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Outlook on Wealth Management

Wealth Management looks into every piece of a client’s 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 Sharia-

compliant 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 don’t 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 thegovernment domestic bonds. The above chart shows that most of the wealth in the middle-



east region comes from inheritance, therefore it’s 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.

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. Bonds and Fixed Income Instruments

2. Equity & Debt Mutual Funds

3. Direct Equity

4. Private Equity Funds

5. Insurance Solutions

6. Structured Products

7.

Lending Products8. Leveraging opportunities

Client RiskClassificationInvestmentExperience

Age of theClient

Business orEmployeed

ExpectedRetirement

Age LT & STGoals

RiskAppetite

CurrentPortfolio



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 Planning’s 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 + ‘x’basis 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

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 moretransparent process.

Fee Structure

Sources of Revenue

Referral feesfrom

professionals

Inbuilt Fee frommanufacturers

Fees charged toclients

FeeStructure

Entry/ ExitLoad

Managemnt Fee

BrokerageCharges

% of Portfolio

ProfitSharing

Leveraging& Lending

Cost



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 thatcalculates 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 fresher’s 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 financialsector. 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 tailor-

made it to the region’s 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 entryThe 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 wealthcreation 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 haverecorded 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 Board Member & Chief Executive Officer

Mohamed Al Nahdi Deputy CEO – Chief Operating Officer

Dr. Adnan Chilwan Deputy Chief Executive Officer

Obaid Khalifa Mohammed Rashed Alshamsi Chief of Human ResourcesMohammed Saleem Qassim Chief of Treasury

Syed Naveed Ali Hussain Ali Chief of Corporate Banking

Mohamed Al Sharif CEO – DIB Capital

Abbas Saifuddin Bhujwala Chief Risk Officer

Salman Liaquat Acting Head of Finance

Mostafa Mahmoud Mostafa Chief of Group Internal Audit

(Source: Annual Report 2012, DIB)

Major Business Units and Profitability

The below table shows profit and loss details of the Bank’s business segments for the year

ended 31 December:

Business Units Profit for the year

before income tax

(AED’000)

Retail and business banking 577,802

Corporate and investment banking 97,120

Real estate (140,257)Treasury 482,979

Other 187,311

Total 1,204,955

(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. DIB’s

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 that’s 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 company’s 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 drivingtowards its vision which are based on delivering an excellent customer service, driving its

core businesses and geographic expansions.

Key personnel

Emirates NBD

Chairman Ahmed Bin Saeed Al Maktoum

Vice Chairman Hesham Abdullah Al Qassim

Chieft Executive Officer Shayne Keith Nelson

Chief Executive Officer 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 Bankingowing 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 performanceWealth 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 RAKBANK Emirates DIB Industry

Avg

Current P/E Ratio (ttm) 8.1 9.9 10.2 9.4

Price/Book (mrq) 2.0 0.8 1.0 1.3

Price/Sale (ttm) 3.6 2.1 2.5 2.8

Market Cap (B AED) 11.9 30.6 13.6 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 company’s 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 willboost 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-ranks-

decline>.

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-dual-

challenges/>.

"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-assigned-

capital-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/



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