers of HNW individuals are to be found. This has largely been in the West but as we have seen, Asia is now on the path to overtake the West and countries like Russia are producing disproportionate numbers of HNWIs. Africa, until recently, did not register significantly on the wealth management board. “Over the years there has been ongoing interest in Africa, but this was traditionally ‘under the radar’ interest from jurisdictions where disclosure was not a high priority,” says Erasmus van Niekerk, from fund management firm Maitland’s Investment Services business.
Tom Price-Daniel, managing director at Price Daniel Partners, an emerging markets executive search firm, says this is now changing, and that attitudes towards Africa’s rich have been undergoing rapid transformation.
“As a firm that specialises in PWM (private wealth management) in the African market, we have clearly seen linear growth, especially over the past two years, where hiring has continued apace with a number of pure play private banks adding new teams, as well as the well-known British big three [HSBC, Barclays and Standard Chartered] and the big two in Switzerland [UBS and Credit Suisse], both in significant growth cycles,” he says.
It is true that most interest in wealth management opportunities outside the West is currently channelled towards Asia rather than Africa. Comparative figures reveal why. Asia’s 3.37m HNWI were worth $10.7 trillion in 2011. In the same year, Africa hosted 0.1m HNWI and their collective worth amounted to $1.1 trillion. Total HNWI wealth also decreased by 2% in Africa in 2011, according to the World Wealth Report. Nonetheless, various basic indicators suggest that Africa should be an increasingly attractive market for the wealth management sector. Africans are becoming wealthier and a larger number of them are entering the super-rich category, particularly through the exploitation of natural resources such as oil and minerals.
African economies are also becoming more prosperous, a transformation that will strengthen the position of the typical African entrepreneur. In 2011, the GDP of sub-Saharan Africa’s economy grew by 3.4%, according to the African Development Bank, above global average of 2.7%. The business environment is also improving. In 36 out of 46 countries in sub-Saharan Africa, regulatory reforms have been introduced between June 2010 and May 2011, to make doing business simpler, according to a report by the World Bank and the International Finance Corporation.
Wealth management firms have clearly noted these positive changes. “Over the past decade, with the stabilisation of Africa after years of struggle and turmoil, plus with growth and returns under pressure in the developed world, we have seen an increase in the interest from international banking and wealth management groups,” adds Van Niekerk from Maitland.
Local know-how or international brands?
According to Van Niekerk, the development of stock markets in Africa has also played a role. “The need for advisers to be closer to clients has been influenced by the growth of stock exchanges in Africa. Although these are mostly still quite new and often illiquid, there is a need for access to capital for businesses, as well as a market for investment by Africans into businesses in their own back yard,” he says.
Tom Price-Daniel also cites features of Africa that are normally seen as weaknesses as the very characteristics driving growth of the wealth management sector: “The reason the wealth management sector is specifically interested is that for a HNWI there are a number of risk factors that are inherently high in Africa. As a result, offshore banking that can offer protection by offering a safe haven by mitigating against risks is in increasing demand.”
With interest in Africa’s wealth management sector rising, the question of whether local firms present competition to bigger, international firms and vice versa inevitably arises – domestic firms often may have an advantage in terms of local knowledge, whether administrative and legal or cultural, for example. But a high-profile international foreign firm may have a much stronger brand that they can deploy to lure new clients.
“The local banks are a challenge in South Africa, of this there is no doubt. However, across the rest of the region, the role of the private banks is not really in competition with the local banks,” argues Price-Daniel. But he also adds, “The key factors are regional commitment and local understanding and knowledge – which is not necessarily naturally abundant in a European private banking model. Banks have had to implement talent acquisition strategies that meet the needs of the market.”
Van Niekerk has a similarly nuanced perspective: “Local knowledge is always very valuable in any context, but it’s not an insurmountable problem to foreign players. The foreign firm’s best avenue for success would be to acquire a partner with a local team, with a similar corporate culture and philosophy, but with the experience in the local market. The marriage of local knowledge with global reach will be quite effective. Wealth management is driven quite strongly by the relationships involved, and the local relationships and networks built up over a long time are valuable.”
Market still fragmented
While foreign funds are getting more excited about Africa’s wealth management potential, the sector is still very much in its infancy and investors are stepping in gingerly. The UK and Nordic countries, which have an established history of doing business in Africa and are familiar with the risks involved, are ready to invest. But, others are more cautious, according to Lanz Zulu, Stanlib Executive Head, Asset Management, Africa. “Whilst American and Latin countries are expressing a verbal interest in the continent, this interest is not translating to deployment of funds. However, I believe they are cautiously optimistic and do foresee this mind shift translating to active investment in the continent,” he says. Second, wealth management firms serving African clients are currently far from well distributed. Most are located in South Africa – over 50% of respondents to Novare Investments’ Investing in Africa – Funds and Managers Survey 2010 were based there. This does not mean that South Africa is necessarily the endgame for many firms that base themselves there. “The majority of these groups use South Africa [where most of them seem to have fairly significant client bases amongst high-net-worth individuals] as a stepping stone into Africa,” argues Van Niekerk.
Yet many of the other firms that responded to the 2010 survey were based outside Africa: a quarter in Britain and around the same number in the US. Only a small percentage was based in other African countries, such as Kenya and Zimbabwe. If firms want to fully exploit wealth management opportunities that the region offers, they may need to consider strengthening their physical ties to the continent.
Thirdly, even the most mature aspects of Africa’s wealth management industry need work. The South African market, although it is the biggest wealth management market in Africa, presents a number of challenges. The sector is ‘fragmented’ and ‘competitive’, according to an Insights report by NMG Group: no provider has managed to carve out more than a 12% stake of the country’s market.
Wealth management firms are also failing to differentiate themselves from their competitors in South Africa, which makes it difficult for the same companies to increase their share of the market: “We have a large number of sophisticated providers, all drawing on what they believe to be the same international case studies and learnings, uniformly investing to compete in a market that is quite possibly too small to support more than two platforms over the longer term and which presents challenges around account economics, service costs and downstream participation that are specific to South Africa.” Clearly, companies need to be more focused on differentiating the products and services they offer in areas other than price.
There are also specific measures that firms feel could be taken in response to factors currently constraining profits. One is better collaboration between governments and the private sector, according to Zulu at Stanlib. “Help local stock exchanges to help companies list and help them attract FDI into the various countries,” he says, adding that firms need to cooperate with universities to create specific courses relevant to the demands of the wealth management sector. The wealth management sector in Africa is, then, clearly embryonic. But it holds much potential.