For the first time in years, the net
worth of the rich is contracting, a reflection of the global credit
crisis and the meltdown in financial markets. Global assets under
management are expected to shrink to about 8 percent this year to
stand at around $100 trillion.

Assets under management rose by 5 percent to an estimated
$109.5 trillion in 2007, down from the 8 percent pace the previous
year, according to Boston Consulting Group (BCG) in its global
wealth survey.

But unsurprisingly, it has gone into reverse this year. Updating
its original projections for 2008, BCG now thinks that this year
will see the total fall back to around $100 trillion as valuations
in a wide range of asset valuations have crashed.

“We don’t expect to see (wealth) growing again this year,” says
Victor Aerni, a partner in BCG’s Zurich office.

The revision is even more dramatic given that the report had
originally projected that global AuM would reach a record $113.2
trillion for 2008.

In North America – the epicentre of the turmoil – wealth grew by
3.8 percent last year, down from 8.9 percent in 2006.

It appears the world’s wealthy are particularly vulnerable to this
global downturn: from 2002 to 2007, the share of wealth invested in
equities grew from 32 percent to 40 percent, increasing the
potential for volatility.

That was at the expense of bonds and cash, which fell as a
percentage of total AuM over the period – by three and four
percentage points respectively.

But portfolios have been quickly unwound in the flight to safe
haven investments. The financial crisis has prompted many investors
to move their assets to “more conservative products,” Aerni
says.

Still, BCG is positive in the longer-term, forecasting that global
AuM will grow by a CAGR of 4.8 percent to total an impressive
$138.3 trillion by 2012.

Looking at wealth formation in various countries in 2007, North
America remained the wealthiest region, with $39.2 trillion in AuM
followed closely by Europe, with $38.3 trillion.

While the US has far and away the most millionaire households, in
2007 Europe had the strongest growth in millionaire households.
From 2002 to 2007, the number of millionaire households in Europe
grew 19.1 percent whereas in the US it grew 10.2 percent. BCG’s
European data contains the fast-growing regions of Russia and
Eastern Europe.

In 2007, the number of millionaire households worldwide jumped more
than 11 percent to 10.7 million, BCG estimated.

Emerging economies continued to make the running in the
accumulation of wealth. High net worth markets in Asia-Pacific,
Latin America, Eastern Europe, and the Middle East accumulated
about $33 trillion in AuM in 2007.

But these markets are not an automatic way of diversifying out of
low-growth Western wealth management. Most emerging economies share
a common set of challenges such as high entry costs, a scarcity of
relationship managers, and increasing competition, the report
notes.

“To grow, wealth managers will need to overcome these challenges
while developing products and services that suit specific markets,”
it comments.

Asia-Pacific, excluding Japan, showed a 17.4 percent jump in AuM –
the world’s highest – to take its total to $13.1 trillion last
year.

Latin America also grew fast, by 16.5 percent to $3.1 trillion.
Brazil and Mexico accounted for 60 percent of this wealth. Brazil’s
banking sector has exceptionally strong local competition, relative
to other emerging markets. Mexico’s wealth market has two valuable
attributes: growth and stability.

The competitive environment is heating up in Latin America but it
is “not yet overcrowded,” the report observes.

 

Among BRIC economies, Russia is by far the largest wealth market in
Eastern Europe. Its AuM totalled $950 billion in 2007. However,
markets in Central and Eastern Europe (CEE) had the strongest
growth in AuM. From 2002 through 2007, four of the ten
fastest-growing wealth markets worldwide were in CEE: Poland,
Slovakia, Hungary, and the Czech Republic.

The growth opportunity in the Middle East is concentrated in the
six markets of the Gulf Co-operation Council (GCC): Bahrain,
Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates. In
2007 this region had an estimated $1.5 trillion in AuM. All but one
of the six GCC markets were among the top 15 markets ranked by
percentage of millionaire households.

China continues to generate private wealth at dizzying rates. From
2002 through to 2007, China’s AuM grew at a CAGR of 25 percent.
Last year, it grew by what BCG calls an “astounding” 36.8 percent,
or by $850 billion. But it cautions that the market crash, economic
recession and drying up of the China corporate IPO pipeline will
moderate wealth accumulation.

India upped AuM to a total of $1.4 trillion. Millionaire
households, representing just 0.05 percent of India’s population,
owned 38 percent of the wealth in the country last year. Four of
the eight richest people in the world are Indian nationals,
boasting a combined net worth of $160 billion.

India’s wealth market is still relatively underdeveloped, BCG
finds, despite a widening range of offerings by local and foreign
players.

It also has a unique revenue model, which does not include the
usual percentage fee based on total assets. Instead, an asset
manager pays commissions to a bank to push the manager’s
products.

BCG says the rate is about 2 percent for existing funds and between
4 and 6 percent for new funds, observing, “Wealth managers can
multiply commissions by churning investments, making this a
relatively lucrative market.”

Knowledgeable clients demand a share of the commission and many
small wealth managers oblige, “although the official sharing of
commissions is illegal.”

Globally, wealth is still growing faster among richer households.
Wealthy households – those with at least $100,000 in AuM –
represented about 18 percent of all households but owned 88 percent
of global wealth in 2007. Millionaire households represented just
0.8 percent of all households but owned 35 percent of global
wealth.

“Small markets, however, had the greatest concentrations of
millionaire households,” BCG’s Aerni notes. “In Singapore, an
astounding one in ten households had at least $1 million in AuM.
Three of the five densest millionaire populations were in the
Middle East – in Qatar, the United Arab Emirates, and Kuwait –
while Switzerland had the highest concentration in Europe, at 7.3
percent.”

BCG turns to Japan, which is responsible for about half of all
wealth in Asia and which although not an emerging economy still has
a “relatively immature” wealth market. There are about 71,000
established wealth households in Japan, with more than $5 million
in AuM.

This market is, however challenging and low-growth – from 2002
through to 2007, AuM grew at a CAGR of just 1.9 percent.

But there are signs that the wealth market could shift into a
higher gear. A large share of Japanese wealth has traditionally
been held in cash and deposits, but equities have been gaining
ground, mostly through mutual funds.

Between 2002 and 2007, the AuM invested in mutual funds increased
by almost 80 percent. Nonetheless, local wealth mangers would be in
the best position to capitalise on this growth because Japan’s
wealth market is expected to remain difficult to access for
foreigners and many Japanese are automatically distrustful of
non-Japanese financial institutions.

Several foreign banks have entered the market, but act as asset
managers rather than true wealth managers, in that they sell their
products through third parties. But some may eventually launch
private banks, BCG concludes.