Private wealth fell 0.9% to $38 trillion in North America in 2011, yet rose 10.7% to $23.7 trillion in the Asia-Pacific region. Welcome to the new reality of a so-called "two-speed world."
Those results, outlined in Boston Consulting Group's new global wealth report entitled "The Battle to Regain Strength" show uneven growth in wealth across the globe in 2011. And the management consulting firm projects that many of those patterns of growth and contraction are here to stay for the next several years.
That means that wealth management firms and their financial advisors will be faced with the challenge of taking advantage of the fast pace of wealth growth expected in Asian countries like India and China, preparing for a changing landscape in offshore wealth, particularly in Europe, and gearing up for new expectations of transparency from all clients.
"Everybody is kind of looking for the golden bullet. Everybody is trying to refine the model, realign strategy and redefine operating models," says Peter Damisch, partner and global leader of wealth management at BCG.
Uneven Global Growth
In fact, 2011 shaped up as a year of tepid growth for private wealth globally, with a 1.9% increase to $122.8 trillion, versus 6.8% growth in 2010 and 9.6% in 2009.
Last year's growth also divided the globe, with a .9% decline in private wealth in "Old World" areas such as North America, Western Europe and Japan, and a 10% gain in "New World" regions like Asia-Pacific excluding Japan, Eastern Europe, Latin America, the Middle East and Africa.
"BCG has consistently talked about a two-speed world, and it is incredibly apparent this year in wealth management markets," says Monish Kumar, senior partner and global leader of asset and wealth management at BCG. "All of the growth was driven off developing markets, and the developed world pretty much stayed where it was."
The drop in North American wealth last year was caused by investors worried about debt problems in both the U.S. and Europe and the U.S. debt downgrade. Ultra-high-net-worth households, defined as those with more than $100 million, saw a 2.4% decline in their wealth in the region. Investments fell by 3.6% in equities and 2.1% in bonds, while wealth held in cash and deposits rose by 3.5%. For the U.S., 2011 was "two steps forward, one step back," says Bruce Holley, senior partner and leader of asset and wealth management in North America at BCG. "This puts us back to where we were about five years ago."
Despite the euro debt crisis, Western Europe continues to be the second wealthiest region of the world after the U.S. In 2011, private wealth fell by .4% to $33.5 trillion. Wealth in equities dipped by 7.1%, while wealth increased by 3.2% in bonds and 2.2% in cash and deposits.
The Asia-Pacific region, excluding Japan, came in third with $23.7 trillion in private wealth, a 10.7% gain. The region includes China, India, Australia, Hong Kong, South Korea and Taiwan. Last year, households with more than $1 million grew to 48%. Wealth in equities rose just 4.1%, compared to the average 17.7% growth over the last five years. Wealth in bonds rose 17.5%, while cash and deposits climbed 13.4%. BCG projects that wealth in the Asia-Pacific region will grow at an 11.1% compound annual growth rate to $40.1 trillion by the end of 2016, in part due to strong GDP growth expected from China and India.
By contrast, wealth in North America is expected to rise at a 1.8% compound annual growth rate to $41.5 trillion by the end of 2016, while Western Europe will grow at 1.8% to $36.7 trillion.
Between 2006 and 2011, wealth in Asia nearly doubled and is expected to do so again in the next five years, says Vish Jain, a partner with BCG's financial institutions practice in the Asia-Pacific region. The firm projects that the Asia-Pacific area will surpass Europe in terms of overall wealth by 2016.
That growth offers a unique, but complicated opportunity for banks and wealth managers. Private banking or wealth management only has a penetration of between about 5% to 7%, Jain says. Overall, Asians prefer safety and security and tend to keep a larger cash cushion, Jain says, leading to a product mix of cash and equities that is not particularly profitable. "The product landscape is still forming. There is not necessarily enough product out there that provides the right sort of consumer benefits," Jain says. "Because of the incredible growth Asia has seen, there has been a lag in terms of developing advisors, and advisors and advisory capabilities are still catching up."
Another area that is also seeing more competition from local players is Latin America, especially in Brazil and Chile, says Jorge Becerra, senior partner and head of BCG's financial institutions practice there. Although the percentage has come down in recent years, offshore wealth has stabilized at about 20% to 25%, Becerra says.
In 2011, total offshore wealth rose 2.7% from 2010 to $7.8 trillion. Switzerland, the largest offshore center, had about $2.1 trillion in offshore wealth in its banks last year. But offshore wealth held by Switzerland should decline, with assets from Western Europe held there expected to drop steeply through 2016 as taxes increase and as regulatory pressures in Western Europe and North America increase.
Offshore centers in Hong Kong and Singapore, which are not targets of increased regulatory scrutiny, may surpass Switzerland in the next 15 years or so, BCG predicts. Even with those pressures, "there are still many clients that want to put their money offshore," Damisch says. All of these changes come as "clients are expecting more from their banks," he adds. "What they expect from their banks is more stability, more reliability and more client-specific solutions."
Winning the Wealth
Ultra-high-net-worth households saw the largest amount of growth, expanding by 3.6% to $7.1 trillion in 2011 from the year before and representing 5.8% of global wealth. That segment is expected to grow at the fastest clip in the next five years at a projected compound annual growth rate of 8%, BCG says. Groups below $1 million are expected to grow at a 3% compound annual growth rate.
"This is very good news for all of those banks that operate in those segments," Damisch says. "There is a lot to grow and a lot to win in the upper part of the wealth pyramid going forward." The U.S. had the most ultra-wealthy households last year at 2,928, and the largest number of millionaire households with 5.13 million. The total number of millionaire households rose by 175,000 globally to a total of 12.6 million last year.
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