A survey of trends and developments in the global market, highlighting major banks, wealth managers, and hiring news.
According to Credit Suisse’s latest Global Wealth Report (2019), “global wealth grew during the past year by 2.6% to US$360 trillion and wealth per adult reached a new record high of US$ 70,850, 1.2% above the level of mid-2018. US, China and Europe contributed the most towards global wealth growth with US$3.8 trillion, US$1.9 trillion and US$1.1 trillion respectively”.
Switzerland is the country with the highest average wealth per adult (US$ 564,650), followed by Hong Kong (US$ 489,260), the United States (US$ 432,370) and Australia (US$ 386,060). To complete the top ten list; they are followed by New Zealand, Singapore, Canada, Denmark, the United Kingdom and the Netherlands with wealth per adult between US$ 279,000 and US$ 304,000. Wealth differences between adults globally are highlighted in Table 1 and Table 2; full report can be viewed at credit-suisse.com.
Young and wealthy millennials (born between the early 1980s and the early 2000s) are getting ready to take over the market in a wealth transfer from the previous generation of baby boomers. Although the baby boomers are still inheriting wealth from the greatest generation, the wealth shift from the baby boomers to the millennials has now started and will continue for the next 30 – 40 years, dubbed the “greater wealth transfer”. Consulting firm Cerulli Associates estimates the wealth transfer over the next few decades to be worth US$68 trillion.
Millennials are widely expected to change the wealth management industry, as they are often more comfortable with digital technology than human wealth managers, preferring to handle their financial transactions and take decisions by themselves with digital solutions. They manage money through apps, rarely visit a wealth manager or make phone calls; but personal relationships and trust still matter immensely to this group. They expect transactions to be executed quickly, and they may easily drop a wealth manager for another if fast and innovative digital capabilities are not provided, or if onboarding is not fast and seamless. A recent survey by MyPrivateBanking reported that 73% of millennial HNWIs stated that they are unimpressed with their wealth manager’s digital app.
According to recently published The Millennial Impact Report, this generation is shaping up to be the most charitable generation in history. They give more than twice than their predecessors to philanthropic causes, despite the many challenges that are affecting them. They do not only dedicate money, but give time and talent driven by a desire to ease the suffering of their fellow man.
In just a few decades, the number of women who have careers, head corporations, run their own household, and invest is increased, becoming a strong financial force. Wealth managers need to treat women as a key client category in their organisations, but they must do it right.
According to data by RBC Wealth Management, women are currently holding approximately 30% - 32% of global wealth controlled by individuals or families, up from 28% ten years ago; of which 44% of females have grown their wealth independently as entrepreneurs. The trend is forecasted to continue, as millennial women are entering the highest circles of asset ownership faster than women born earlier: 22% of baby boomer women (born between 1946 and 1964) have $5 million or more in assets, while millennials come in at 32%. The distribution of adult female wealth per region is reported in Table 3.
Despite this encouraging data, a study by Ernst & Young (2017) found that 73% of female wealth management clients in the UK felt their private bankers misunderstood their goals and could not empathize with their lifestyle; this number was 86% in Hong Kong, and 44% in the U.S. This is because, although large global players have improved their workforce gender balance in recent years, the industry is still largely male dominated.
A large percentage of new wealth management clients is, and will increasingly be, female; yet many institutions are unprepared for them. Firms need to prioritise diversity in their businesses, starting at the C-Suite or top level of management, to be able to attract female talent. A lack of women in these positions damages the perception for those starting their careers. Current surveys have shown that 72.5% of British HNW women think men and women have different investment attitudes and, in most cases, they do not trust male wealth managers with their money.
Switzerland is introducing new rules to regulate the trust sector, marking a new beginning for trustees active in Switzerland as prudentially regulated financial institutions. Then new regulations are being introduced in January 2020. Some of the requirements to become members of the senior management of trusts have been amended, including education and professional experience requirements. It has also been recognised that trustees do not provide financial services and, as a general rule, do not act upon the instructions of clients.
These new rules are predicted to introduce additional compliance costs for trustees which could in turn lead to industry consolidation, as firms will merge to optimize operational and back office costs. New supervisory organisations will be set up by FINMA, the Swiss Financial Market Supervisory Authority, to oversee the activities carried out by licensed trustees and portfolio managers. Swiss trustees and foreign trustees with a presence in Switzerland will have a three-year transition period to comply with the new requirements.
