Outlook on Wealth Management

Wealth Management looks into every piece of a clients financial needs in a consultative and a highly individualistic manner. It integrates financial planning and uses a complete range of product and services in order to meet the investment objectives of its clientele which can be High-net-worth individuals (HNWIs), small-business owners and families. A wealth manager has to collect information on both financial and personal platform to be in a position to make recommendations totally custom-made for each client. The wealth market in UAE is quite complex, with huge expat HNW clients and Shariacompliant investors. In order to be successful in the field of wealth management, one must fully understand the profile of the local HNW individuals, the investment trends of these individuals, and the preferences for services facilitation and client communication. HNWIs Wealth Distribution

(Source: Capgemini, 2008)

In the UAE, wealth mostly constitutes first-generation entrepreneurs and family-owned businesses. Furthermore, expats represent 65% of the HNW population a very significant portion, and thus a key market for the wealth managers in UAE. HNW investors dont like to invest in riskier funds and mostly prefer to have some control over their assets, with advisory asset commanding the market and HNW investors wanting regular reporting on their investments. The average HNW portfolio in UAE is dominated by bond holdings due to the popularity of Sharia-compliant sukuk funds which are more in demand than the government domestic bonds. The above chart shows that most of the wealth in the middle-

east region comes from inheritance, therefore its highly important for any wealth management firm to offer inheritance planning services to attract these HNWI individuals. Wealth Management firms started sprouting in 1990s. The objective of Wealth Management firms is to provide tailor made wealth solutions to High Net Worth and Ultra High Net Worth clients. Their product offering is far wider than that offered by conventional banks.

Risk Classification of clientele

Product risk classification and Client risk classification are the 2 subsets of the overall Risk classification. Products offered are of a risk classification one notch lower than the clients Risk Classification.

Business or Employeed Age of the Client

Expected Retirement Age

LT & ST Goals Risk Appetite

Investment Experience

Client Risk Classification

Current Portfolio

Services offered
Clients are classified as Execution services and Advisory services Execution Services: Execution services include product offering services. Products can be requested by the client and/or be offered by the Wealth Advisor as an exclusive offering. Financial Product offerings include 1. 2. 3. 4. 5. 6. 7. 8. Bonds and Fixed Income Instruments Equity & Debt Mutual Funds Direct Equity Private Equity Funds Insurance Solutions Structured Products Lending Products Leveraging opportunities

Advisory services: A pre-requisite of offering Advisory services is to have a Chief Economist in the team. Advisory Services include Portfolio Management Services, Financial Planning, Investment Planning, Retirement Planning, Profit Sharing Portfolios over and above the Execution Services offered. In the long run a Wealth Management firm aims are having maximum percentage of clients as Advisory Clients. This is because Advisory Services like Financial Plannings main objective is to have optimal risk to return Asset Allocation. In the process of achieving this, products from multiple categories can be sold which generates higher revenue and a more efficient asset allocation than by selling a single product as execution only.

The Use of Leveraging

One of the services that have boosted the WM business is the use of leveraging. Leveraging is more often used when investing in the Bond Market wherein the client borrows at LIBOR + xbasis points (aka averaging cost) and invests in long duration bonds. Leveraging leads to additional premium on the bond coupon over the leveraging cost and also leverages the capital gains or losses on the Bond Price of high duration bonds. The use of Leveraging is capped differently for different clients. The Risk Profiling of clients determines the amount of leverage the client can use in his/her portfolio. A high risk profile client can leverage upto 12X whereas a low Risk Profile client can leverage upto 4X. The Cost of Leveraging varies from Bank to Bank. Leveraging Cost charged by Private Banks averages around 1M LIBOR + 1% with an exit fee of 1%. Private Banks generally have higher caps on the use of Leverage. Local Banks in the UAE have a higher cost of leveraging of around 3M LIBOR + 1.75% with an Exit fee of 1%. Local Banks are more conservative when it comes to Capping the use of Leverage.

