The 2013 World Wealth Report is the industry-leading benchmark for tracking High Net Worth Individuals (HNWIs) , their wealth, the global and economic conditions that drive change in the wealth management industry, and the key industry topics that firms need to tackle. New to the 17th annual edition are findings from the most in-depth primary research work publically available on global HNWI perspectives and behavior, our Global HNW Insights Survey . The survey provides direct insights from more than 4,400 HNWIs across 21 countries in five regions regarding their level of confidence in the industry, investment objectives, asset allocation decisions, types of relationships and services they look for from their wealth management firms, and the impact of regulatory challenges occurring around the globe in the wake of the financial crisis.
The wealth management industry has become top-of-mind over the past few years due to a number of factors. For one, wealth levels are at all-time highs, despite ongoing economic uncertainty and only modest growth in many key economies. This makes the topic of wealth management a key one in terms of not only public interest through the media, but also for governments, as well as for HNW clients themselves in terms of how to obtain improved service. Secondly, many firms have increasingly come to see wealth management as an attractive industry due to the resilient client base, stable cash flows, and lack of large-scale capital requirements – which also caused many universal banks that previously prioritized investment banking to “pivot” towards wealth management. A third driver for the increased interest in wealth management is that despite the positive tailwinds, many firms are struggling with profitability linked to lack of scale, regulatory compliance, and other factors requiring insight into how to manage these dynamics.
This makes our report a vital resource for a broad range of stakeholders. I am pleased to share some of the highlights from our research.
Record levels of global HNWI population and wealth
While the first half of 2012 was marked with investor uncertainty and decelerated global economic growth, policymakers worked effectively to reduce risk and encourage growth in the second half of the year with the European Central Bank’s July 26 pledge to do “whatever it takes” to prevent the Eurozone from collapse being a key inflection point in reassuring investors. The result was record wealth levels reached by the end of 2012 as global HNWI numbers expanded. Our forecast indicators are pointing to continued strong wealth growth through 2015, with expectations of surpassing current records and reaching a new all-time high.
In terms of specific figures, the investable wealth of the world's HNWIs rebounded in 2012, growing by 10% to reach a record high of $46.2 trillion, after declining 1.7% in 2011. One million individuals joined the global HNWI population, which reached 12 million, reflecting an increase of 9.2%. Growth was fueled by global recovery in the equity markets, (notably in the second half where the MSCI World Index grew 16.1%, versus a 0.7% decline in the first half,) as well as in some real estate markets.
Regionally, North America reclaimed its position as the largest HNWI market in 2012 after being overtaken by Asia-Pacific in the year prior. North America's population of 3.73 million HNWIs surpassed Asia-Pacific's 3.68 million, while its HNWI wealth reached US$12.7 trillion, above the US$12.0 trillion in the Asia-Pacific region. North America's lead in both population and wealth is likely to be eclipsed again in the future by Asia-Pacific. Interestingly, while North America led in HNWI population, Asia-Pacific actually had a higher overall wealth growth rate at 12.2%, compared to North America's 11.7%. Asia-Pacific’s fastest-growing HNWI markets are Hong Kong (35.7%) and India (22.2%).
Global investable wealth growth was led by HNWIs in higher wealth bands—Ultra-HNWIs (defined as those having investable assets of US$30 million or more, including the standard HNWI exclusions)—expanding in wealth and number by approximately 11%, following declines in 2011. The ‘millionaires next door’ category ($1M – $5M) grew ~9% in both population and wealth, up from marginal increases in 2011, while growth for mid-tier millionaires ($5M – $30M) was ~10%.
The Top 12 HNWI markets remained unchanged in 2012. U.S., Japan, and Germany still dominate with more than half (53.1%) of total HNWIs, though their market share is expected to erode as emerging and other markets continue to grow. For example, other than India and Hong Kong’s strong performance noted above, China’s HNWI population grew 14.3%, South Korea’s by 10.9%, and Australia by 15.1%.