The Alpine nation is also planning to introduce stricter reporting requirements with regards to the automatic exchange of financial information; foreign investors in Swiss property will come under more scrutiny as the reporting exception for apartment owners’ associations is planning to be removed, and companies will have to retain documents that could be useful for AEOI purposes. The exception for the bank accounts of non-profits will be maintained due to the strong public opposition during the consultation process.
Despite the challenges and uncertainty that upcoming Brexit presents to wealth management companies with regards to investment management, distribution, and talent management; the industry has overall continued to prosper throughout the year. According to research firm ComPeer, UK wealth industry assets climbed to £1.02 trillion at mid-2019, marking the first time the industry tops the £1 trillion mark, with total industry revenues standing at £1.8 billion. This represents an increase from £948 billion of total industry assets recorded at the end of 2018 (Table 4). The increase does not necessarily reflect the prosperity of the firms though; although assets and revenues are rising, costs have also consistently risen, making it difficult for banks and wealth managers to achieve economies of scale.
According to the recent Brexit & Beyond study by PwC (2019), wealth managers have continued to prepare for Brexit during 2019. They were originally planning for a March 2019 exit, now set for January 2020. The report found that most wealth managers have prepared for a no-deal Brexit and, although there is still uncertainty about the future marketing of UK funds to EU investors, they expect to be able to rely on certain key arrangements made by Europe’s supervisory authorities, including portfolio management delegation and temporary permissions regimes (TPRs).
Although there is general confidence that London will maintain its status as a top destination for global wealthy individuals, an increased interest in shifting assets towards other jurisdictions has been recorded. Switzerland, Luxembourg and Jersey have emerged among those. According to research by the Bank for International Settlements (BIS), Britons held US$19 billion in Switzerland at the end of the first quarter of 2019, and recent reports by Reuters confirmed of numerous Swiss institutions seeing money inflows from UK citizens increasing significantly. Luxembourg holds about US$14 billion of UK wealth, a number that has been increasing for the past three years, while Jersey has seen a third more UK HNW individuals (130+ in 2019) enquiring about Jersey’s 21E status to obtain residency rights and special tax status.
Numerous research outlets forecast the UK real estate sector to rebound in 2020. After four years of falling prices, the prime London housing market has showed some sign of stabilising. Although it was still flat in the final quarter of 2019, real estate agents have reported a bump in sales after the Conservative party’s victory in December.
Thirty years after the end of Communism, statistics and data show that the transition to capitalism has been a remarkable success for Eastern European countries which are now wealthier than ever before. Countries in the region have experienced one of the fastest economic growth globally; with people living longer and on average twice as wealthy. Statistics show that since 1990, the Polish and Slovak economies have grown more than sevenfold, and those of Estonia, Latvia, Lithuania, Romania and the Czech Republic more than fivefold (Table 5).
Eastern Europe is becoming a prime investment location. Foreign investors have clearly realised that it is in Poland, the Czech Republic or Hungary where the return on investment of commercial real estate is substantial. With annual growth rates between 3% and 4%, the major countries in CEE outperform the Western European ones, offering much more attractive yields to investors.
Mr. Simon Mallinson, executive managing director of London-based real estate firm Capital Analytics, states that “when we think about investing in office space, the momentum is clearly with eastern European markets” and particularly for Poland “the domestic market is significant, liquidity is better than in other places and office space is generating good income”.
International investments have been coming into Eastern Europe for a while. Mainly from Western Europe, but increasingly from Asia as well. According to the CEE Investment Report (2019) jointly created by developer Skanska, real estate consultant Colliers International and law firm Dentons, close to €7.7 billion of Asian capital has been invested in Eastern Europe since 2013. Germany itself has invested over €8 billion during this time. South Korea is also very active in the region.
Rich Russian oligarchs and business owners have been pushing the government to move towards a more European style tax system, softening the current tax regime to make it easier and less expensive for them to take cash out of their companies. The country’s top business association, the Russian Union of Industrialists and Entrepreneurs (RSPP), has argued that the current strict tax system on conglomerates is holding back foreign capital from coming into the country. The RSPP has reportedly been discussing proposals with the Economy Ministry during the last two quarters of 2019.
Among some of the requests, they are asking for an amendment in the regulations to reduce the length of time a business owner is required to own shares in a company before they can sell (currently five years), as well as lowering the ownership threshold at which tax-exempt dividend payments apply (currently 50%). The tax regime on holding companies is stricter in Russia than in the rest of Europe, driving some of Russia’s larger firms to register holding companies in foreign countries. Proposals presented by the RSPP included the reduction of the length of time a business owner is required to own shares in a company before they can sell to twelve months and reduce the ownership threshold for tax-exempt dividends to 25%. The Russian government is yet to show support.
