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As World's Rich Got Richer, Wealth Industry AuM Rose In 2013; Margins Improved - BCG

Tom Burroughes Group Editor 10 June 2014

As World's Rich Got Richer, Wealth Industry AuM Rose In 2013; Margins Improved - BCG

An annual survey of the wealth management industry and clients by Boston Consulting Group paints a picture of rising affluence, some welcome AuM gains and margin improvements - and continued challenges.

The wealth of private individuals around the world rose 14.6 per cent last year from the year before to reach $152 trillion, faster than the 8.7 per cent growth rate in 2012, but the wealth management industry cannot assume any complacency, according to the Boston Consulting Group.

Nevertheless, the report, entitled Riding a Wave of Growth, said wealth managers had an “outstanding year” for assets under management growth in 2013, while cost/income ratios fell as firms fought to contain expenses.

By 2018, the report estimates there will be a total of $198.2 trillion of such wealth.

The North America region remains top of the heap so far: in 2013, total private wealth stood at $50.3 trillion, beating Asia ex-Japan at $37 trillion. The report, however, expects that to be reversed in 2018 when Asia ex-Japan holds $61 trillion and the US holds $59.1 trillion of such wealth.

In Western Europe, wealth stood at $37.9 trillion (expected to be $44.6 trillion in 2018) and Japan held $15 trillion (2018: $15.9 trillion); in Africa and Middle East, the 2013 figure was $5.2 trillion, and expected to be $7.2 trillion in 2018; in Latin America, meanwhile, total wealth stood at 33.9 trillion, and is expected to rise to $5.9 trillion in 2018, the report said. (Private wealth numbers for all years were converted into dollars at year-end 2013 foreign exchange rates to exclude the effect of currency fluctuations.)

“In nearly all countries,” it said, “the growth of private wealth was driven by the strong rebound of equity markets that began in the second half of 2012.” It noted, however, that emerging markets were the exception, with the MSCI Emerging Markets Index falling 5 per cent last year. Wealth growth was driven mainly be returns on existing assets; the amount of wealth held in equities rose by 28 per cent, with rises in bonds (4.1 per cent) and cash and deposits (8.8 per cent), lagging significantly.

“Looking ahead, global private wealth is projected to post a compound annual growth rate of 5.4 per cent over the next five years to reach an estimated $198.2 trillion by the end 2018. The Asia-Pacific region and its new wealth will account for about half of the total growth,” it predicted.

The report also waded into recent controversy about the alleged widening inequalities of wealth, as highlighted by controversy surrounding a much-touted book on the subject by French academic Thomas Piketty. “As the debate over the global polarisation of wealth rages on, one thing is certain: more people are becoming wealthy,” it said.

The number of millionaire households (in US dollar terms) rose to 16.3 million last year, a rise from 13.7 million in 2012. The latest percentage figure accounts for 1.1 per cent of all households around the world. The US has 7.1 million of such millionaire households and the biggest number of new ones (1.1 million). In China, there are 2.4 million such households.

And in figures that will drive controversy about widening wealth gaps, wealth held by all population segments above $1 million will rise at least 7.7 per cent per annum through 2018, while those under $1 million will see wealth rise by an average of 3.7 per cent, the reports said.

Ultra high net worth households, defined as those with $100 million or above, held $8.4 trillion in wealth, or 5.5 per cent of the global total, a rise of 19.7 per cent from the amount in 2012. By 2018, that share is expected to rise to 6.5 per cent, it said.

Offshore trends
Reflecting on the trends in the offshore world, such as Switzerland, the BCG report said private wealth booked across borders rose 10.4 per cent to reach $8.9 trillion last year; the share of offshore wealth from the total fell slightly to 5.9 per cent from 6.1 per cent.

“Offshore wealth is projected to grow at a solid CAGR of 6.8 per cent to reach 12.4 trillion by the end of 2018,” the report said, adding that the offshore model will “continue to thrive”. BCG argued that wealthy individuals continued to want access to innovative products, professional investment and relationship teams and, particularly in emerging market cases, security.

“Indeed, the latest tensions between Russia and Ukraine, as well as the escalated conflict in Syria, have highlighted the need for domiciles that offer high levels of political and economic stability,” the report said.

Switzerland remains the world’s single largest offshore centre, the report said, holding $2.3 trillion in assets, or 26 per cent of all offshore money, but it noted the pressure on the country from other nations to combat tax evasion.

“In the long run, Switzerland’s position as the world’s largest offshore centre is being challenged by the rise of Singapore and Hong Kong, which currently account for about 16 per cent of global offshore assets and benefit strongly from the ongoing creation of new wealth in the region,” the report continued. It expects assets booked in Singapore and Hong Kong to rise at CAGRs of 10.2 per cent and 11.3 per cent, respectively, through 2018, together accounting for 20 per cent of such offshore money by that year.

In 2013, Hong Kong and Singapore accounted for $1.4 trillion of offshore wealth; Caribbean and Panama was $1.2 trillion; Channel Islands and Ireland, $1.1 trillion, and the UK was $1.0 trillion. The US held about $700 billion of such money, with Luxembourg holding $600 billion and “Other” holding $700 billion.  

For all the talk of regulation and compliance burdens, the reported noted that in asset under management terms, wealth managers logged an “outstanding” year in 2013, with AuM up 11 per cent year-on-year. Markets, however, did the bulk of the work and net new money accounted for only 4 per cent of this rise. The Asia-Pacific region made up the largest share of net net money growth at just over 10 per cent, the report found. In revenue terms, wealth managers logged an 8 per cent rise last year. Fees rose by 10 per cent, commission rose 5 per cent and net interest income fell 7 per cent.

The share of discretionary mandates held steady at 21 per cent, but regional variation is wide, with only 5 per cent of DFM money in Asia, for example, and 30 per cent of money run in this way in Europe.

As revenue growth lagged behind the rise in AuM, return on assets declined by five basis points in Asia and by 3 per cent in Latin America, while other regions’ RoA fell by one basis point from a year earlier.

Firms achieved some success in reducing cost/income ratios last year to an average of 70 per cent from 74 per cent in 2012; in Asia, ratios fell to 67 per cent, below the global average. American brokerage houses had the most cost-intensive model because of high levels of compensation for relationship managers, the report said. In total, overall costs rose 3.5 per cent last year. The biggest cost increase was in legal, compliance and risk-management.

European offshore firms cut RMs by 7 per cent last year from a year before; in North America, numbers rose 3 per cent and in Asia, they rose 21 per cent.

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