Global Growth Of Private Wealth Faltered In 2011 – BCG Report

Charles Paikert

1 June 2012

Global growth in private wealth is now being driven by the “new world” of rapidly developing economies, according to The Boston Consulting Group’s annual report on global wealth.

Nevertheless, despite an impressive 10 per cent jump in private financial wealth in the Asia-Pacific region (excluding Japan), Latin America, Eastern Europe and the Middle East and Africa, total global wealth grew only 1.9 per cent in 2011 to reach a total of $123 trillion. The annual increase marked a dramatic slowdown from 2010 and 2009, when global wealth grew by 9.6 and 6.8 per cent, respectively.

Economic uncertainty and struggling equity markets in major developed economies were the primary reasons for last year’s slump, according to the BCG report, The Battle to Regain Strength: Global Wealth 2012.

Wealth creation has become “a two speed world,” said Monish Kumar, senior partner and global leader of asset and wealth management at BCG, speaking at a press briefing in New York yesterday. “More than 100 per cent of growth was driven by the developing world, while the developed world pretty much stayed where it was.”

Indeed, private wealth in the “old world” of North America, Western Europe and Japan declined by 1 per cent last year, according to the report.

BCG expects the two-track trend to continue for the rest of the decade, and predicts that private wealth in the Asia-Pacific region will exceed $40 trillion by 2016, overtaking Western Europe.

UHNW market expected to grow fastest

But wealth managers in developed countries can take heart: the ultra high net worth market, defined by BCG as households with more than $100 million in wealth was the fastest growing segment of the market last year – rising 3.6 per cent – and is expected to remain so for the next five years, with a projected compound annual growth rate of 8 per cent.

“The good news for wealth managers is that there’s a lot of room to grow and a lot to win in the upper part of the wealth pyramid,” said Peter Damisch, global leader of wealth management at BCG.

The US had the largest number of UHNW households at 2,928, followed by the UK at 1,125, and Germany at 807. While the numbers in those countries remained steady, fourth-place Russia, fifth-place China and thirteenth-place India showed the largest gains, boosting their totals to 686, 648 and 278, respectively.

Continued pressure on costs and margins

Wealth managers will continue to face pressure on costs and profit margins, according to the report.

Increasing complexity of the business including technology, operations, compliance and risk management drove up expenses on what the report called “non-front office costs.” Pre-tax profit margins dropped by one basis point to 22 basis points last year, although variation across and within regions was high, and cost-income ratios deteriorated in most regions.

And despite the rapid growth of wealth in the Asia-Pacific region, Western banks have mostly incurred costs there, Damisch said, pointing out that massive investments in infrastructure and talent takes time to pay off and achieve scale.

Wealth managers are also facing considerable pricing pressure from clients, according to Damisch: “They are challenging what they get for their money.”

The most important criteria in choosing a wealth manager, according to a BCG survey of high and ultra high net worth clients, are referrals from friends and family, brand reputation and product offering.

The primary reasons clients said they switched providers were price, poor returns, and poor reporting quality gauged by accuracy, depth, user-friendliness and customization.

Clients also said they expect relationship managers to be reliable, trustworthy, knowledgeable about products and fully transparent. “The personal touch in private banking,” according to the report, “continues to be paramount.”

Wealth managers will face continued economic strain, according to the report. Revenue margins are expected to be compressed by “stronger competition from disruptive business models, increased product commoditization, limited trading activity, and a slow recovery of demand for complex products.”

Margins are also expected be affected by rising costs, increased regulation and the scarcity of top talent.

To do list

Consequently, according to the report, it will be “imperative” for wealth managers to:

Leverage growth in emerging markets by customizing business models for each market and finding and keeping local talent.
Establish more granular and need-based segmentation.
Offer segment-specific solutions.
Offer more compelling value by developing pricing models geared to product usage and service levels and drawing sharper distinctions between high value offering and low-cost models.
Integrate alternative channels such as multi-channel capabilities and social media into the delivery of a consistent client experience.

“There’s a big list of things to do,” said Kumar, “but the real challenge will be not what you get done but how you get it done. The winners will be the ones who are able to get it done better.”