Sources of Revenue

Fees charged to clients Inbuilt Fee from manufacturers

Referral fees from professionals

Sources of Revenue
Wealth management firms earn revenue from the 3 sources listed above. One of the key pointers to note here is that in many cases the Wealth Management firm earns revenue from more than one source for selling the same product. In many cases the client may not be aware of the revenue the firm gets from the product manufactures. Regulators are working towards making this a more transparent process.

Fee Structure
Entry/ Exit Load

Leveraging & Lending Cost

Managem nt Fee

Fee Structure
Profit Sharing Brokerage Charges

% of Portfolio

Entry & Exit Load: The most common revenue generating vertical across almost all asset classes except for Direct Equity. Entry Load is charged over and above the Investment amount and Exit load is deducted from the capital divested from the MF. Management Fee: This is charged on a per annum basis from clients and is passed on to the Wealth Advisors to incentive them to continue holding the Mutual Funds in client portfolio for a longer term. Brokerage Charges: brokerage charges are levied on products that are traded more frequently such as Direct Equity, Commodities, Futures, Options and other Derivatives. Percentage of Portfolio: This is an unconventional and the simplest form of charging fees to the client. Ultra High Net Clients with Advisory portfolios consisting products from different asset classes prefer paying fees as a percentage to the overall portfolio rather than different fees for different products. For the Wealth Advisor, it incentivizes him/her to rationally select products rather than inclining the portfolio towards high revenue generating products. Profit Sharing: Most common in Portfolio Management Services. The way it works is that a threshold return expectation is set by the client and any excess return over the threshold return is shared at a predetermined rate between the Client and the portfolio manager. Leveraging & Lending Cost: As mentioned above leveraging cost is linked to LIBOR and varies from bank to bank. Other Lending cost depends on the type of loans taken by the client such as home loan, personal loan, education loan etc. The rates of lending products other than leveraging have minimal spread across banks.

Fees charged to clients on each product category

Equity Mutual Funds 1.5% to 2.5% Entry Load, 0.5% Annual Charge and Exit Load charged if invested for less than 1year. Bond &Fixed Income Instruments Entry load of upto 1.5% is charged on these instruments plus a brokerage charge of ~0.25% if the instruments are traded in the secondary market. Insurance Products This is by far the highest revenue generating and the fastest growing offering with revenue upto 15% on the premium charged to clients. Structured Products These are tailor-made solutions that cover both ends of risk and asset class spectrums. Entry Load charged varies from 1% to 7%

Salary Payout Structures to Wealth Advisors

Wealth Advisors are treated as revenue generating assets by wealth management firms. Base Salary and Performance Bonuses form the 2 subsets of their overall compensation. Depending on the employee grade of the Wealth Advisor a matrix of targets are set that calculates their absolute bonus generally paid out every quarter. The Target matrix includes verticals like Revenue generated, Asset under Management garnered, New Clients Acquired, diversification of overall investments etc. Across the Wealth Management spectrums in the UAE 3X to Base Salary revenue generation is the minimum benchmark to qualify for a bonus. Lowest grade Wealth Managers who are generally freshers out of MBA colleges are hired at AED 8K to AED 12K plus a denied bonus which the firm estimates to be 30-60% of the total compensation by the end of 6months.

Government Regulations
Wealth management firms in UAE fall under different regulations which is decided according to where they have set-up their operations. All banks having separate wealth management units and individual firms operating outside Dubai International Finance Centre(DIFC), need to hold a license from the Central Bank of the United Arab Emirates. However, firms operating from DIFC fall under DFSA legislation which has designed a unique legal and regulatory framework to create an ideal environment for the growth of financial sector. DIFC was permitted to have its own civil and commercial laws through a synthesis of Federal law and Dubai law so as to model it based on the international standards and tailormade it to the regions exclusive needs.

