The wealthy are becoming increasingly rich (see Fig. 1) and the term millionaire has recently been dubbed obsolete as multi-millionaires or the ultra-wealthy continue to dominate rich lists. The new wealth standards are particularly common in emerging markets such as China and Russia, but also in developed countries such as the US.
This is putting pressure on the wealth management sector to rethink their products and services in order to match the demands and specifications of the super-rich. The growing amount of personal wealth has also spiked criteria for private banking clients, as more and more firms look to only take on the very wealthiest of customers.
Wealth managers and private banks have had to refocus their energies and businesses on emerging markets
Interestingly, during the past 10 years, worldwide millionaire and multi-millionaire numbers have grown at vastly different rates, especially with the amount of those that are ultra-wealthy increasing. On a worldwide basis, millionaire numbers have grown by 58 percent during this period, while there are now 71 percent more multi-millionaires, according to a study from the wealth consultancy New World Wealth.
In particular, the higher growth of ultra high-net worth individuals can be put down to a number of factors, including a widening wealth gap at the top-end, a rising rate of conversion of millionaires into multi-millionaires and strong growth in countries that have a large number of ultra wealthy persons. This has been a particularly strong development in countries such as Russia and India, the study said.
Surprisingly, growth in multimillionaires hasn’t just been centred on major economies but in very high growth areas such as South America, which has seen the largest growth in multi-millionaires at 265 percent over the 10-year period. Other top performers include emerging markets such as Australasia and Africa, which have seen a surge in major wealth. According to New World Wealth, this is no surprise, as all the countries with more than 200 percent growth in multi-millionaires are emerging and includes key markets such as Russia, Brazil, China and Angola (see Fig. 2). A lot of this comes down to the 10 percent or above GDP growth percentage that most of these countries have enjoyed in recent years.
With developed markets seeing less exponential growth in high wealth, wealth managers and private banks have had to refocus their energies and businesses on emerging markets. The surge in wealth has also lead to a shift in products and services as they’re increasingly geared towards ultra-high-net-worth individuals (UHNWIs).
The death of the millionaire
To this end, the term millionaire or high-net worth individual may have become redundant as wealth providers are looking for new definitions for this group of individuals with net assets of $10m or more. In this respect, there’s little doubt that the richer are getting much richer.
This year’s annual CapGemini/RBC survey of investors worldwide showed the number of households with more than $1m in investable wealth rose almost 15 percent to 13.7 million in 2013. Shockingly, their total wealth rose almost 14 percent to $53trn. In essence, this means that both the ranks of the rich and their collective wealth have now risen 60 percent since 2008, according to the survey, and those fortunes are expected to rise a further 22 percent by 2016. For those in the wealth management industry, this presents new opportunities.
To a large extent private banks and wealth managers have rebranded to focus on the ultra-wealthy by changing their services and products to match the very specific needs of this segment and distinguish between the assets of a billionaires versus those who are affluent. With the finance industry becoming increasingly oriented towards niche services, segment specialisation has been drawing in clients like never before and for firms, such client retention means sure-fire profit.
It has also meant an investment in new private client teams, with advisors dedicated to only a handful of clients, ensuring the best service available for the ultra-wealthy. That said – firms have kept such changes largely under wraps, not willing to divest any trade secrets as to how they’re drawing in and retaining extremely profitable clients.
Growth in global HNWI wealth
Record high achieved
UBS, one of the world’s largest banking groups, has largely focused on wealth management in recent years, rolling back less profitable divisions such as investment banking. In 2010 the bank started actively targeting affluent clients in emerging markets as Europe’s economic decline has continued to bring down wealth and growth in developed markets. As a result, Switzerland’s largest bank is currently boosting business with an inflow of ultra-wealthy families with at least $54m of investable assets, and is said to have a business relationship with as many as eight out of 10 billionaires in Asia. “We have a penetration of one in two billionaires in the world,” Chief Executive Officer Sergio Ermotti said in the bank’s announcement of second-quarter earnings this year. “In Asia, this was much deeper.”
Pretax earnings at the wealth-management division for customers outside the Americas rose 11 percent to 557 million francs, the company added today in a more detailed quarterly filing. That unit attracted $10.8bn in net new money, with emerging markets and the Asia-Pacific regions driving growth, and the most money coming from UHNWIs.
Similarly, German lender Deutsche Bank rid itself of its UK-based asset manager, Tilney, which focused on the mass affluent lower end of the wealth management market. With the decreasing number of millionaires in developed markets, Tilney saw its losses grow from $14.6m in 2011 to $15.6m in 2012, according to its annual report at the time. To a large extent, the loss was caused by a drop in its assets under management from $8.2bn to $7.7bn, lower fees from clients with smaller accounts, goodwill impairments and client redresses.
In this respect, the impact of compliance and regulatory costs has sent client costs through the roof, providing further incentive for firms to focus on ultra-rich clients. Deutsche has openly chosen to focus on the super-wealthy as it continues with a lengthy and broad restructuring of its underperforming asset and wealth management business.
So far, this has been a successful move as Deutsche Asset and Wealth Management has grown its profits from $902m in 2012, reaching $6.05bn by the end of 2013. This has partly been achieved through a mixture of cost cuts, staff reductions, bundling of investment platforms and closer collaboration with the group’s investment bank. However, some cost reductions have also been reinvested to expand the global business and, in particular, hiring senior advisers for a 30-strong ‘key client partners’ team that is exclusively dedicated to advise ultra-rich families in London.
It’s no surprise that this focus on the higher end of the wealthy segment has paid off for major banks and wealth managers. The global UHNWI population currently counts 187,380 individuals with a combined wealth of $25.8trn and, curiously, a lot of this comes down to a surge in billionaires. Meaning that not only are millionaires becoming multi-millionaires, but the even richer are especially gaining. According to a recent report from Wealth-X, the world’s UHNWI population grew by 0.6 percent but the growth rate of the global billionaire population outstripped that growth rate by expanding at an impressive 9.4 percent.
Currently, there are 2,160 billionaires globally, representing the top 1.2 percent of the world’s UHNWI population, yet controlling a quarter of the total fortune attributable to the ultra wealthy. As such, every billionaire is on average worth $2.9bn each. In comparison, the lowest tier of the ultra-wealthy segment is represented by those worth $30m-$49m. Making up the largest group of the super rich it’s noticeable that they only amount to a combined fortune of $3.3trn.
[F]ocus on ultra-high net worth individuals is a convincing long-term strategy for those firms betting on high wealth management profits
With the combined wealth attributable to this segment shrinking gradually from year to year, as the eurozone crisis and a slowdown in emerging economies continues to hurt the mass-affluent, financial firms have done well to focus on the extremely rich, rather than the averagely rich. It has also become clear that the mass affluent tend to be more vulnerable to market fluctuations. In this respect, focus on ultra-high net worth individuals is a convincing long-term strategy for those firms betting on high wealth management profits.
With the highest growth in billionaires centred on Asia and emerging markets in general, it’s no surprise that more and more firms are also expanding their wealth management business in this region. By 2016, the Asian Pacific region is forecasted to account for 18.8 percent of world wealth, whereas North America will account for a marginally smaller 17.9 percent, despite the US typically boasting the largest number of UHNWIs in the world.
This is why Nordic banking group Nordea launched its first private client business in Singapore and why UBS has specifically focused its efforts on the Asian region. In this respect, wealth management has become a big earner for firms, and banks are hedging their bets on the safest option for profitable growth in years to come – the emerging super-rich.