Time to adapt as wealth glut grows

In the calendar year 2007 the number of people in the world holding at least $US1 million ($1.14 million as at December 31, 2007) in financial assets increased by approximately 6 per cent. By the standards of the Capgemini/Merrill Lynch World Wealth Report, released in late June 2008, this growth brings the total of high net worth individuals (HNWI) roaming the planet to 10.1 million. “Global HNWI wealth totalled $US40.7 trillion, a 9.4 per cent gain from 2006, with average HNWI wealth surpassing $US4 million for the first time,” the report says.

And it appears the rich really are getting richer with the “ultra-HNWI ‘wealth band’… gaining 8.8 per cent in population size and 14.5 per cent in accumulated wealth”. Despite the glut of zillionaires, though, the market downturn late in 2007 had a sobering effect on the mega-wealthy, who are moving to safer havens.

“Our 2007 findings reveal that HNWIs assumed a more defensive approach to asset allocation in response to marked changes in economic environments, steering away from some alternative investments,” the report says. “As investor confidence rebounds, our expectation is that HNWIs will gravitate once again to less conservative investments – particularly to the high returns and growth opportunities offered in emerging markets.”

The downturn did not put the wealthy off buying upmarket trinkets however with this retail sector reporting “record sales figures in 2007, testifying to the unquenchable appetite of HNWIs for luxury items”. Whatever the short-term ructions, Capgemini and Merrill Lynch predict that the HNWI population will trend upward at a rate of almost 8 per cent a year until at least 2012, with their net wealth climbing to about $US60 trillion.

“However, as HNWI population and wealth continue to climb, so does the number of clients seeking private bankers and wealth managers,” the report notes. The demand might be increasing, but supply is thin on the ground for a few reasons, the Capgemini/ Merrill Lynch study says. Firstly, HNWIs require multi-skilled advisers to meet their complex financial needs – meaning better-trained and more experienced people who can fit the “trusted adviser” mould.

Also, the advisers who can meet these higher standards are an ageing bunch. The average age of financial advisers in the US is 52 and within five years, 42 per cent of the current practitioners will be nearing retirement. “Similar age trends among advisers exist globally,” the study says. Aware of this demographic problem, private banks and others are recruiting the next generation of HNWI advisers, but it is not an easy task.

For example, drop-out rates from adviser training programs can range from 40 to 60 per cent, according to the study. “Despite the intensity of effort, capital, and resource on the part of firms, attrition among advisors is still high, as the job of an advisor is rigorous, demands discipline, as well as strong relationship and technical skills,” the report says. Another solution adopted by some firms is to recruit other professionals as advisers – such as lawyers and accountants – whose life experience and professional grounding can serve them well when dealing with wealthy clients.

At the same time a bidding war has erupted as private banks compete amongst themselves (and other wealth management firms moving in on their patch) for top advisers – but this can take a long time to pay off, the study warns. Some firms have also adjusted their incentive packages “strategically” in order to retain advisers for longer. “For example, before advisers retire, wealth management firms have arranged a compensation plan that extends income into retirement, which works well for the client, the adviser and the firm,” the report says. “The adviser, reaching retirement, can carefully transition clients to colleagues, ensuring key relationships are maintained, while remaining a mentor/consultant for the firm/client relationship.”

Many private banks are also looking to dilute the risk of losing clients who generally move with their “trusted adviser” by adopting a team-based approach. Such team models also “enable strategies to develop talent, allowing firms to develop promising advisers with senior colleagues while enhancing the trust between advisers and clients”.

As the HNWI count increases across the globe, private banks and others serving this sophisticated market will have to adapt quickly to meet these challenges, the report says. The top-tier advice businesses have already changed fundamentally, it notes: “Wealth management firms have adapted in response to the changes in their client base, shifting the industry from a transaction-driven business to an advice-oriented and fee-based business.”