Shaping a new tomorrow
Global wealth continues to grow following financial crisis
By The Boston Consulting Group
Global wealth grew in nearly every region of the world in 2010, with assets under management (AuM) showing signs of a sustained recovery in both developed and emerging markets. Propelled by growth in nearly every region, AuM continued a solid recovery in 2010, increasing by 8.0 percent, or $9 trillion, to a record of $121.8 trillion. That level was about $20 trillion above where it stood just two years prior during the depths of the financial crisis.
North America had the largest absolute gain in wealth, at $3.6 trillion, and the second-highest growth rate, at 10.2 percent. Its $38.2 trillion in AuM made it the world’s richest region. In Europe, wealth grew at a below-average rate of 4.8 percent, but the region still gained $1.7 trillion in AuM. North America surpassed Europe as the wealthiest region in part because its capital markets had a stronger recovery, but also because the euro lost value relative to the dollar in 2010.
Wealth grew fastest in the Asia-Pacific region (excluding Japan), at 17.1 percent. In the Middle East and Africa, growth was above the global average, at 8.6 percent, but was limited by volatility in the price of oil as well as by the real estate crisis in Dubai. In Latin America, wealth grew by 8.2 percent. Together, these three emerging-market regions accounted for $29.7 trillion in AuM, and their share of global wealth continued to rise ― from 20.9 percent of global wealth in 2008 and 22.9 percent in 2009 to 24.4 percent in 2010.
Wealth declined by 0.2 percent in Japan to $16.8 trillion. Although Japan remains one of the largest wealth markets in the world, its share of the Asia-Pacific region’s AuM has been declining. As recently as 2008, Japan accounted for more than half of all the wealth in Asia-Pacific. In 2010, it accounted for about 44 percent.
Cash was king
The strong performance of the financial markets accounted for 59 percent of the growth in AuM. The remainder came from savings. The impact of the financial markets was amplified by the ongoing reallocation of wealth.
During the crisis, cash was king. Since then, clients have been redirecting their assets back into riskier investments. From year-end 2008 through 2010, the share of wealth held in equities increased from 29 percent to 35 percent, while the share of wealth held in cash and deposits declined from 49 percent to 45 percent.
The rising share of wealth held in equities was heavily influenced by changes in North America, where the absolute amount of wealth held in equities increased by 18.1 percent and where financial market performance accounted for 81 percent of the increase in AuM.
The region continued to have the highest proportion of wealth held in equities ― 44 percent, up from 41 percent in 2009. The change was significantly smaller in all other regions except Asia-Pacific (ex Japan), where the proportion of wealth held in equities grew from 30 percent to 34 percent. Despite these increases, we do not expect the share of wealth held in equities to reach its pre-crisis level of 39 percent until 2013.
Growth of millionaire households
The vast majority of the world’s wealth, 87 percent, was owned by households with more than $100,000 in AuM. Millionaire households represented just 0.9 percent of all households but owned 39 percent of global wealth, up from 37 percent in 2009.
The proportion of wealth owned by millionaire households increased the most in Asia-Pacific, at 2.9 percentage points, followed by North America, at 1.3 percentage points. A subset of this group ― the established wealthy, with more than $5 million in AuM ― represented about 0.1 percent of all households and owned nearly 22 percent of global wealth, up from 20 percent in 2009.
Again, the proportion of wealth owned by these households increased the most in Asia-Pacific, at 2.2 percentage points, followed by North America, at 1.5 percentage points. Emerging markets, in general, had some of the highest concentrations of established wealthy households.
The number of millionaire households increased by 12.2 percent in 2010 to about 12.5 million. The United States had the most millionaire households, followed by Japan, China, the United Kingdom and Germany, while small countries continued to have some of the highest concentrations of millionaire households.
In Singapore, 15.5 percent of all households had at least $1 million in wealth. Switzerland had the highest concentration of millionaire households in Europe and the second-highest overall, at 9.9 percent. The United States had the largest number of ultra-high-net-worth (UHNW) households (those with more than $100 million in AuM), while Saudi Arabia had the highest concentration of UHNW households, measured per 100,000 households, followed by Switzerland, Hong Kong, Kuwait and Austria.
Pressures continue to mount for offshore private banks
The amount of offshore wealth ― defined as assets booked in a country where the investor has no legal residence or tax domicile _ increased to $7.8 trillion in 2010, up from $7.5 trillion in 2009. At the same time, however, the proportion of wealth held offshore slipped to 6.4 percent, down from 6.6 percent in 2009. The decline was the result of strong asset growth in countries where offshore wealth is less prominent, such as China, as well as of stricter regulations in Europe and North America, which prompted clients to move their wealth back onshore, thus lowering the net increase in offshore assets.
Offshore private banking, in general, remains a tumultuous part of the business. The relative importance of offshore centers is changing rapidly. Some are benefiting from continued asset growth, while others are seeing large asset outflows, with wealth being repatriated to onshore banks, transferred to other offshore centers, redirected into nonfinancial investments or simply spent at a faster rate.
For most clients, however, the core value proposition of offshore banking remains. Offshore wealth managers offer a sense of stability and security that these clients cannot find in their home countries. Other clients value the expertise or access to certain investments provided by offshore private banks. To continue to grow, offshore wealth managers will need to adapt to the changes imposed by the push for greater transparency while accentuating their strengths in areas that remain extremely relevant to clients around the world.
BCG expects wealth to grow at a compound annual rate of 5.9 percent from year-end 2010 through 2015 to about $162 trillion, driven by the performance of the capital markets, the growth of GDP and increased savings in countries around the world.
Wealth will grow fastest in Asia-Pacific (ex Japan), at a compound annual rate of 11.4 percent. As a result, the region’s share of global wealth is expected to increase from 18 percent in 2010 to 23 percent in 2015. In Japan, the amount of wealth is expected to decrease slightly in 2011 and then grow slowly for several years. The impact of the recent earthquake on private wealth is still unclear, but it could put further stress on Japan’s growth rate.
In general, wealth will grow at above-average rates in emerging markets. In India and China, it will increase at a compound annual rate of 18 percent and 14 percent, respectively, from year-end 2010 through 2015. China alone will account for 19 percent of the overall increase in AuM over the period, while India will account for about 8 percent. BCG expects growth rates in Western Europe and North America to be slightly below the global average.
As much as the sustained recovery of global wealth reaffirms wealth management’s place as a relatively stable and attractive part of the financial services world, it also masks important and lasting changes to the dynamics of this industry. Perhaps more than ever, a wealth manager’s adaptability ― its capacity to anticipate and respond to a combination of regulatory, client-driven and competitive changes ― will determine how well it prospers from the continued growth of wealth.
This article was contributed by The Boston Consulting Group.