The Evolution of Wealth Management in the Middle East

The state of the wealth management industry in the GCC was debated in-depth at the November 19 Hubbis Digital Dialogue event, with an erudite panel of experts who reviewed the evolution of the WM market there to date, and opined on what steps must be made by both the authorities in the region and by the private sector to more fully set the industry on the road to realising more of its full potential. Which jurisdictions do GCC based clients prefer to utilise for their wealth planning and trust structures? Is the recent availability of common-law trust structuring through the DIFC, resulting in a boost for business there? Are wealthy clients remediating older structures, with the arrival of the CRS, economic substance and soon Mandatory Disclosure Rules? How does life insurance fit into wealth and succession planning in the region these days? Will the family office proposition thrive in the region thrive as the whole concept of family office becomes better appreciated and as providers gear their offerings to them, and the regulators become more welcoming and encouraging to keep more of such clients at home in the region. In this regard, is the region yet offering a competitive service in the single-family office and the multi-family office segments, both of which are seeing a rapid expansion globally and especially in recent years in Asia? Can the GCC region compete with Singapore, Switzerland, London and others? For wealth management to thrive in the Middle East, there is no doubt that the quality of advice on investments, wealth structuring, and estate planning must improve, hence there is a growing emphasis on both the professionalisation and related expansion of the products and solutions the industry can offer in order to keep their private clients engaged. Estate and succession planning solutions are key areas where there is a far greater emphasis in the GCC, as the founder generations age and as the younger generations return from overseas armed with their Western education. These and other fascinating topics were covered in some detail in what was a lively and insightful discussion on November 19.

Sponsors: Moxtra, Tradesocio, additiv

The discussion opened with a panellist diving straight into the evolution of the industry in the region. The first area, he reported, is digitalisation and omni-channel, noting that in the mature markets in the West, in the US primarily and a few countries, especially Singapore, they have taken digitalisation and moved it seamlessly into client centricity in a hybrid model, and he observed that the UAE had achieved major strides forward in this regard. The second area is talent and the development of the skills base, where he noted that industry experts in the US are leading the way, and so too in this region, there is a strong need not only for training but learning from those with real experience. And his third point was that to make brands and reputations in WM in the region that really stand out will help the industry continue to grow apace.”

More opportunities ahead

Another guest with substantial on-the-ground operational experience in the region then reported how the pandemic had brought about more opportunities than challenges. “I can confidently say that the level of interaction and engagement with clients has in fact gone up for us, despite the early challenges. We have more attendees in webinars than there used to be at seminars where you just have a big hotel room booked, and the host is there, there is buffet being served, and there’s a lot of distraction, but when you come on to video calls such as today, there’s a total focus on what the people who are talking are actually saying. So, in terms of client engagement, in terms of reaching out to customers with products and services that meet the requirements that have been a big plus.”

Expert Opinion – Madhavan Sivashankar, Founder, CEO & Member of The Board of Directors, Gulf International Finance: “I see the recovery in the UAE and the region in recent times as extremely encouraging. There is no doubt that the UAE government and health authorities have handled the pandemic well. Now, the health care system is evidently not overwhelmed, and life has come back to normal. Investors, clients, friends and peers from other parts of the world have evinced interest, post-Covid, to buy a home here which is an extremely positive sentiment for the region. Healthcare, as a sector could attract investments, technology and new entrants in the months to come.”

Expert Opinion - Wael Salem, Chief Executive Officer, Tradesocio: “The company and I have a strong belief that the next wave of digital transformation of banking and wealth management products is going to happen across Middle East and Africa. This is why we have setup our presence here. Financial institutions across MENA have very recently come back to the digitisation topic, allocating resources for the year 2021. Everyone is ‘shopping’ at the moment.”

As to digital, they explained that those who were ahead of that race have actually best prospered this year, as they have been able to provide the clients with all the products and services via digital channels, and offering straight through, seamless processing and execution. “Luckily, we are amongst those who can offer exactly that,” the panellist added.

