Wealth of Opportunity

High Net Worth families in the Middle East are adopting protocols to regulate succession, conflict resolution, business valuations and other key issues to preserve wealth

The Middle East, one of the world’s hotbeds of wealth creation, has seen an acceleration in trends relating to succession planning, alternate investment vehicles, wealth preservation, digitisation in wealth management and growing interest in sustainable investing. The changes in demographics, technology, environment and social behaviours have set the ground for rapid transformation in wealth management and investment.

“With the proliferation of investment products, digitalisation, the heterogeneous nature of client bases and the need to integrate strong sustainability criteria into their business, the wealth manager’s role has become even more complex,” said BNP Paribas.

The outbreak of COVID-19 created some exceptional challenges for all industries and in wealth management and investment, the pandemic is driving pre-existing trends as wealth managers are changing the way they deliver advice and serve clients.

“The wealth management industry is in the midst of significant change as a new generation of investors, whose expectations and preferences have been shaped by new technologies, have brought new standards to the industry in terms of how advice and investment products are being delivered,” said Deloitte.

Julius Baer said that there’s an emergence of the next generation of clients—a generation that looks beyond the traditional ways of wealth preservation, especially in the GCC region. The Swiss wealth manager expanded its regional footprint by setting up an advisory office in Qatar in June to tap into emerging opportunities in the region.

Meanwhile, wealth managers are being confronted by the task of balancing the traditional approach to risk management with the need to respond quickly to the prolonged pandemic that has created massive changes to their operating environment.

Over the past two years, business ethics have moved to the forefront as metrics to identify how well a company is performing amid growing demands from investors that environmental, social and governance (ESG) issues be factored into their portfolios. PwC said that ESG trends are converging and driving rapid social and economic change in the Middle East including the regional government’s recent net-zero pledges in response to climate change—that companies are still digesting their implications.

The regulatory environment in the Middle East is fast evolving leaving wealth management firms grappling with a deluge of requirements and expectations

from both regulators and investors. The UAE securities regulator, which is tasked with structuring the legislative policy that promotes the organisational and supervisory framework of companies operating in the securities field, cautioned investors against engaging with unlicensed entities in May.

Wealth management is one of the most attractive sectors within the financial services sector, thanks to the business’ greater growth prospects, lower capital requirements and a higher return on equity (ROE) compared to most other retail banking businesses. The business’ offerings are also essential to attracting and retaining profitable retail customers.

A hotbed of wealth creation

Family wealth in the Middle East makes up a sizeable proportion of the region’s non-oil economy and in these challenging times the need for adaptability and action to ensure that potential isn’t wasted, and the future is secured has never been more paramount.

“As HNW business families in the Middle East are quite young (led by first/ second generation), succession planning will become increasingly important as these families grow,” said KPMG.

Middle East high net worth (HNW) families are adopting protocols to regulate succession, conflict resolution, business valuations and other key issues to preserve wealth and ensure a smooth transition between generations. However, these policies and procedures do not necessarily include key documents such as family constitutions or conflict resolution mechanisms, hence there is still much work to be done.

Abu Dhabi issued a new family business ownership governance law in January that prevents selling shares or dividends of family-owned businesses to individuals or companies outside the family. The law requires prior approval from family partners before a shareholder sells an equity stake to a non-family member.

Family-owned companies are also turning to foundations owing to how they provide a dynamic option that can accommodate a family’s transformation priorities and values. Nina Auchoybur, the Managing Director at Ocorian said that foundations were first introduced in the UAE in 2017 and they have since grown to become an integral part of the Gulf state’s wealth management offering. There are currently more than 170 foundations registered in the UAE.

Meanwhile, the UAE will lead the world in attracting private wealth to its economy this year as Russian and Ukrainian millionaires seek new homes, Henley & Partners projected in June. The Gulf state is poised to welcome 4,000 millionaires as Russia and Ukraine are likely to suffer a net outflow of 15,000 and 2,800 high net worth individuals (HNWIs), respectively.

“The UAE is the largest wealth management center in the region, with approximately 83,000 millionaires living in the country and assets under management (AuM) of around $110 billion,” said KPMG.

The succession problems have been around for the last five years and are expected to remain a challenge for the next 10 years. However, to ensure that wealth is being preserved and that there is a smooth transition between generations, establishing family protocols to regulate succession and conflict resolution is critical.

AS HNW BUSINESS FAMILIES IN THE MIDDLE EAST ARE QUITE YOUNG (LED BY FIRST/SECOND GENERATION), SUCCESSION PLANNING WILL BECOME INCREASINGLY IMPORTANT AS THESE FAMILIES GROW

– KPMG

The client of tomorrow

The shift to digitisation in the financial services sector is inevitable and industry experts expect it to radically transform wealth management in the coming decade. Once a laggard in the adoption of technology, the sector is accelerating digital transformation, deploying artificial intelligence (AI), robotics and other financial technologies to enhance clients’ experience and trust.

McKinsey said that the wealth management industry is typically seen as embodying old-fashioned values and providing discrete as well as tailored services. However, these attributes remain valuable parts of the business, but for many clients, they are no longer sufficient.