Decades of guaranteed oil income have hardened since crude’s collapse in 2014, forcing many of the region’s millionaires to think more about wealth preservation. Due to the ever-changing political dynamics in the region, an increasing number of Middle Eastern clients feel safer abroad. The richest individuals and families move to the US and the UK (as they’ve always done) while citizenship requests in the Caribbean and other European countries are in hot demand among the HNW clients too, as citizenships are now cheaper than ever before.
Despite this trend, the Middle East has still been minting many more millionaires than other regions, recording the strongest growth in ultra-wealthy population in 2018, up 6.8% to 9,710 individuals. Saudi Arabia and the United Arab Emirates, the two largest UHNW countries in the region, posted strong gains. A new generation of entrepreneurs is driving the growth and more wealth is being held by women in the region than ever before (as much as 35-40% of wealth in the region is estimated to be held by females).
Banks and wealth managers need to keep up with these changes to continue servicing the UHNW & HNW Middle Eastern population and attract new clients. A recent EY global study found that 23% of wealth management clients in the Middle East are planning to move assets to a new bank or wealth manager in the next three years, with 50% of clients having already moved their assets in the past three years. EY found the main drivers behind this shift to be quality and reputation, products, advisory capabilities, personal attention, pricing, and technology capabilities.
The Monetary Authority of Singapore (MAS) has announced in November that it will invest US$2 billion (S$2.7 billion) into public market investment strategies with a strong green focus, through their Green Investment Program (GIP). This is part of several new initiatives to make Singapore a leading centre for green finance. According to MAS Board Member Ong Ye Kung “MAS will place funds with asset managers who are committed to drive regional green efforts out of Singapore and contribute to MAS’ other green finance initiatives including developing green markets and managing environmental risks”.
Out of the US$2 billion, US$100 million will be allocated to the Bank for International Settlement’s Green Bond Fund to catalyse further deepening of the growing green bond market, in a bid to make green lending a mainstream activity in Singapore. MAS will select firms that “demonstrate their capabilities in incorporating environmental considerations into their investment process and actively directing capital towards investments that have a better green profile”. This effort comes in a bid to mitigate climate change risks in Singapore and the region. According to a 2016 study by the London School of Economics and Political Science, natural disasters over the last 30 years have cost the world an annual average of US$140 billion, and a further US$1.7 trillion of global financial assets (2 per cent of today’s global GDP) are at risk as temperatures keep rising.
The US trend of advisers breaking away from the wirehouse firms to set up their own RIAs (Registered Investment Advisors) has continued strong in 2019. In June, the biggest walk out of all time was recorded, with a team of 50 wealth management professionals in the US leaving their bank and following the top five advisers in the team, walking out with close to US$17 billion in assets from First Republic Bank, a firm with US$140 billion of assets under management. Although launching an RIA is a complicated and time-consuming process, requiring more effort than senior bankers usually have, wirehouse advisers often realise that it’s worth the initial pain as they can make more money on their own.
Of the four regions of the US, the Northeast and West have the most RIA assets. The Northeast has US$425 billion and the West US$405 billion; while the South has US$327 billion and the Midwest US$304 billion (Investment News, 2019). Wall Street in New York and the Silicon Valley in California have the most advisers per state, with 2,449 adviser locations in New York and 1,585 in California, tapping old money and new money respectively (Fidelity Investments, 2018).
According to Credit Suisse’s Global Wealth Report (2019), Latin America added US$463 billion in wealth between 2018 and 2019, with Brazil continuing to drive the region’s wealth creation. Despite political turmoil in some Latin American nations such as Venezuela and Chile, region household wealth grew to US$9.9 trillion. According to PwC and Sura Investment Management (2019) this number is forecasted to grow at a compound annual rate of 11.8 per cent in the five years until 2025, more than doubling the region’s AuM to US$5.3 trillion (Table 6).
A number of private banks and wealth managers have stepped up operations in the region in recent years, as well hiring for their offshore teams covering UHNW and HNW clients in the region. “The asset and wealth management industry in Latin America is a long-term growth story and players who are able to successfully position themselves in this market now will reap the benefits for a long time to come,” Pablo Sprenger, CEO Sura Investment Management.