How would you characterise your HNW and UHNW private clients’ appetite for mainstream financial investments as the difficult year of 2020 draws to a close?                                     

Still incredibly confident                              0%         

Reasonably positive                                      60%      

Same as before the crisis                             13%      

Now rather cautious                                     27%      

Looking ahead, what percentage of your HNW and UHNW private clients’ investment portfolios will be in the following asset classes?            

Mainstream fixed income                            42%      

Mainstream equities                                     36%      

Private/Alternative assets                           22%      

Looking ahead over the next few years, what percentage of your HNW and UHNW private clients’ investment portfolios will be invested in international financial assets?                                             

Less than 20%                                                 14%      

20%-30%                                                          29%      

30%-50%                                                          50%      

More than 50%                               7%         

How interested do you think Middle Eastern private clients are today in DPM?                              

Rising interest                                                 79%      

No change                                                       14%      

Not very keen                                                 7%         

In general terms, how sophisticated and organised are Middle Eastern HNW and UHNW clients in their wealth and succession planning?                                            

Incredibly advanced                                                     7%         

Improving/becoming more focused                        79%      

No visible change                                                         14%      

Which categories of private banks or IAMs/EAMs are likely to best succeed in the years ahead?                              

Global brand private banks                                        22%      

Boutique international PBs                                        14%      

PB arms of local/regional banks                14%      

IAMs/EAMs/MFOs                                                        50%      

How would you characterise the digital proposition offered by the wealth industry in the region?

Improving steadily                                                        94%      

No real change/not much progress                          6%         

Another guest commented how troublesome 2020 had been for everyone and how he himself had lost a dear friend to the virus. As to the markets and sentiment, he explained that earlier in 2020 it was about beating a retreat, regrouping to be ready for some recovery and that currently the third phase is about transformation. “Transformation,” he said, “would be across technology, across the way we compensate people, across the way we go about asset allocation for our clients. Lots of changes ahead, but we do feel that the worst is behind us, and we are looking at 2021 in a much more positive manner.”

Digital days are here

An expert commented how banks had made tremendous progress in digitising wealth management - covering protection planning, retirement planning and overall wealth building. “This is being achieved via RM interaction via digital channels, straight-through processing of transactions including insurance and investment,” they reported.

Expert Opinion - Thomas Schornstein, General Manager, Middle East, and Member of ExB, additiv: “Unfortunately, a client self-service investment journey is often incorrectly assumed to be a Robo Advisor.  A Robo Advisor makes algorithm-based investment decisions based on predefined criteria only, on the other hand, a client self-service journey is human and not machine based. It provides the client with access to advisory-based model portfolio’s or simply accesses advised securities and instruments.  Both have their advantages and ideally should be available.”

Another added that one aspect that is often overlooked is the engagement with the legal advisors from the very beginning to ensure that the client receives the best ultimate solution. “The UAE has some fantastic wealth management solutions available to protect GCC assets and help clients based in the Middle East. Each client will have different needs, or objectives and depending on the composition of their portfolio, needs a sustainable and bespoke solution,” she explained, “but more so one that gives them flexibility and access to liquidity if required.”

Expert Opinion – Madhavan Sivashankar, Founder, CEO & Member of The Board of Directors, Gulf International Finance: “The year began poorly. Volatile leveraged portfolios gave way leading to a significant number of margin calls, positions being squared off and the inevitable client remorse that follows. GIFL however, did not experience any margin calls, owing to clients being advised to steadily deleverage through 2019. After a tumultuous Q1, Covid-19 followed. I think the market was hardest hit in Q2 with the world wide lockdown and more importantly, we were facing situations never seen before akin to a deer in the headlights.”

