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At the end of this exercise, students should be able to: • Describe and discuss the key drivers for the wealth management market Quote: “Let me tell you about the very rich” (with undisguised envy). “They’re very different from you and me.” F. Scott Fitzgerald Questions 1. Describe the key factors driving the growth in the wealth management market. A key driver of the wealth management market is clearly the growth of wealth itself and how it is distributed. As individuals grow wealthier, they Make more use of financial services Invest and spend more Seek more protection for their existing wealth and lifestyle Feel comfortable borrowing large sums of money Seek advice for their financial needs In principle, the revenues of most financial services are driven by ‘surplus’ wealth. For main drivers for growth in wealth: Economic growth The growth in global wealth has exceeded that of global GDP in recent years. However, there are differences in different geographical regions – e.g. Asia Pacific and Latin America giving grown wealth in excess of their GDP growth rates, while Europe’s wealth share is disproportionately low. The strong economic growth, in turn, ultimately helps drive asset prices.
Asset Prices The 1900s surge in wealth largely due to the biggest ever bull market in equities. A shift of investable wealth from illiquid asst to the market. Many family-owned companies have been sold, including growing number through IPO.
WEM (CFI3C02) 2009
Wealth Allocation Trend towards the increasing and wealth concentration among the more affluent segments of society as a whole. Forecast the wealth of the world’s wealthiest investors (i.e., > $5million) will grow by 6.6% a year between 2004 to 2009. Demographic factors The age group generally mattered most to the industry from the growth perspective is those aged 46065 (the baby boomers) – these are the people who are the most likely to accumulating wealth for retirement. Economic and technological change has been driving the recent growth in HNWI wealth led to changes in profile of wealthy individual. Entrepreneurial wealth has become increasingly important. A redistribution of existing wealth through inheritance-related wealth transfer.
2. Discuss the demographic factors as a powerful catalyst to wealth market development for the following geographical regions: • North America • Western Europe • Asia-Pacific • Latin America • Middle East • Africa North America: Industry shift towards full-service model Key wealth drivers are the high economic and productivity growth rates. Wealth also driven by strong US financial market returns, particularly in equities, in which investors hold more than half their assets. Bulk of the wealth is held onshore, reflecting low domestic tax rates and general economic stability. Early phases of economic development were dominated by family businesses. From early 1950s to the mid-1970s, many millionaires were senior corporate executives. Start-up businesses have grown significantly since the 1980s. Form the early 1980s the bulk of the newly created wealth has come from entrepreneurs. During the mid-to-late 1980s there was a tendency for wealth to be liquidated through leverage buyouts. In the 1990s, a further pick-up in the number of entrepreneurs, and the booming IPO market turned them into instant millionaires. E.g. the August 2005 IPO of Google (~$78), is reported to have created 5 billionaires and 1000 millionaires. Western Europe: Wealth transfer between generations Includes a significant proportion of global ‘old’ wealth – associated with inheritance and more traditional forms of asst growth rather than entrepreneurial wealth creation.
WEM (CFI3C02) 2009
A tendency of wealth toe be tied up in land and property in some countries, has contributed to illiquidity. A significant proportion of European wealth is managed offshore reflects relatively high tax rates, and weak domestic investment opportunities. Exposure to equities throughout Western Europe has stabilized to 32% of assts, though UK and Switzerland have higher shares. A large proportion of Western European wealth is held in property, shipping and privately held businesses.
Asia Pacific: Strong economic development Strong economic growth and development across Asia has led to wealth accumulation, over the last 25 years. The growth has been supported by higher savings rates, young and productive populations, and strong inflows of foreign direct investment. Intense regional entrepreneurial activity, particularly in real estate, banking and trading-related businesses is a key contributory factor to growth. Most Asian assets are still held in cash, with equity exposure of around 28% of total assets. Most recently, China’s huge export industry, long with many successful IPOs of Chinese companies in Hong Kong and New York, have been key wealth drivers In recent years, Indian Wealth has been driven mainly by very economic growth. Strong economic growth in Singapore, South Korea, Hong Kong and Taiwan also contributes to the wealth growth in the region. The ethnic Chinese (Diaspora) population is particularly successful in accumulating wealth in Thailand, Malaysia and Indonesia. Latin America: Traditional offshore-banking stronghold (Not shown by lecturer) Middle East: Oil-driven growth The wealth of the region, both public and private, has derived almost entirely from oil, and other natural resources such as gas, as well as from property and land. Wealth in the Middle East is highly concentrated and predominantly in the hands of relatively few families, who invest mainly in their own businesses These family bus nesses act as agents, diversifying into other sectors of the economy and building a chain of dependencies. The majority of these families has inherited their wealth over several generations and continues to control large segments of domestic economy. Five broad categories of wealth: Classical inherited wealth accumulated over several generations First-generation oil wealth Younger generation family businesses Female inheritors Funds held in Islamic institutions
Much of the region’s wealth has traditionally been held offshore (‘petrol dollars’). Most recently, the region is experiencing wealth generation primarily driven by the growth in oil revenues. Mckinsey estimates that close to half of new wealth is currently staying onshore, with half of that wealth invested in local equity markets.
WEM (CFI3C02) 2009
[Source: Global Private Banking and Wealth Management by David Maude]
WEM (CFI3C02) 2009