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Portfolio > Alternative Investments > Private Equity

McKinsey’s Prescription for Private Banks: Look to Fast-Growing ‘Core Millionaires’

By Michael S. Fischer

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Core Millionaires, American households with investable assets of $1 million to $10 million, are the fastest-growing, largest and most profitable segment of the wealth market, McKinsey & Co. said Wednesday in a new report.

At present, there are 4.2 million Core Millionaire households in the country, according to the McKinsey report, “A Tale of Two Millionaires: The Best of Times for Private Banks to Look Beyond the Ultra-High-Net-Worth Market.”

U.S. private banks, it said, could return to levels of asset growth and profitability they enjoyed before the onset of the financial crisis serving UHNW clients by widening their focus to include this segment.

McKinsey said that its 2011 Global Private Banking Survey showed that U.S. private banking net flows had been flat for several years, while total profits had declined by half since 2007. Growth over the coming decade “will come from new client segments with different needs,” it said.

The Core Millionaire segment has a number of outstanding features, according to the new report:

  • While it accounts for 27% of the typical private bank’s assets today, by 2015, it will generate nearly two-thirds of the asset growth among individuals with more than $1 million in assets.
  • It delivers revenue margins two-to-three times the average for the UHNW segment (85 basis points versus 38 basis points) at a lower cost-to-serve.
  • It generates a higher proportion of business in profitable deposit, lending and discretionary investment products than the UHNW segment.
  • It will generate more than 80% of all net new revenue growth in wealth management by 2015.

McKinsey said that in the past, “private banks have often served Core Millionaires only as an accommodation or in the hope that their assets will grow,” and have tended to “indulge this segment with the customized personal service intended for UHNW clients.”

Fundamental changes are necessary to serve Core Millionaires profitably, according to the report. Private banks must create a multi-faceted product and service line that offers value, but can be delivered at lower cost.

McKinsey said private banks should do the following:

  • Develop an integrated investment and banking experience that feels customized, but offers standardized packages of services that meet the wealth preservation and retirement needs of Core Millionaires, which are different from the philanthropic and legacy issues that concern UHNW clients.
  • Design solutions to meet the critical needs of key market segments, such as wealth preservation and income generation for retirees, liquidity and credit solutions for entrepreneurs and tailored financial advice for corporate executives and professionals.
  • Implement a disciplined and profitable service model that would provide services centrally, increasing the coverage and productivity of bankers and account managers, offering selective tax and estate guidance as required and enforcing pricing discipline.

Read Wealthy Worry They Might Be Targets, but Don’t Buy Adequate Protection at AdvisorOne.

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