Expert Opinion - Wael Salem, Chief Executive Officer, Tradesocio: “The decision to digitise is not being driven from the top to bottom. The mentality needed a major shift, and the pandemic provided a convincing stress test situation for these executives to see that digitisation is no longer a luxury but a requirement. After the lockdown happened, C-levels came to the decision that digitisation is a need and have begun to evaluate the opportunities and the costs that comes with digitising their whole investment framework.”

Expert Opinion - Thomas Schornstein, General Manager, Middle East, and Member of ExB, additiv: “To service a broader range of clients efficiently, the most promising approach today is a hybrid client journey.  This is where the client receives the required support from an advisor to complete the investment decisions. Following an upstream risk profiling process, a bank makes sure that the client receives only suitable and appropriate investment recommendations which the client understands and accepts any associated investment risks.”

Driving WM professionalism

A banker scanned the WM environment, commenting that there are two key trends. The industry had broadly been engaged for some years, making concerted efforts to raise awareness amongst investors. “UAE happens to be an expat hub, where you have people from all over the world, so there always was a need for short timeframe investments that offer the highest amount of return with a minimum amount of risk. But we all know that does not exist, that is where education has been required. Then the regulator has been driving better skills and professionalism, requiring continuous professional development schemes, so the advisors can assess what the client needs versus their risk profile. So progress is being made, and there is a better approach, and more thinking about retirement planning and protection planning.”

Expert Opinion - Malik Sarwar, CEO, K2 Leaders: “It used to be Shanghai, Mumbai, Dubai or bye-bye. Now Dubai is reinventing itself.”

Another expert observed that for many years global growth had been robust and corporate profits even more so, leading to far less reliance on research being published by large research houses, which is often very dated, and more reliance on news and information and general education to help them become nimble. Additionally, the IAMs and EAMs can move faster than the major banks due to many rounds of compliance at the banks, and as more independents move into the region, these smaller firms can disseminate views and information more rapidly. “All this,” he said, “is resulting in more tactical portfolios and a very active approach, with adjustments being made to allocations almost on a daily basis.”

A fellow panellist agreed, adding that for the WM market to grow in the region, greater professionalism is the key, with RMs able to become truly trusted advisors to their clients. “And we need advisors who stay here, not suitcase bankers,” he said.

Post-Event Survey & Comments

Hubbis: Are more of the region’s HNW and UHNW investors moving more money back into the region? Why, or why not?

Delegates:

• “I see more returning, because of the relative stability in the Middle East, especially during Covid-19.”
• “Not yet. The US market in particular still offers bigger diversity and liquidity.”
• “Yes, for business needs, for the investment opportunities in real estate due to attractive pricing, and also the health & safety infrastructure and capabilities of the UAE during the pandemic.”
• “Yes, due to CRS and also overseas regulations getting tighter.”
• “Not yet really, but with higher proficiency of the local wealth management offering repatriation of assets will happen.”
• “Yes, the economy in the US and Europe are worse compare, and the valuations of equities in the US still at a historic high.”
• “Not until the region’s financial system is more mature.”
• “Yes, for geographical and political reasons.”

Hubbis: Is the Middle East wealth management industry succeeding in converting more clients to discretionary and advisory?

Delegates:

• “We can see that more and more wealth management units in the Middle East are better trained and have access to foreign financial products. They are now also able to more easily wrap foreign product into local schemes to provide to their clients quality advice and products.”
• “No, it will take a long time to achieve that.”
• “Yes, we are seeing more traction for DPM solutions in the UAE, and especially for the need of advisory DPM to manage the portfolio by experts and risk management of portfolio by diversification.”
• “Yes, very much as we have seen plenty of enquires as well as on-boarding for such solutions.”
• “More clients in the Middle East are converting to advisory and portfolio management.
• “This is a process with has only started recently, but which will grow strongly in line with the banks offering such services.”
• “It takes time, and it is a culture and trust issue which evolves gradually into DPM.”
• “Larger clients and single-family offices do prefer to have discretionary exposures, but those exposures are typically restricted to investing in PE funds. There is a need for professional management of private investments by domain experts. Otherwise, as volatility increases, there is a greater inclination by sophisticated clients to retain control/active oversight for traded market investments.”
• “Yes, there is a trend towards more management fee-based models.”

