This article first appeared in Personal Wealth, The Edge Malaysia Weekly on July 1, 2019 - July 7, 2019
Millionaires around the world accounted for nearly half the global wealth last year, according to Boston Consulting Group’s (BCG) report entitled “Global Wealth 2019: Reigniting Radical Growth” that was released on June 20. The number of millionaires grew 2.1% year on year to 22.1 million last year, and they currently hold a combined 50% of personal financial assets globally.
The greatest concentration of millionaires is in North America, although Asia is fast catching up. The report estimates that from 2018 to 2023, Asia ex-Japan is likely to experience the fastest growth in millionaire population of 10.1%, followed by Africa (9.8%) and Latin America (9.1%). By 2023, the number of millionaires worldwide is expected to reach 27.6 million.
High-net-worth individuals (HNWIs) hold the greatest concentration of wealth but the middle band of affluent households will grow significantly over the next five years, says the report. The affluent segment, holding assets of US$250,000 to US$1 million, grew at a compound annual growth rate (CAGR) of 3.8% from 2013 to 2018 and now accounts for 16.2% of global wealth.
Lower HNWIs, who own assets of US$1 million to US$20 million, held 31% of total wealth in the same period while upper HNWIs with assets of US$20 million to US$100 million accounted for 7%. Ultra-HNWIs, who have assets of more than US$100 million, represented 12% of total wealth.
“Of these, the upper HNW tier is likely to see the greatest increase — at an expected CAGR of 8.6% — from 2018 to 2023,” the report says.
It notes that despite recent economic challenges, the past five years saw a substantial increase in overall global personal wealth. “From 2013 to 2018, investable assets — consisting mainly of equities, investment funds, currencies and deposits and bonds — grew at a CAGR of 5.5% and now account for 59% (US$122 trillion) of all personal financial assets.”
Direct equity investments and mutual funds constituted the largest asset class by value last year, reaching US$45 trillion and generating 37.2% of total investable wealth. Listed shares made up 50.1% of the value while investment funds accounted for the rest. Debt securities and bonds made up just US$7.2 trillion (5.9%) of total investable wealth.
Non-investable financial assets, such as life insurance, pension funds and equity in unlisted companies, accounted for 41% (US$84 trillion) of total personal financial assets, growing at a CAGR of 4.9% in the past five years. “Life insurance and pension entitlements stood at US$61 trillion (72.5% of total non-investable wealth) while unlisted shares and other equity stood at US$23 trillion (27.5%),” the report says.
Based on detailed projections using a variety of macroeconomic and market indicators, the report notes that in its base case scenario, it is predicted that wealth will increase at a CAGR of 5.7% worldwide from 2018 to 2023. However, the big growth story will be in Asia.
“Our base case scenario predicts that wealth across Asia will rise by a CAGR of 9.4% to reach US$58.2 trillion over the next five years, the highest rate of regional growth during that period. Other regions will see sizeable growth, too, although from a much lower baseline,” the report says.
Cross-border wealth patterns are shifting as well with the report stating that by 2023, Asian cross-border assets under management (AUM) will experience a growth factor of 1.5 and will represent 37% (up from 31% in 2018) of the total.
“The shift in cross-border clientele will significantly affect the disposition of assets globally. Over the next five years, cross-border hubs in or near high-growth regions will attract an increasing share of personal financial wealth,” the report states.
“The combined cross-border assets booked in Singapore and Hong Kong have already caught up with those held in Switzerland (which is still the largest cross-border centre in the world) and by 2023, they are likely to exceed U$3.3 trillion.”
The wealth shift from West to East means that many cross-border-focused centres should rethink their growth strategies and value propositions, says the report. “Wealthy individuals traditionally tend to seek cross-border services from locations that are reasonably close to their home countries, that share a common culture and language, or that have large immigrant communities.
“Because many established cross-border hubs lack proximity to high-growth regions, those centres will need to position themselves as attractive travel destinations for business and pleasure and will need to use digital technologies to keep clients within close virtual reach.”
The affluent segment
This is one of the largest areas for potential expansion by wealth managers but is often overlooked, says the report. “This tier with wealth of between US$250,000 and US$1 million is substantial, consisting of 76 million individuals globally, and its investable assets are projected to grow at an above-average CAGR of 6.2% over the next five years. This base of potential clients for wealth management services shows extraordinary promise.”
While retail banks, private banks, discount brokers, insurance companies and fintechs have developed a wide range of offerings, the affluent segment remains poorly served, according to the report.
