The South African wealth market is set to experience a strong increase in demand for professional wealth management services over the next two years. However, with 68.5% of the HNW population above the age of 50, the pension and financial planning services will be the most popular. Vania Goncalves finds out more from a recent GlobalData report
The South African wealth market is influenced largely by the country’s political, economic and financial turmoil. President Jacob Zuma has been widely criticised in recent months, not only for failing to uphold the constitution when he ignored a state order to repay some of the government funds used to restore his private home, but also for firing the finance minister Pravin Gordhan in March 2017.
As a consequence of Gordhan’s dismissal, the rand fell by around 2% and the rating agency Standard & Poor cut South Africa’s credit rating to junk, citing “heightened political and institutional uncertainties”.
Despite this, the country’s financial market is the most developed in the continent, providing easy access to financial products when compared to neighbouring countries, according to GlobalData Financial Services’ latest country report. However, the country’s wealth management market is far from mature, according to the Wealth in South Africa: HNW Investors 2017 report published in May.
It is an evolving market, though, and it presents significant opportunities to wealth managers as a proportion of the high net worth (HNW) wealth remains unmanaged.
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Approximately 21.5% of the HNW investors, according to the report, do not have their assets managed by a wealth manager — double the global average — creating an opportunity for financial advisors to reach out to this segment.
The South African HNW population is dominated by men aged 51 years or above. Approximately 43% of HNW investors have accumulated their wealth through earned income, in comparison to 23.3% of family business owners and 21.8% of first generation entrepreneurs.
With an aging HNW population, 99.1% of wealth managers experience strong demand for pension planning services. The pension offered by the South African government is far from satisfactory for the HNW population, and most individuals seek alternative ways to prepare for their retirement.
Moreover, the country’s wealth market experiences a high demand for pension planning advice among British expats, who account for 65.6% of the South African HNW expat population.
Demand for professional wealth management on the rise
Unsurprisingly, demand for pension planning services will continue to increase over the next two years. According to the report, demand for financial planning services is and will also continue to be strong, with 74.2% of wealth managers believing that the need for such services will rise in the next two years.
There are several reasons behind the rise in demand for professional wealth management services, on the whole, in South Africa. Lack of expertise is the major reason (34.7%) for South African HNWIs to have their assets professionally managed, according to the report. As most of them come from the manufacturing, property and real estate sectors, HNWIs are not as familiar with the financial services sector.
This is in conjunction with the possibility to gain access to a range of more sophisticated investments (23.3%).
Investors who lack financial market knowledge gain from choosing discretionary mandates, as they require less management from the client. The South African wealth market is dominated by discretionary asset management services (52.8%).
Despite this, approximately 70% of the industry participants interviewed for the GlobalData report forecast an increase in demand for advisory mandates.
Building new advisory models with the help of integrated digital services will prove to be advantageous, since demand for automated investment services is also set to rise among cost-conscious consumers, according to the report. Advisers should promote their professional knowledge and experience to attract clients.
The growth in demand for digital platforms will help clients mange a small proportion of their wealth at a lower cost, as 26.4% of wealth managers believe that self-directing clients invest a proportion of wealth independently because they want to avoid management fees.
This suggests that wealth managers will have to find alternative services to accommodate the needs of this digitally savvy population and a transparent cost structure is vital to avoid losing clients to execution-only providers, even though they account for a small percentage of the HNW portfolio.
Property investments to dominate
Property investments are expected to remain an important part of the typical HNW portfolio, according to GlobalData 2016 Global Wealth Managers Survey.
Even though only 11.5% of the South African HNW portfolios are allocated to this asset class, GlobalData believes it will experience a strong rise over the next 12 months.
The nominal house price growth is predicted to slow down as foreign investors’ confidence has been hurt by the country’s political and economic situation, leaving room for future price appreciation opportunities — the second most important reason investors allocate assets to property.
In addition, with rental income being the main driver of property investments and interest rates at their highest in six years, more people will be forced to rent, therefore increasing rental income opportunities.
Equities will continue to account for the largest segment of the HNW portfolio, with 46.7% of the HNW investors’ assets allocated to this asset class, in comparison to 37.8% globally.
According to a study by Credit Suisse and the London Business School, South Africa has the best performing equity market – providing a 7.2% average return over a century. However, the market is also subject to significant instability, with the JSE Index returning 8% in 2014, -1% in 2015, and 3% in 2016.