Private banks need to focus on families with $1 million to $10 million, rather than setting their sights exclusively on the ultra-high-net-worth client if they want to succeed in the future, says McKinsey & Company, a management consulting firm.
Private banking revenues have been flat in recent years and total profits have declined by half since 2007. To regain the assets that private banks had before the financial crisis they need to court the 4.2 million families that make up what McKinsey calls "core millionaires" with $1 million to $10 million in assets.
This group accounts for 27% of the typical private bank's assets today, but, within three years, will generate nearly two-thirds of the asset growth among individuals with more than $1 million in assets, according to the firm.
The revenue margin this group can deliver is two to three times more than what banks can make on the ultra-high-net-worth households, said the report, A Tale of Two Millionaires: The Best of Times for Private Banks to Look Beyond the Ultra-High-Net-Worth Market. The study looked 160 banks, including eight of the top 15 private banks in the U.S.
Banks would do well to focus on this group because they generate a higher proportion of business in profitable deposits, lending and discretionary investment products than ultra-high-net-worth households, the report concluded. The same group will generate more than 80% of all new revenue growth in wealth management in the next three years.
In the past, "private banks have often served the core millionaires only as an accommodation or in the hope that their assets will grow," the report said. Banks have tended to "indulge this segment with the customized personal service intended for ultra-high-net-worth clients"
Instead, banks should develop an integrated investment and banking program that offers standardized packages of services for the core millionaires, who are typically more focused on wealth preservation and retirement than ultra-high-net-worth clients, who are focused on philanthropic and legacy issues, the report said.
Therefore, banks should develop programs that address wealth preservation and income generation for retirees, as well as liquidity and credit solutions for entrepreneurs, the report said. Private banks also should tailor financial advice for corporate executives and professionals, who are part of this core millionaire group, McKinsey said.