Hubbis: Is the Middle East region succeeding in winning its fair share of new single-family and multi-family offices, and if so, why or why not?

Delegates:

• “Yes, as they have the investment power, and they are putting a lot of effort to offer a digital experience to the younger generation.”
• “The process is still a bit slow.”
• “Advisory firms like single or multi-family offices are witnessing growing importance in UAE post-Covid. The rationale is three-fold. First, clients need for multi-bank and holistic portfolio aggregation and management to one single point, and then to have a bird’s eye view on a continuous basis and supported by a highly experienced seasoned advisory team of the family office. Secondly, the family offices pool the resources of the banks at a much lower cost. Third, we see shrinking private banking RM teams due to reduced margins and high cost-to-income ratios. All in all, this means more family offices and a positive trend in that regard.”
• “Yes, certainly. With the greater maturity of the market and more of a local focus we will see a significant growth of SFOs and MFOs.”
• “To some extent. It is not easy, but progress is happening. The SFO tends to be more focused with dedicated goals and the MFO acts more like private bank.”
• “Over the last five years, my experience has been that the Middle East region is attracting clients from high-tax jurisdictions looking for a safe haven for their portfolios. There is also inherent gravitation towards Dubai in particular for clients looking to supplement their investment needs with corporate banking.”

Hubbis: In your view, what needs to happen to boost the success of the Middle East WM proposition/market in the years ahead?

Delegates:

• “We want to see more multi-family office and private banks offering global solutions and with latest digital tools to tackle the mid-market and the retail segments.”
• “We need more attractive, customised products.”
• “The strengthening of the regulatory environment by incorporating best practices of mature and developed markets.”
• “We want to see flexibility and the building of trust with patience to attract more new clients, with easier on-boarding.
• “To implement technology frameworks like blockchain and smart contracts to create value and improve the ease of transactions.”
• “With the positivity surrounding the new rules and regulations in the UAE and even the incentives being offered, and the stimulus packages is a way to success.”
• “We need segment-specific offerings.”
• “Greater access to markets, products and instruments including Sharia-conformity.”
• “Omni-channel distribution (both self-service and hybrid).”
• “Financial planning capabilities, including goal setting and also portfolio simulation.”
• “If the financial markets here are mature and stable.”
• “Deregulation, a culture shift in WM, a product innovation that is fitting to the region.”
• “I think bringing together one-stop solutions to the clients is critical. It is not useful for a client to deal with several specialist institutions as then client loyalty and attention is bifurcated. Middle East WM participants need to seize this opportunity to build a strong franchise which can help the client in wealth management, succession planning, corporate and commercial banking and insurance.”

Technology upgrades accelerate

Turning to digital transformation, an expert observed that it was relatively quiet for the first six months of 2020, while those players that already had a relatively advanced digital platform were best placed to support the whole remote working proposition, sometimes as he reported tripling their revenues over similar periods in previous years, or even better.

But in the second half of the year, things have stabilised and since September he had seen roughly about 25 to 30 Middle East banks, who are starting a project, either actual or planned. “Banks are realising that developing an end-to-end digital investment and wealth management journey and the necessary investment required is crucial,” he said. “They have to get away from the pure balance sheet business, increasing their other revenues, so this is a clear trend, a fundamental transition taking place in the region. We specialise in developing end-to-end digital investment and wealth management journeys for banks, so we are rather active here now.”

Expanding the WM proposition

He stepped back somewhat from the technology side to also comment that many Middle Eastern banks want to upgrade capabilities from execution-only as they have offered in the past, to value-added advisory. “The wealthier clients want to have advice and they want to see an opinion of a bank, and execution-only is maybe good for 20% to 30% of the wealth, but for the majority of clients they need advice on portfolio creation and want dedicated professionals and perhaps discretionary support. So, the trend is introducing this advisory proposition to the Middle East on the level which stands up to even international banks.”

