15 June 2015 — Global private wealth rose at a healthy pace in 2014, just under that of the previous year, but wealth managers must raise their games on numerous fronts and decide where to invest in their own businesses if they hope to ensure profitability through 2020, according to a new report released by The Boston Consulting Group (BCG), Global Wealth 2015: Winning the Growth Game.
The report, BCG’s fifteenth annual study of the global wealth-management industry, addresses the current and future size of the market—notably the projection that the Asia-Pacific region (excluding Japan) will surpass North America as the wealthiest region in the world in 2016—and explores the keys to profitability on the basis of extensive benchmarking of global players. The report also examines the choices that institutions face regarding where to invest in their own businesses in order to achieve profitable growth and overall future excellence.
“Potentially disruptive forces are everywhere,” said Brent Beardsley, a BCG senior partner and a co-author of the report. “The tightening regulatory climate, a more complex investing environment, highly demanding clients, technological evolution, and other trends are straining traditional models. As the pace and magnitude of change intensifies, wealth managers need to think more strategically.”
According to the report, global private financial wealth grew by nearly 12% in 2014 to reach a total of $164 trillion. Almost three-quarters (73%, or $13 trillion) of private wealth growth was generated by the market performance of existing assets, with the balance (27%, or $5 trillion) generated by newly created wealth. North America, with $51 trillion in private wealth, remained the world’s wealthiest region in 2014. But for the first time, Asia-Pacific (excluding Japan) overtook Europe (Eastern and Western Europe combined) to become the world’s second-wealthiest region with $47 trillion. With a projected $57 trillion in 2016, Asia-Pacific (excluding Japan) is expected to surpass North America (a projected $56 trillion) as the world’s wealthiest region, and is further projected to hold one-third of global wealth in 2019. Over the next five years, total private wealth globally is projected to post a compound annual growth rate of 6% to reach an estimated $222 trillion in 2019.
The report says that the total number of millionaire households globally (those with more than $1 million in private wealth) reached 17 million in 2014, up strongly from 15 million in 2013. The increase was driven primarily by the solid market performance of existing assets, both in developed and emerging markets. Millionaire households held 41% of global private wealth in 2014, up from 40% a year earlier, and are projected to hold 46% in 2019. The US still had the highest number of millionaire households in 2014 (7 million), followed by China (4 million). Private wealth held by ultra-high-net-worth (UHNW) households (those with above $100 million) grew by a strong 11% in 2014.
According to BCG’s benchmarking of more than 200 wealth managers—a study involving more than 1,000 data points concerning growth, financial performance, operating models, sales excellence, FTE efficiency, client segments, products, and trends along a number of dimensions (including locations, markets, client domiciles, and different peer groups)—the most successful players over the past three years possess five key characteristics. These attributes, which are explored in the report, are the following: segment-specific value propositions and coverage models, rigorous price realisation in target client segments, a differentiated advisory offering, a focus on front-office excellence, and the ability to measure and manage profitability.
Offshore Wealth Management
The report says that despite the intense scrutiny being placed on offshore domiciles, there is still potential for profits and future growth for offshore players that stay ahead of the curve strategically.
“Clients are still willing to pay a premium for benefits such as political and financial stability, regional diversification, high-quality service, discretion, and broad expertise across products and asset classes,” said Anna Zakrzewski, a BCG partner and a co-author of the report. “Top offshore performers are transforming their businesses to make them viable for the future.”
Investing in Excellence
The report says that it is critical for wealth managers to determine where they should be investing for the growth of their companies. Across all regions, BCG client work and research have revealed certain patterns. For example, onshore businesses in North America and Eastern Europe and offshore players in Switzerland plan the highest allocation of resources (71%, 63%, and 62% of their respective investment budgets) to optimising existing businesses as opposed to expanding into new areas. All other regions are allocating slightly more than half of their resources to optimising existing business. The three highest priorities for enhancing existing businesses are improving sales force effectiveness (17% of total investment resources), enhancing digital interfaces (14%), and increasing collaboration with other business units (10%).
“Of course, most wealth managers are still grappling with traditional challenges such as how to attract new assets, generate new revenues, and manage costs,” said Daniel Kessler, a BCG partner and a co-author of the report. “Newer challenges include raising digital capabilities and coping with potentially disruptive new business models. Their priorities for investing in themselves have to be clear now.”