Foreign Competition
UAE market is highly competitive with 23 local and 28 foreign banks offering wealth management services. The major foreign players dominating this segment are Devere group, Standard Chartered Bank, Citibank, JP Morgan, HSBC Bank, BNP Paribas, Goldman Sachs and MorganMckinley.

Barriers to entry
The high net worth individuals in the UAE had experienced a rapid accumulation of wealth in the past as compared to the current scenario. The industry has witnessed a fall in the high net worth individuals by 18% due to the economic downturn. The volatility in the market has increased and this demands for a high risk tolerance level for any entrant in to this sector of the industry. Wealthy entrepreneurs as compared to those who have inherited wealth have higher risk tolerance and with the increased volatility, the existing players are trying to get the market stable. One of the other challenges is to have a complete analysis on the changing order of wealth creation and how the money is being allocated, spent and preferences of people over time.

The industry in UAE faces fierce competition amongst each other as the industry has major dominant players domestic and international. New entrants will have to face fierce competition as the industry is matured and well established with its existence for decades. Considering a holistic view, the barriers to entry are few and are moderately challenging for a new entrant.

Key Challenges
Syrian Crises: Geo-political tension in the Middle East has made investors apprehensive in making new investments due to uncertainty looming around Syria. Wealth managers have the opportunity to have a closer look at the behavioural patterns of these clients are ensure the relationship is sustained through the crises. Market Risk: Wealth Management is the most sensitive industry to the market performance. The fact remains that Equity forms a part of the overall offering to clients which still constitutes to around 40-50% of portfolios for moderate clients. The markets have remained flat across the globe for the past 7-8years which was unheard of till 2008. Eurozone and the Syrian war has worsened the outlook on equity. From clients perspective, it is about how much money they make and if their financial goals are being met. This can happen only if the Equity markets break the upper resistance of Index levels for the wealth management industry to breathe some fresh air. Quality of Wealth Advisors: Insurance products in the UAE have lock-in periods of upto 20years. UAE has seen a phenomenal growth in sales of Insurance products. This growth in Insurance sales is much faster than the growth of overall Investment portfolios in the market. Some firms in the UAE have recorded over 70% of total revenue from Insurance sales. Implying mis-selling of Insurance to clients for higher revenue to achieve targets. The short term gain of insurance revenue has shaken Investor confidence hampering the industries reputation negatively impacting the long run future.

Last but not the least, clients are more apprehensive towards giving full control of their portfolios to these Emirati wealth managers.

DUBAI ISLAMIC BANK

Company Profile
Dubai Islamic Bank is one of the leading Islamic banks based in UAE. DIB, one of the largest Islamic banks in the UAE, offers retail banking, wealth management service, business banking, corporate banking, investment banking, real estate finance, private banking, Johara banking and contracting finance services. The bank provides full range of products and services in compliance with Sharia law.

Key Personnel
Abdulla Ali Obaid Alhamli Mohamed Al Nahdi Dr. Adnan Chilwan Obaid Khalifa Mohammed Rashed Alshamsi Mohammed Saleem Qassim Syed Naveed Ali Hussain Ali Mohamed Al Sharif Abbas Saifuddin Bhujwala Salman Liaquat Mostafa Mahmoud Mostafa
(Source: Annual Report 2012, DIB)

Board Member & Chief Executive Officer Deputy CEO Chief Operating Officer Deputy Chief Executive Officer Chief of Human Resources Chief of Treasury Chief of Corporate Banking CEO DIB Capital Chief Risk Officer Acting Head of Finance Chief of Group Internal Audit

Major Business Units and Profitability

The below table shows profit and loss details of the Banks business segments for the year ended 31 December: Business Units Profit for the year before income tax (AED000) 577,802 97,120 (140,257) 482,979 187,311 1,204,955

Retail and business banking Corporate and investment banking Real estate Treasury Other Total
(Source: Annual Report 2012, DIB)

Strategy of DIB
The bank, managing assets in excess of US$ 1 trillion globally, is more inclined towards building its retail banking services already serving more than 1 billion customers. DIBs strategic focus is on diversification and organic growth, including extension of its branch

network and growth in its whole client base. DIB also contributes to the overall development of the economy of the UAE by participating in various government initiatives.

