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Why Most Banks will Miss the Next Generation of HNWs

James Lawson

Ledbury Research

19 August 2005

In order to help our clients understand where to find the high net worth population in the next few years, Ledbury have investigated the sources of wealth that will be generating this new breed. One of the starting points for this analysis was Ledbury’s European Wealth Manager Survey. We asked today’s private client money managers what their high net worth clients who joined them this year look like; then what they expect their wealthy clients to look like in the future. The current situation seems to be positive as, on average, the survey respondents saw an increase in clients across all six different sources of wealth we looked at. Of these sources, the clients that have made the largest impression over the last 12 months have been entrepreneurs. Sixty four per cent of respondents saw more entrepreneurial wealth last year than previously. Similarly, when it comes to what the future holds, the industry appears to be most excited about entrepreneurs and executive wealth; 75 per cent of respondents think that entrepreneurs will make a larger proportion of their new clients whereas 45 per cent think it will come from executive wealth. Entrepreneurs Making a Comeback During the 1980s on the first day a company floated on the stock market, its share price rose by an average of 7 per cent; by the height of the internet bubble in 1999-2000, prices could rise 65 per cent. Though this figure has fallen to a calmer 12 per cent, selling companies still seems alluring. However, there are a number of other factors that mean that the future millionaire entrepreneur does not look like she/he used to. Firstly, floating on the stock market is a very visible way of making money – the company is, by its nature, going public. Nowadays, private equity firms are much more popular, buying out owners in more clandestine deals. Last year, more investments were made in European private equity than ever before – even than in the 2000 bubble. Similarly, there were 5,917 of exits from private equity investments, up 6 per cent in number and 44 per cent in value. Fifty-seven per cent of these exits were made in the UK. Demand for private equity by investors is up too: 53 per cent of European wealth managers will invest more of their client’s money in this asset class (compared with a mere 11 per cent upping their bond allocations). The second important fact to realise is that entrepreneurs do not all come from one sector anymore. For example, the amount invested in technology has fallen two-thirds from 2001 to £678 million in 2004; over the same period, the amount in retailing has trebled to £1,413 million, and insurance has risen nine times to £284 million. Thirdly, these entrepreneurs are not all based in the same location. Though London is still the most important UK location, 12 per cent of UK investments were made in the North West & Merseyside last year, compared with only 6 per cent in 2001. Implications Whilst there are many other ways of making money, from inheritance, property development and the entertainment industry, amongst other, none of these will generate as many wealthy in the future as the executive, professional services, and entrepreneurial sectors. Entrepreneurs represent the most exciting opportunity of the three, and are arguably the worst served at the moment. This is partly because they are much harder to find than previously. Furthermore, those with commercial responsibility at many financial services firms revert to the idea that this group look like, and can be treated similarly to, their old client base or even people they know. A number of the entrepreneurs we’ve interviewed from our Millionaires Panel have complained that the London-centric, old-boy network is unattractive and patronising. A bold new approach is desperately needed to reach this group and the new generation of the wealthy, recognising their different backgrounds, locations, needs, and attitudes. James Lawson CFA is the research director at Ledbury Research: a marketing and research consultancy focused on the wealthy consumer. This opinion is an abridged version of an article taken from Ledbury Research’s monthly publication High Net Worth: aimed at professionals who need to know about the wealthy. For more information please contact highnetworth@ledburyresearch.com