The amount of offshore wealth (defined in this report as assets booked in a country where the investor has no legal residence or tax domicile) grew to $7.4 trillion in 2009, up from $6.8 trillion in 2008. Switzerland remained the largest offshore center; it accounted for $2.0 trillion, or more than 27 percent, of global offshore wealth. (See the exhibit “Offshore Wealth Was Dispersed Across Financial Centers, but Switzerland Remained the Largest”.)
The growth of offshore wealth was driven by resurgent financial markets rather than a strong inflow of assets. In fact, the increase in AuM belies the considerable pressures bearing down on offshore centers. We expect the share of global wealth held offshore to fall from close to 7 percent in 2009 to just over 6 percent in 2014.
The most obvious pressure comes from regulators. The United States, perhaps most notably, has ramped up its monitoring of offshore wealth—but pressure in other markets, especially among other OECD countries, has also increased over the last few years. Although undeclared assets account for a declining share of offshore wealth, the push for greater transparency will still dampen asset growth. Clients from North America and Europe, in particular, are expected to move some of their assets out of traditional offshore centers. These clients accounted for 56 percent of the offshore wealth held in Swiss banks in 2009, for example. Their share is expected to drop to 52 percent by 2014.
Banks based in traditional offshore centers will face a unique set of challenges, some of which may force wealth managers to transform their business models. The scope and severity of the challenges will vary according to two dimensions: the level of serviceability of client wealth and the importance of the private-banking business to the overall institution. (See the exhibit “Banks in Traditional Offshore Centers Face Major Strategic Challenges.”)
To some extent, all banks based in traditional offshore centers will have to adapt their strategies and operating models to respond to new regulatory conditions emerging over the coming months and years. More specifically, they will need to focus on several opportunities that are likely to remain attractive over the medium to long term.
Traditional Markets. The first opportunity involves clients whose offshore wealth has or will become more difficult to service owing to tighter regulations imposed by authorities in North America and Western Europe as well as in emerging markets such as Brazil. Such changes will constrict the flow of offshore wealth, but the existing AuM associated with these markets will continue to generate attractive revenues and profits. This opportunity is viable only for banks that can provide fully compliant value propositions that are geared toward clients’ fundamental needs. Their offerings should be competitive with the alternatives provided by local onshore banks in clients’ home markets.
Emerging Markets. These markets are likely to remain an important source of new offshore wealth in the medium term, with wealthy individuals seeking political and economic stability, confidentiality, and high-quality banking services. Latin America and Asia-Pacific (ex Japan), which accounted for 29 percent of all offshore wealth in 2009, will generate about half of the increase in offshore wealth from year-end 2009 to 2014.
Wealth managers from traditional offshore centers will face considerable competition within emerging markets, which will only intensify as these markets grow. An increasing number of banks are putting these markets at the core of their strategy, and regional offshore centers such as Hong Kong, Singapore, and Dubai are attracting a significant share of offshore wealth, leading to greater competition among offshore booking centers. At the same time, onshore opportunities are becoming more attractive. In Asia-Pacific, Eastern Europe, Latin America, and the Middle East, improvements in political stability, coupled with stronger economies, are making local markets more attractive to wealthy individuals. In addition, local onshore banks in some emerging markets now offer a range of sophisticated banking products.
Onshore Markets. Several traditional offshore banks have already increased their onshore presence in foreign markets with the intent of capturing some of the money being repatriated owing to regulatory pressure. This is not a strategy to be taken lightly, especially for small and midsize banks. Entrants sometimes underestimate the difficulty and expense of establishing their brand in a new market. Moreover, foreign banks are rarely in a position to contend for the number one spot and will have to settle for a smaller share of wallet. As a result, some banks are narrowing their onshore presence to places where they can establish a strong position.
In order to pursue these opportunities, banks will need to create more flexible operating models. Banks that once depended on a small set of clients will need to broaden their value propositions. (For more on this, see the chapter “Retaining and Winning Back Clients.”) In the wake of the crisis, however, some banks will find it difficult to justify the necessary investments to expand the offering. As a result, consolidation activity may intensify, particularly among smaller offshore banks.
At the same time, offshore banks should not lose sight of their core value propositions. Their status as tax havens is no longer the draw it once was, but banks in offshore centers can continue to attract clients by highlighting their ability to provide high-quality wealth management, along with the political and economic stability of their home markets and their reputation for innovation and expertise.
An offshore bank’s pathway will be determined by its client focus, service model, advisory capabilities, and underlying operating model, along with the intensity of the regulatory and political pressure in its own market as well as in its clients’ domiciles. Some banks have already refocused their businesses.