Strengths and weaknesses

Strengths of DIB 1. It is one of the largest and leading Islamic Banks in the UAE. 2. It has strong financial stability and robust capital base. 3. The bank has a large branch network and it leverages on this to attract a large customer base, a main part of its funding mix. Weaknesses of DIB 1. It is facing concerns with regards to its asset quality due to which the bank has to pay high impairment charges. 2. The bank has huge exposure on real estate sector which was badly hit in the 2009 crisis in UAE and thats the reason why it is the only unprofitable segment of DIB. 3. It has restricted its operations to just Middle-East region and surviving on the profits generated in this region. This strategy might be harmful for the firm in the long run as more foreign players are entering the market.

EMIRATES NBD
Company Profile
Emirates NBD, the leading bank in UAE with the largest asset base, were formed by a regional consolidation of Emirates Bank International and National Bank of Dubai in 2007. It operates in retail banking, Islamic banking, investment banking and wealth management.

Strengths and Weakness

Emirates NBD is known to be the biggest bank by assets. The bank displays strong management and has high potential which has built customer loyalty over the years. The management has strived to strategically strengthen the financial position of the Bank and has achieved its goals even during the phase of financial crisis. The Brand name is also a major strength of Emirates NBD which allows them to function at a premium because of the additional value in the brand build over the years. However, the companys has high levels of toxic debts which is impacting its future expansion plans of acquisition in the international market with the underlying challenges faced by the slow pace of markets in UAE.

Strategy
Owing to the uncertainty of markets currently and as witnessed in the past few years, Emirates NBD has taken a conservative approach of de risking its balance sheet, optimising capital allocation and several measures that would drive profitability. They have consolidated their private banking, asset management and brokerage services under a new unit Wealth Management. Emirates NBD has planned a three year strategy driving towards its vision which are based on delivering an excellent customer service, driving its core businesses and geographic expansions.

Key personnel
Emirates NBD Chairman Vice Chairman Chieft Executive Officer Chief Executive Officer Ahmed Bin Saeed Al Maktoum Hesham Abdullah Al Qassim Shayne Keith Nelson Rick Pudner

Business Units and their performance

Wealth Management: The consumer banking and wealth management segment majorly contributed to the overall profits of 2012. Income from this division has increased by 12% with a 23% improvement in fee income. 2012 was a significant year for them as they consolidated their private banking, asset management and brokerage activities under one new unit Wealth management.

RAK BANK
Company Profile
RAKBANK, the trading name of the National Bank of Ras Al-Khaimah, is a public joint stock company. The bank is 52.75% owned by the Government of Ras Al-Khaimah. The bank provides retail and corporate banking services.

Strengths and Weakness

RAK bank is known to have recorded highest growth and highest return on assets in GCC. The bank strongly reflects a growing and high profitability, sound asset quality and is among the few commercial banks to report profits during the financial crisis. RAK Bank strong capital and liquidity basis is the trademark of the bank. RAK Bank operates as a small medium enterprise exclusively only within UAE and has huge dependence on the economic growth of UAE which increases its risk factor.

Strategy
Being on the leading players in this sector and displaying positive outcomes over the years, the bank continues to develop by significantly improving its infrastructure and building a new banking system. The Bank is well managed with credit policies being risk averse, controls in place and is planning to expand its horizons by strengthening its customer base. The Bank is also strategically placing itself by introducing a segment for Islamic Banking owing to the demand for Islamic Finance.

