The rich want less risk — Richard Hartung
JUNE 27 — Even the wealthy have gotten a little poorer. It’s not a big drop, mind you. Yet it is enough to cause them to change their habits, and even to force private banks to change.
That conclusion comes from the latest Capgemini and RBC Wealth Management World Wealth Report, which found that the total wealth globally of high net worth individuals (HNWI) — who each have at least US$1 million (RM3 million) of investable money — dropped by 1.7 per cent last year.
And with those wealthy individuals holding a total of US$42.7 trillion, even what seems like a small percentage drop means they lost about US$700 billion.
Asia wasn’t spared, despite being a bright spot in the global economy, as the total riches of the wealthiest Asians actually fell 1.1 per cent.
That drop comes despite an increase of 0.8 per cent in the total number of wealthy individuals globally, and an even greater 1.6 per cent increase in HNWIs in Asia.
As part of their money disappeared for the first time since 2008, the wealthy started to change what they actually do with their money.
“Wealth management is in a long period of uncertainty,” said RBC head of Wealth Management for Emerging Markets Barend Janssens, so “there was greater risk aversion”.
The results of troubles in the euro zone, leadership changes in Europe, a volatile situation in the Middle East as well as natural disasters such as the tsunami in Japan and flooding in Thailand seem to have spooked even the wealthy.
Instead of continuing to take the wait-and-see approach they have used over the past several years, Janssens said the wealthy now have a more conservative approach.
They are starting to move their money into lower-risk investments such as US treasury bonds and fixed income investments or even certificates of deposit.
Even though returns are low, Janssens said, keeping what you have is better than losing money.
While he didn’t specifically discuss Singapore, the wealthy here may well have become even more conservative, since the drop in the stock market caused the number of HNWIs here to drop a hefty 7.8 per cent, compared with growth in much of the rest of the region.
Looking ahead, he sees more of the same. While there are a few bold HNWIs who are willing to take more risks, a year full of uncertainty means the wealthy are likely to continue their more conservative approach.
The seismic shift in wealth — which saw the number of HNWIs in Asia reach 3.37 million and surpass North America for the first time — also means private banks are continuing to grow in the region.
There are more than 150 firms in the wealth management industry in Singapore alone, Janssens said, and money is continuing to flow from other parts of Asia into Singapore
What European and American wealth management firms in particular have found, though, is that how they work with their clients here needs to be far different from in the west.
There, HNWIs tend to be older, and discreet meetings in elegant rooms to provide highly personalised service are the norm.
On the other hand, in Asia, Janssens said the HNWIs tend to be younger and they are predominantly entrepreneurs. The second and third generations in wealthy families are PC-savvy, so digital technology is important.
And along with the differences in the clients, Capgemini Vice-President Claire Sauvanaud said the different economic environment means wealth management firms have hit a “perfect storm”.
In the past, wealth management was a very attractive business that required less investment than other parts of banking and had a very stable cash flow.
Now, changes ranging from market volatility and intensifying competition to the public backlash against banks and crackdowns by regulators has resulted in a less stable business.
Lower interest rates mean lower fees for the firms, which are then under pressure to reduce costs. And the storm is intensified because they have not hired enough new staff to replace their ageing workforce.
Sauvanaud said the firms need to scale up to thrive, or perhaps even to stay alive. In an industry long accustomed to personalised service, she said, automation and an effective digital transformation strategy will be critical success factors.
Especially for the wealthy who have just US$1 million to US$1.5 million, and even for some of the ultra-HNWIs as well, she said wealth management firms need to create virtual advisers and self-driven investment options that leverage Internet and mobile channels.
Behind the scenes, they need to centralise their services so they can segment their clients and enable their private bankers to spend more time with people and less time on paperwork.
To drive that change, firms need to automate, she said, so they can increase the efficiency of everything from client statements to regulatory filings and reduce their costs.
While the headline numbers of more wealthy individuals in Asia than ever before might make it seem like wealth management firms are thriving, in reality it’s an even-more-competitive industry.
And while highly personalised service is still at the core of the business, as Janssens said, the digital transformation that companies in virtually every other industry are undergoing is perhaps surprisingly the key to success for firms serving the wealthy as well. — Today
* Richard Hartung is a financial services consultant who has lived in Singapore for more than 20 years
* This is the personal opinion of the writer or publication and does not necessarily represent the views of The Malaysian Insider.