Monday, June 11, 2012
Wealth Management Industry and Economic Inequality
By BEIF Team
Recently, Boston Consulting Group (BCG) released a report entitled Global Wealth 2012: The Battle to Regain Strength. The report deals with how private wealth has changed around the world in the last year, and how private wealth managers can address the challenges faced by their clients.
According to the report, growth in private wealth has been 1.9% in 2011, quite slow compared with 9.6% and 6.8% in 2009 and 2010 respectively. Behind these number lies an interesting story on how the pattern of private wealth has changed and how it is managed. More importantly, these numbers also raise questions on how private wealth might be related to inequality.
First, private wealth shrunk in the “old world” - North America (-0.9%), Western Europe (-0.4%), and Japan (-2.0%). In contrast, private wealth grew in the “new world” - Eastern Europe (14.4%), Asia-Pacific (10.7%), Latin America (10.6%), and the Middle East and Africa (4.7%). So, the modest growth in global wealth was driven by the emerging economies.
Second, the rise in private wealth was higher (at 3.6%) for households with more than $100 million in wealth (known as ultra high net worth or UHNW households), compared with other segments that grew at 1.7 percent. This trend is expected to continue as BCG forecasts that the wealth of UHNW households will continue to grow at 8% over the next 5 years, compared with a 3% growth among households with less than $1 million. The UHNW households held $7.1 trillion (5.8% of global wealth) in 2011 and are expected to hold $10.3 trillion (6.8% of global wealth) by 2016. It must also be noted that the UHNW household segment is also most susceptible to adverse economic conditions, as in 2011 when the UHNW household segment in North America lost 2.4% of its wealth compared to the average loss of 0.9% among all household segments.
Third, the report notes that offshore wealth (i.e., assets booked in a country where the investor has no legal residence or tax domicile) increased 2.7% to $7.8 trillion. However, this offshore wealth is increasingly coming under greater scrutiny from countries in North America and Western Europe, simply because “in difficult fiscal times such as these, governments need funds-and cracking down on perceived “tax havens” is one way of obtaining them.”
Fourth, BCG found that “Asian HNW clients are generally younger and still focused on wealth accumulation as opposed to wealth preservation. They also tend to be entrepreneurs [...]” The survey also found that “Western counterparts have, to a greater extent, gained their wealth either as senior company executives or through inheritance (often involving multigenerational wealth)”.
As the report points out, the wealth management industry is highly active (BCG benchmarked over 130 companies) and competitive. Given the trends captured in the study, the report states that wealth managers “will have to customize and focus their offerings to meet each client’s specific needs with regards to products, services, tax reporting, and preferred booking centres.”
Trends in global wealth can be a helpful indicator for assessing the role of business in economic inequality. For example, while there seems to be some global dispersion in wealth, overall the rich (UHNW) seem to be getting richer. Interestingly, the roots of these riches are different across geographies such as executives and inheritors in the West versus entrepreneurs in Asia. Deeper analysis of such patterns from an inequality perspective is needed. A further question that needs some thought is how the professionalization of wealth management, and thereby the businesses engaged in such management, could serve to perpetuate economic inequality.