Key personnel
RakBank Chairman Ahmed Bin Saqr Mohammed Al Qasimi Chief Executive Officer Graham Honeybill

Business Units and their performance

Wealth Management segment has grown over 30% in the previous year in terms of its customer base. The wealth management segment is renowned and is backed by award winning customer service. The bank has opened new wealth management centres in three to four UAE locations.

Financials
Key Statistics Current P/E Ratio (ttm) Price/Book (mrq) Price/Sale (ttm) Market Cap (B AED) RAKBANK 8.1 2.0 3.6 11.9 Emirates 9.9 0.8 2.1 30.6 DIB 10.2 1.0 2.5 13.6 Industry Avg 9.4 1.3 2.8 18.7

Deviation of the P/E ratio from the Industry average is far lower than observed in other industries which imply that markets have been valuing the top firms value closely to their earning. RAKBANK: Price/ Book ratio is highest for RAKBANK and this is supported by high NI to Assets. RAKBANKs assets are far less toxic than Emirates NBD and DIB as their primary focus is on the Investment side of wealth management rather than the lending side. RAKBANK has 45% of its Net Income coming from Fees & Commissions.

Emirates NBD: 2 biggest weaknesses of Emirates NBD are that it has a high amount of toxic assets which is expected to be written down on their books and their client base is relatively conservative and high risk averse. Reason being that Risk Averse investors tend to park their money in the safest bank and the safest asset category. This makes their Wealth Management business more challenging as they have the largest database and assets under management than their peers but most of them are highly risk averse. This is reflected in their low Price/ Book and Price / Sales ratios. Dubai Islamic Bank: The proportion of Wealth Management Business to their overall business is the lowest among the other 2 companys taken into consideration for this paper. The valuation ratios are closest to the mean.

Future Trends in the UAE market

Wealth Management Industry is here to stay. The Industry has been active for over 20yrs in the UAE region. It has survived the 1998 Asian crises, 2001 Internet Bubble and the worst of all the 2008 Financial Crises + Property bubble. The fact that most of the players are still in the business has created a decent credibility in the minds of Investors. Investment experience in general have also gone up, there is a larger audience that appreciates the work wealth managers do. On the macro side, UAE is growing at about 4.5%, the number of billionaires are growing at even a faster rate. With the Dubai 2020 Expo approaching, further Foreign Investments will boost up the economy leading to a larger potential client base. In addition, the market trend also point towards a major increase in demand for commodities followed by equity and bond funds.

References

"Emirates NBD." Wikiwealth. N.p., n.d. Web. 30 Aug. 2013. <http://www.wikiwealth.com/swot-analysis:emirates-nbd>. "High net worth individuals see their ranks decline - The National." Latest and breaking news | thenational.ae - The National. N.p., n.d. Web. 1 Sept. 2013. <http://www.thenational.ae/business/banking/high-net-worth-individuals-see-their-ranksdecline>. Parasie, Nicolas. " New Emirates NBD CEO Faces Dual Challenges - Middle East Real Time WSJ." WSJ Blogs - WSJ. N.p., n.d. Web. 1 Sept. 2013. <http://blogs.wsj.com/middleeast/2013/06/26/new-emirates-nbd-ceo-faces-dualchallenges/>. "Positive outlook for UAE's Rakbank assigned by Capital Intelligence | Al Bawaba." Middle East News & Arab Headlines From A Local Perspective | Al Bawaba. N.p., n.d. Web. 1 Sept. 2013. <http://www.albawaba.com/business/positive-outlook-uaes-rakbank-assignedcapital-intelligence>. "RAKBANK - Wikipedia, the free encyclopedia." Wikipedia, the free encyclopedia. N.p., n.d. Web. 1 Sept. 2013. <http://en.wikipedia.org/wiki/RAKBANK>. Annual Reports 2012 http://www.emiratesnbd.com/en/investorRelations/financialInformation/annualResults.cfm http://rakbank.ae/wps/portal/home http://www.dib.ae/