Latin America was the exception to the strong growth trend seen, after leading regional growth in 2011, as it faltered in 2012 due to slow GDP growth and challenged equity markets – In particular in Brazil where only 0.2% HNWI population growth was achieved. However Mexico was a bright spot for the region, with HNWI population up 6.6%.
Improved HNWI trust levels, though preservation remains key feature of asset allocation strategies
Investor confidence had improved by the first quarter of 2013 , which was an underlying factor in leading to greater stability and strong performance in select drivers of wealth, including equities and real estate. Global HNWI confidence in the wealth management industry improved, with 61% of HNWIs having a high degree of trust in both wealth managers and their firms (up approximately 4 percentage points for both firms and individual wealth managers). The global economic recovery and strong trust in wealth managers contributed to 75% of HNWIs feeling confident about generating future wealth, despite their stated current low confidence in financial markets (at 45.4%) and high holdings in cash.
Record wealth levels were achieved in 2012 despite a conservative HNWI investing approach. One-third (33%) of HNWIs told us they were more focused on preserving wealth as a strategy, versus 26% focused on growing wealth. Asset allocation followed this preservation trend, with almost 30% of HNWI wealth held in cash and deposits. Regional differences were clear with equities taking up the largest portion of North American HNWI portfolios (37%), while HNWIs in Latin America and Asia-Pacific (excluding Japan) preferred real estate (30% and 25% of portfolios, respectively). Ultra-HNWIs are the most focused on preservation across all wealth bands. HNWIs in the emerging markets of Middle East and Africa (MEA) are more focused on growth (42%).
Japan, in particular, is a fascinating market because it is the second-largest HNWI market after the United States, with over 1.9 million HNWIs. With wealth levels in 2012 of almost $4.5 billion, there is around $2.2 billion in HNWI wealth on the sidelines as almost half (49.4%) of Japanese HNWI portfolios were in cash during the first quarter of 2013. Japan has a deeply ingrained history of conservative investing, and after a long period of economic stagnation and chronic deflation, its HNWIs lack trust (less than half of HNWIs were confident in their ability to generate future wealth). However, there has been increased positive (though very early stage) economic news around Japan in 2013, which could represent a tailwind to future wealth growth.
HNWIs consistently seek out investment opportunities close to home. In every region except MEA, HNWIs invested 74% to 80% of their wealth in their home regions. The high levels of HNWI population and wealth in North America and Asia-Pacific, combined with the focus on home markets, led to the greatest amounts of overall global HNWI investment being in those regions (approximately 30% in each).
Leading practices for delivering best-in-class service to HNWIs
Perhaps unsurprisingly, wealth manager competency emerged as the key service priority among HNWIs globally, with 68% rating it as most important. As an extension of this finding, to operate successfully in the HNW market wealth management firms must fully understand their clients’ diverse servicing prerequisites.
In terms of meeting wealth management needs, globally HNWIs indicated preference for a seamless approach, working with a single trusted firm (41% versus 14% preferring multiple firms) and single point of contact (34% versus 24% preferring multiple contacts). Preference for a single firm was highest in North America (53%) and for HNWIs aged 60+ (48%). Asia-Pacific (excluding Japan) HNWIs and those in the ultra-HNWI wealth band more were likely to prefer working with multiple experts (40% and 32%, respectively).
While 31% prefer direct in-person contact, almost one in four HNWIs feel digital communication to be more important, a trend driven by younger HNWIs and those in Asia-Pacific (excluding Japan). It is a question of when and not if digital will catch up to direct, in-person channels for some HNWI segments, making it important for firms to begin considering strategic investments in technology and effective portfolio management applications through digital channels.
The volume and pace of regulations presents the biggest challenge to the wealth management industry in our view, heavily impacting both firms and their clients. Firms face pressure to operate cost effectively and efficiently under tight deadlines, while limiting disruptions to clients who have come to expect a seamless approach to managing their wealth. While regulations can deliver meaningful positive change for investors, some, as an unintended consequence, negatively impact a firms' ability to provide a positive client experience, such as by increasing requests for client information and documentation (including source of funds) and increased wealth manager time taken up on compliance issues, to name just two.