He explained that mobile is essential for all such clients, so the banks can offer self-service, or the hybrid model including advisory and strong input from the RMs. “And clients now want full global access,” he reported, “when they are of a certain wealth, so the platform needs that range and breadth.”

Expert Opinion - Wael Salem, Chief Executive Officer, Tradesocio: “The availability of high-quality content to retail investors have now given them access to information that they would have never had access to a few years ago. The mass affluent and retail investors now can act quicker and they need a technology infrastructure available for them to do so. Unfortunately, banks in MENA are still behind, and FinTechs are filling this gap. It’s time for large institutions to catch up.”

Expert Opinion – Madhavan Sivashankar, Founder, CEO & Member of The Board of Directors, Gulf International Finance: “As I had mentioned in one of my earlier interactions, we see sweeping changes in the regulatory, business and social environment. We have recently heard of landmark changes to cover topics such as normalisation of relationships with the State of Israel after several decades, long term visa issuances, retirement visas for residents over 55 years, a process for naturalisation for expatriates, decriminalising cohabitation (without marriage), liberalising alcohol licensing, setting up of an SME bourse to name a few. This government is very focussed on progress and they are demonstrating it!”

Democratising investment and advisory

Another digital expert offered his insights into his firm’s mission in the region to digitise the wealth management and investment management platform end to end, with a strong focus on the mass affluent market and the democratisation of wealth.

“We are now present in the DIFC in order to get exposure further to Middle Eastern clients where I have a strong belief and the company as well that the next wave of digital transformation of banking and wealth management products is going to happen, and also across Africa. Of course, it was a very slow year for us at the start, but there is always silver lining in the developments that happened and where we came to fruition at the beginning is that the financial institutions in the Middle East, the decision making to digitalisation has not been driven from top to bottom and it needed a major shift in that mentality in order to be able to get a convinced stress test situation in which digitalisation is not a luxury anymore, but it’s an actual requirement. And then lockdowns happen, and all C levels came to decisions that digital is a need and it is not a luxury anymore. And then they have looked at the opportunities and the costs that comes with taking such a position to digitise their total investment framework. Everyone is shopping at the moment.”

Opening more doors

He explained that a core mission is to facilitate mass affluent investing, where for example there is the feasibility to open a relatively modest account to invest for in ETFs, funds, to conduct financial planning and retirement planning, and all with access to global investment product. He also noted how the UAE has seen the evolution this year of the pension sector, which will develop, he believes, significantly in coming years.

“At the same time,” he reported, “there is greater availability of high-quality content for retail and mass affluent investors; they’re able to get more information, they’re able to be up to speed with latest developments and permission that they never had access to a few years ago. So, investors right now on a mass affluent and a retail level have that feasibility to move quicker, and they need the technology infrastructure to be available to them. Unfortunately, however, right now banking institutions in MENA are still behind upcoming FinTechs but I think it’s a matter of time before these larger institutions catch up.”

Expert Opinion - Malik Sarwar, CEO, K2 Leaders: “The big question is who is the Ritz of the wealth management in the Middle East, delivering exceptional client experience? A lot of aspirational players, yet no one stands out so far.”

Another technology expert whose firm focuses more on the HNW and UHNW client segments, as well as the mass affluent market, explained that their mission was to help financial services firms interact with their clients digitally, in a simple, secure way. “We work with some major banks,” he reported, and the key is that everything has to be centred around the end customer, the end-user, especially in uncertain times like these, when there is so much that’s going on emotionally as well, so much that the client is facing, and of course when you’re not able to bring them into your branch, and provide them with that relationship that they have with the relationship manager, the goal is to keep that relationship going, ensure that same personal touch, and that is exactly what we focus on.”

