Report shows that some wounds recently suffered by wealth managers may have been self-inflicted


(By: Steve Wallace, CAIA, Member – Editorial Board) – Notwithstanding the recent out-performance of hedge funds, it’s been a tough year for High Net Worth Individuals (HNWI) and their even wealthier cousins, the Ultra High Net Worth Individuals (Ultra HNWI).  A recent Capgemini/Merrill Lynch report shows just how tough.  The “2009 World Wealth Report” showed, not surprisingly, that gains made during 2006 and 2007 were completed eroded primarily due to more aggressive asset allocations.


However, that being said, it’s certainly not all doom and gloom.  The report forecasts that by 2013, HNWI financial wealth will total $48.5 trillion up from $32.8 trillion at the close of 2008 and well in excess of the $40.7 trillion at the end of 2007.  The figure below also illustrates the far higher forecast for the growth rate of wealth in Asia Pacific at a whopping 12.8% p.a from 2008 to 2013 (click to enlarge).


More Conservative Assets

Most of the people to whom I speak in my travels through Europe and the Middle East on behalf of the CAIA Association would probably agree that HNWIs significantly increased their exposure to more conservative assets during 2008, thus reducing their exposure to equities and alternative investments.

But as the figure below shows, HNWIs also increased their exposure to another alternative investment – real estate – as they saw new opportunities arise – mainly in residential real estate (click to enlarge).


As forecast by many, market conditions will improve by 2010 – drawing HNWI investment back into equities and out of real estate.  Meanwhile, investments in alternatives (defined as hedge funds and private equity) are expected to remain stable at 7%.  But for now, HNWI have increased their allocation to conservative investments (cash, FI and RE) from 60% to nearly 70% in only one year.

So What?

So what does this all mean for the Private Banks and others servicing HNW and Ultra-HNW clients?

Unfortunately, it means lower margins for financial services providers.  According to the Capgemini/Merrill Lynch report, “low-margin” assets actually held up well over the past year, while “other” (higher margin) assets fell dramatically.  The result was that the proportion of investable financial assets allocated to low margin assets was went from only 35% in 2006 to the 50.3% level in 2008…


As the recovery takes place HNWIs will move back into riskier, higher margin financial assets.  But in the interim, wealth management divisions of global financial institutions face some serious pressure on margins (despite the fact that they have clearly weathered the past couple of years better than their investment banking brethren).

What HNW Clients Really Want

This leads us to what HNW clients want from their advisors.   While you might assume that breadth of investment options would not necessarily be a key differentiator given most forms offer similar products, the Capgemini/Merrill Lynch report suggests that this is not the case.  It says that the availability of product/investment options is actually ranked as “very important” by 55% of clients.  Oddly, only 27% of advisors agreed.

Notably, the report finds that there were other areas where significant gaps existed between what clients and advisors saw as “very important” – namely “statement & reporting quality” and “transaction/management fees” (green box in chart below from report – click to enlarge).


Mid-market Success

While the tough times may be coming to an end for investors, this report suggests they may only be beginning for wealth managers.  According CapGemeni and Merrill Lynch, lower margins, mismatched expectations, and shifting asset allocations mean that both independent advisors and global banks will face challenges.  Meanwhile local and regional banks are “poised for success” since they avoided the “esoteric” products offered by global players.  With all the talk about the “barbell” in the fund management sector (see related post), this is a refreshing change for mid-sized financial services firms

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One Comment

  1. JJ
    August 19, 2009 at 6:14 pm

    Something missing here from the post:

    Even if the percentage of “higher-margin” assets like equities has decreased relative to lower margin (cash and FI), many independent advisors charge a blended fee on total assets (typically established at the onset of the relationship) and that fee doesn’t change even if the mix of assets does…

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