The digital transformation in the industry is being driven in part by changes among clients. Though the typical client in a developed market today is around the age of 65 years and is comfortable with digital technology, shifting demographics, evolving client behaviours, the rise in new innovative technologies and emerging disruptive competition are all reshaping the wealth management industry.

“Regardless of how the models shape up. What all wealth managers are doing, and they continue to do is to ensure that they are there for the client in the shape and in the form that the consumer prefers,” Ayesha Abbas, Managing Director and Head of Affluent Priority & Premium Banking, Standard Chartered UAE said at MEA Finance’s Banking Technology Summit & Awards 2022 in May.

Digitalisation trends

Although most incumbents banks in the region are working on strengthening their wealth management businesses, they’re likely to face growing competition from wealth technology platforms that are developing advanced business-tobusiness (B2B) and business-to-consumer (B2C) digital solutions and challenger banks—neobanks and payments firms.

“The client experience has been the prompt for the digital transformation journey of wealth management companies,” said Deloitte.

The growth of “automated wealth managers” or Robo-advisors is revolutionising wealth management with unprecedented force. By leveraging algorithms to offer financial advice for a fraction of the price of a real-life client advisor, Robo-advisors are growing at a rapid pace, doubling their assets under management every few months.

The Middle East market had undergone a dramatic shift long before the pandemic hit as regulators embraced Roboadvisors or digital financial advisories. Bahrain’s central bank issued directives on Robo-advisory in 2019 as the small Gulf state affirmed its position itself as a leading digital financial hub. The Saudi market regulator also allowed two firms, Wahed Capital and Haseed Investing Company, to test their digital financial advisory services the same year.

“Robo-advisors translate client input into investment logic such as risk or liquidity factors and propose adequate investment opportunities well beyond simply highlighting a handful of ETFs out of a few thousand possibilities,” said Deloitte.

Commercial Bank of Dubai unveiled its Robo-advisory app CBD Investr in April 2021. The platform offers the bank’s clients access to globally diversified and personalised portfolios of stocks, bonds, and other asset classes using low-cost exchange-traded funds. Meanwhile, the regulatory push for open API infrastructures across the Middle East is expected to make it easier for wealth managers to deliver consolidated client views of multiple relationships.

Responsible investment

The pandemic accelerated digitisation of processes and client propositions, a shift towards centralised portfolio and risk management amid increasing focus on responsible investing while emphasizing the role of wealth managers in supporting socio-economic ecosystems.

The growing demand for sustainable investing from investors is driving some wealth management firms to develop sustainable investing strategies as public attention towards the global sustainability agenda is also on the rise.

Speaking at the Banking Technology Summit & Awards 2020, Daniel Robinson, Head of Wealth & Personal Banking, HSBC said that ESG is a massive trend in the Middle East not because corporates want to talk about it but because of the growth in clients’ interest.

The investment theme is increasingly attracting attention in wealth management due to the strategy’s promise of utilising a range of non-financial information to better align finance with long-term value and societal values.

The World Economic Forum (WEF) said in a report in January that HNWIs and family wealth are uniquely positioned to leverage private capital to drive growth in the ESG sector by supporting long-term societal goals and ambitions. Wealthy individuals and family offices are ideally suited to the kind of approach that the investment theme requires owing to the group’s large pools of capital and multi-generational objectives that support a long-term strategy.

Compared to institutional investors that may be subject to commercial policies or have limited decision-making due to mandated trusts, HNWIs and family offices can be flexible in how they approach investments in terms of size, geographies and asset classes.

McKinsey said that for sustainable investment strategies to succeed in this dynamic operating environment, ESG objectives or considerations must be derived from a financial institution’s overall mandate. The overwhelming majority of studies in the field of sustainable investing show that the outbreak of COVID-19 boosted interest in sustainable investments.

Banking juggernauts including JPMorgan Chase & Co., Rothschild & Co. and UBS Group have carbon reduction strategies for clients in place in line with the Paris financing commitments as the wealth management banks face mounting pressure from shareholder activists to align funding activities with climate change commitments.

Last October, Standard Chartered set new targets for reducing its exposure to carbon-intensive sectors by 2030, including plans to mobilise $300 billion in green and transition finance as part of its broader strategies to reach net-zero emissions for itself and its clients by 2050.

However, sustainable investing is subjective because there are as many clients as there are sustainability preferences and for impact investments to inject new capital to help solve social and environmental challenges, the wealth management industry is the most effective option.

Wealth management in the Middle East is a growth industry and mounting hopes of post-pandemic recovery signal an imperative to prepare for the changes in technology, consumer needs, and society that will shape the future of the sector. The real estate sector is one of the most publicly recognised asset classes and the industry is offering investment opportunities buoyed by a rebound in the UAE property market, thanks to wealthy Asians escaping lockdowns to Russians running away from sanctions imposed on Moscow’s financial system by the US and its allies.

HNWIs AND FAMILY WEALTH ARE UNIQUELY POSITIONED TO LEVERAGE PRIVATE CAPITAL TO DRIVE GROWTH IN THE ESG SECTOR BY SUPPORTING LONG-TERM SOCIETAL GOALS AND AMBITIONS

– The World Economic Forum