He explained that many messaging and other apps are banned/prohibited in the UAE but that he is encouraged how when a financial services firm wants to develop remote communication in a secure way, the regulators are actually supportive.

Expert Opinion - Malik Sarwar, CEO, K2 Leaders: “Professional development has to reach the level of the US industry, for Dubai to compete with other financial centres such as Singapore, Geneva, or Hong Kong.”

Keeping the connections alive

“During what has of course been a very stressful time for all concerned, we’ve been fortunate that we’ve been able to play a small role to help some of these financial services firms actually keep that interaction seamless, whether it’s an investment that they have to do or moving funds from one region to another, interacting with the bank systems for straight-through processing, and so forth. And that’s really the value that we’re trying to add as a firm in these times.”

A wealth management expert explained that all these developments should be set against the backdrop of the development of a more client-centric, financial planning and professionalised environment in the region, emulating the types of approach in the US or Europe, or even in the more advanced markets in Asia. The trends towards proper wealth planning, advisory, discretionary are all in the making in the region. And he noted that there is at the same time greater diversity, with more women entering the business, with those more diverse banks and firms benefitting from this evolution.

Expert Opinion - Malik Sarwar, CEO, K2 Leaders: “People don’t plan to fail, they fail to plan. Financial planning is the key to long-term wealth growth.”

Another banker agreed, commenting that the business must start and end with the client. “What’s very important is that whether it’s a bank or it’s an asset management company, whoever is building the platform has to keep the client at the heart of everything that they do,” they said. “So, we facilitate the client being at the heart of everything that we do. There are still many customers who would want to meet their relationship manager and go over all the financials, talk about what’s working, what’s not working for them, do a physical paper-based, risk-providing questionnaire. So we help them achieve this remotely, digitally, and when permitted, we also offer face-to-face interaction as well.”

Expert Opinion - Malik Sarwar, CEO, K2 Leaders: “Diversity correlates directly to more sustainable wealth management business.”

Keeping it human, keeping it hybrid

And at the same time, there are other customers who are market savvy, who like to make their own decisions. “And for these clients, we can offer them a solution on the digital channels,” they reported. “And there are also consumers who may not be having large amounts of wealth to invest but they’re interested in basic protection planning and basic retirement planning, so also for them, we are enabling them to do such transactions over the digital channel. And our advisors are always available, we believe that digital and robo advisory must be aligned with a human touch, as anyone who wants to invest, however much or little, like help with their wealth planning, they would want to speak to someone who is experienced in the field and is able to offer real human advice because after all, it is for their welfare.”

They also reported that new regulatory changes coming to the UAE include the very important availability of Sharia law to expat Muslims. They explained that the FIs in the region therefore need to be ready to handle so much of the expat Muslim wealth that used leave the UAE. “This change is attracting a lot of expat wealth to stay within the UAE, so all financial services players need to be ready on how we give that niche product and service to retain that wealth here. That’s the next big thing that we are working on.”

Challenging times for businesses

A slightly different perspective came from another WM expert who noted that much of the wealth creation in the region is now driven by entrepreneurs. “But with businesses hit significantly through 2020, what has happened is in order to save the balance sheet or to tie it through the balance sheet, clients have been trying to reduce their personal savings and pumping that money into their business, and as we also do advisory on the corporate finance side and debt raising, we see a lot of challenges “We see both sides of the balance sheet and that has become increasingly challenged, because be it debt raising, or M&A activity, all have been challenging. But the positive side is that the region now sees a lot of sweeping changes happening politically, in regulation and culturally. One couldn’t dream that these kinds of things would happen, but they have, so I think the GCC is now getting into a position, and the UAE specifically, that the region is well poised to attract more international interest.”

A very positive note

He added that as to the pandemic, he feels the UAE is one of the safest places on the planet. “We are appreciative of the way this government has gone about matters,” he commented, “and now many of my friends and associates across the world are asking about moving here, real estate, and so forth. This is a very positive environment in so many respects right now.”