Merrill Lynch and Capgemini recently released their 2006 World Wealth Report which is what many believe to be the definitive source of information worldwide on the high net worth marketplace.
In line with their last year’s forecast, 2005 was marked by decelerated growth largely driven by two economic forces – GDP and market capitalization. HNWI portfolios remained relatively stable during the period yet revealed a slightly more aggressive approach with increased allocations to alternative investments and equities. Although their overall asset allocations parallel those employed in 2004, they are markedly different from investment styles seen in 2002 evidence that HNWIs are very sensitive to the economic environment, monitor market shifts and reallocate as appropriate.
This year Merrill Lynch and Capgemini focus on the growth of HNWIs through globalization and the upcoming generational transfer of wealth as prevailing trends and emerging themes in wealth management. According to their study, more than two thirds of relationship managers identified “information available to clients” as one of the most influential developments in wealth management over the past decade. Correlated to this trend, advancements in technology have greatly increased the quantity, quality and speed of information. As a result of these developments, investors have a greater global perspective, an increased demand for products, and expect better performance than ever before. The industry has also grown far more competitive with financial institutions, professional services firms, independents and other service providers actively seeking HNWI clients. Growing competition along with the rise in technology and the proliferation of global information are considered to be the driving forces in shaping and redefining the industry.
The expansion of the state of the world’s wealth emphasizes the significance of the services available to the high net worth marketplace. Today, 8.7 million people globally hold more than US$1million in financial assets – an increase of over 6.5% from 2004. HNWI wealth totals US$33.3 trillion, representing an 8.5% gain since 2004. Wealth generation was driven by real GDP gains and continued market capitalization growth. Emerging markets registered strong advances in market capitalization, aiding wealth creation in regions such as Latin America, Eastern Europe, and Asia-Pacific. South Korea, India, Russia, and South Africa witness the highest growth in HNWI populations. HNWI financial wealth is expected to reach US$44.6 trillion by 2010, growing at an annual rate of 6.0%. Understanding the needs of high net worth individuals and creating services to accommodate them is crucial as the marketplace rapidly expands and becomes more competitive.
HNWIs’ asset allocations become slightly more aggressive. Global HNWI allocations held reasonably consistent in 2005, with regional variations. Europe replaced Asia-Pacific as the region with the most balanced HNWI portfolios. Investments in private equity jumped in 2005 while hedge-fund popularity waned, leading to a net outflow in Q4 ’05 – the first in more than ten years. Moreover, HNWIs pulled funds from North America to pursue higher returns in Asia-Pacific.
As the wealth transfer wave accelerates, HNWI behaviors and portfolios “Globalize”. The interrelationship and convergence of economies and cultures continue to reshape the wealth management industry adding an increasing amount of international flavor to firms worldwide. Intergenerational wealth transfer is likely to accelerate these trends and to prompt new service-delivery strategies from relationship managers and wealth management providers. HNWIs’ inheritors are likely to take a more active role in their investments focusing on higher returns, emphasizing wealth accumulation over wealth preservation and accepting more risk to achieve goals.
Globalization compounds HNWIS’ unfulfilled needs. Opportunities from globalization are widening the gap between HNW clients’ needs and the current state of wealth management services. While investment allocation is becoming more complex, HNWIs’ desires for reporting simplicity are intensifying. Wealthy clients want tailored portfolio strategies and advice to support their overall wealth management goals.
By creating a global, full serviced wealth management provider unfulfilled needs will more easily be satisfied. Establishing specialist wealth management teams around the globe will help relationship managers meet client’s desires for more information on internationals markets and other financial concerns. Streaming-lining back-end processes such as client reporting and account opening around the globe will improve banking efficiency while fulfilling client needs.