“Shortcomings include cookie-cutter and overly simplistic offers from retail banks, overpriced services from brand-name firms and ill-fitting product recommendations from various wealth management providers,” it says.
“Limited value propositions and a weak track record of product innovation have affected millions of affluent individuals worldwide and resulted in millions of dollars in missed opportunities for the wealth management sector as a whole.”
Another issue is trust and in order to safeguard investors, regulators around the globe have instituted numerous consumer protection measures in recent years. However, wealth managers’ institutional response to these efforts has been counterproductive.
“Rather than aligning their business models with the needs of customers and digitising processes to embed new protection, many firms take a tick-the-box approach to compliance and rely on manual input and paperwork-heavy steps that add time, cost and error to their processes without meaningfully improving their handling of the underlying governance issues,” says the report.
In this regard, wealth managers must significantly change their approach towards the affluent market. “Winners will accelerate product innovation and develop offerings that address the specific needs and preferences of affluent sub-segments.
“They will employ hybrid business models that combine digital and human engagement to personalise and deliver a more convenient and navigable one-stop shopping experience while improving their advisor efficiency and cost to serve. Wealth management firms that are willing to make these changes will transform the affluent segment into a golden opportunity,” the report adds.
Meeting their needs
In order to add value, wealth management firms need to deliver real performance to clients and help them meet their investment goals instead of just selling products. The report notes that traditional private banks often over-serve their affluent customers at the beginning of the relationship, assigning them a private banking relationship manager on the assumption that these individuals will be an attractive source of long-term value to help the bank meet its net new money targets.
“But when client activity fails to live up to its perceived potential, banks may be tempted to pull back on the service they offer — by reducing the frequency of engagement, for example, or by reassigning the affluent individual to a less experienced advisor — in order to shave off their costs. Such reductions in service can leave clients feeling orphaned,” it says.
Poorly differentiated value propositions and plain-vanilla products contribute to the challenges some wealth managers face in trying to attract and retain affluent clients. “Although retirees, new high earners, real estate owners and rural and urban dwellers have very different wealth management needs, many firms tend to crowd these sub-segments under a single umbrella and offer them the same generic ‘long-term globally diversified portfolio varied by risk score’ proposition,” the report points out.
It is also not unusual for affluent individuals to receive recommendations for products that end up being a poor fit for their financial and investment needs, the report highlights, which leads some to wonder why they are paying hefty advisory fees when a simple set of index funds might achieve the same or better returns.
“Fee structures that prioritise sales over positive client outcomes contribute to this flawed situation. So do mass-market coverage models that rely on less-experienced advisors but fail to backstop them with the training, governance and oversight they need to ensure that they present a sensible ‘house view’ to clients.”
A large number of wealth management firms also have the misconception that affluent customers are not interested in digital channels. Firms believe that they prefer to engage with human advisors but the reality is that most expect digital interactions to be part of their wealth management service.
“[Most in the affluent segment] are looking for a hybrid experience with mobile-first interactions for monitoring and assessing portfolios in real time, and one-on-one human engagement for more complex matters,” the report says.
An example of a hybrid model that works was done by a traditional German private bank, which recently built a hybrid wealth management advisory model to serve the affluent market.
“The model featured a robust digital platform backed by a personal financial advisor. Analytics embedded in the platform tailored offerings to a client’s specific risk profile and investment goals,” the report explains.
“Clients who had questions or needed more information could access a personal wealth advisor to browse the platform with them and fine-tune their investment portfolio.”
Finally, many wealth managers think that affluent individuals are more price-sensitive than they actually are, resulting in managers often sticking to low-cost models, fearing that the more expensive ones will drive clients away.
“In reality, we found that affluent clients are not opposed to paying slightly higher fees as long as they believe their advisor is acting in their best interests and is offering sound advice. Leading wealth managers are already experimenting with innovative pricing models,” the report says.
“For example, a traditional US brokerage firm found success with retail (mass affluent) clients by creating a subscription-based advice model that gave clients unlimited access to a certified financial planner for a flat fee of US$30 per month (instead of assessing fees as a percentage of AUM as the industry had traditionally done), an approach similar to the pricing models that consumer companies such as Netflix and Spotify employ.”
The report notes that there are three ways to win the affluent market: building a deeper understanding of key affluent sub-segments and their needs, using technology to personalise at scale and creating incentive structures that promote the right behaviours.
Save by subscribing to us for your print and/or digital copy.
P/S: The Edge is also available on Apple's AppStore and Androids' Google Play.