As a result, firm operating and revenue models are impacted by regulations, leading some firms to adjust their value propositions and service levels based on account size, with clients in lower wealth banks most likely impacted. An example of a possible result could be more automated service, leaving face-to-face contact for the more customized needs of client in upper wealth bands. Overall, it will be increasingly challenging for firms to offer all services to all clients in all markets. Future leaders are likely to be agile firms with niche offerings and large firms that can minimize client disruptions and derive greater value from compliance investments while continuing to invest in other areas.
To move forward, while many firms are making tactical investments to overcome regulatory challenges, more strategic investments have the potential to separate best-in-class firms from the others. Firms will have to analyze regulatory impact, resource availability, firm capabilities and priorities before deciding on key strategic ways forward, particularly regarding client segmentation and target geographies. We see the major strategic opportunities to take compliance from a burden to an opportunity in the following areas: technology and process; people and culture; and client communications.
Reputation, a pillar of successful firms, will be increasingly important as a foundation for the compliance journey and opportunity, and our analysis found that 48% of global HNWIs would pay more to work with a firm with a solid reputation.
HNW global wealth market on track for continued growth
Despite a conservative HNWI investing approach in 2012, record wealth levels were achieved across the globe. The 2013 World Wealth Report also indicates that there are potential growth opportunities ahead for the HNWI market to reach even higher record-breaking levels.
The outlook for the HNWI market is cautiously upbeat, led by Asia-Pacific—expected to become the region with the highest HNWI wealth and population by 2014 and a market size of $55.8 trillion in 2015.
Looking forward, with the ongoing economic recovery providing an environment of reduced risk and improving investor confidence, global HNWI wealth is forecast to grow by 6.5% annually over the next three years. The Asia-Pacific region, which is projected to grow at one-and-a-half times the global average at 9.8%, is expected to lead global growth. Europe also is likely to experience a robust rebound (6.2% growth per year) based on continuous recovery efforts in the Eurozone, especially in the periphery markets, on top of relatively muted performance since 2007. To learn more or download the World Wealth Report, go to www.worldwealthreport.com
We’re currently working on the World Wealth Report 2014 as we develop more insights into HNWI wealth and population around the world. Watch this space!
(1) HNWIs are those individuals with US$1 million or more in investable assets (excluding primary residence, collectibles, consumables, and consumer durables.)
(2) Capgemini, RBC Wealth Management, and Scorpio Partnership Global HNW Insights Survey, 2013
(3) The WWR 2013 focuses on HNWI population and wealth as of 31st December 2012. For 2013 actual data, please see our upcoming WWR 2014.
(4) The Global HNW Insights Survey covered over 4,400 HNWIs in 21 countries, and was conducted in February and March of 2013
World Wealth Report 2013 Key Takeaways:
- Market Sizing: HNWIs achieved record levels of wealth in 2012; North America’s reclaimed lead in HNWI wealth and population expected to be surpassed by Asia-Pacific in the near future. Future wealth growth expected to be robust through 2015.
- Wealth Drivers: Coordinated policy interventions reduced global risk in 2012, leading to improved investor confidence and a cautiously upbeat outlook for future growth
- HNWI Behaviors: Despite a focus on wealth preservation, HNWIs achieved a record level of wealth in 2012 and are confident in future growth opportunities. Confidence comes alongside strong trust in firms and wealth managers, with whom HNWIs seek a seamless approach to managing their wealth
- Regulatory Spotlight: The volume and pace of regulations presents the biggest challenge to the industry, heavily impacting both firms and their clients. While many firms are making tactical investments to meet regulatory requirements, more strategic decisions will be key to separating best in class firms from the others.
For more info on the World Wealth Report, visit: www.worldwealthreport.com