Our last blog covered the trends for the year 2020, this blog will zoom in on the wealth changes from the year 2019 compared to 2018. The World Wealth Report 2020 from Capgemini is an excellent piece to gain insight in the world’s wealth.
Wealth managers must navigate an uncharted, post-pandemic world without a playbook
The COVID-19 health crisis didn’t go unnoticed as there was a decline of 3% in the global economy. Though, around the world, there was an increase in high-net-worth-individuals (HNWI) of 9% in 2019. Especially, North America had a 10.9% change in HNWIs from 2018 to 2019. This leads to that the Asia-Pacific region wasn’t leading the global HNWI global worth for the first time since 2012. Also, Europe had a 9% wealth growth with the HNWI population as European central banks stepped back from tight monetary policies and thus supporting Eurozone stock markets. Highlighted is the fact that even the uncertain times around the Brexit, the UK experienced a more than 6% growth in wealth and HNWI population. The United States, Japan, Germany, China, and France continued to be the top five countries by total HNWI population in 2019. With the top four countries covering for nearly 62% of the HNWI population as well as the responsibility from the global growth of HNWI of 67%. A noteworthy shift is the one of Sweden, the country has gained a more than 10% growth in HNWIs. Also, the Netherlands moved up to the top 10 as a result of robust real estate sector growth and an increase in market capitalization.
To break it down, Ultra-HNWI had a 9.1% growth in population (2018-2019), an 8.2% growth in wealth (2018-2019), and makeup 33.6% of the HNWI wealth in 2019. The Mid-Tier Millionaires had an 8.9% growth in population (2018-2019), an 8.8% growth in wealth (2018-2019), and makeup 22.6% of the HNWI wealth in 2019. Lastly, the Millionaires Next Door had an 8.8% growth in population (2018-2019), an 8.8% growth in wealth (2018-2019), and makeup 43.8% of the HNWI wealth in 2019.
Hyper-personalize to meet client expectations and capture future growth segments
The World Wealth Report noted the market volatility of the past years and with that the shifts in asset allocation. It may drive asset adjustments as well as higher client expectations regarding value justification for advisory fees.
When comparing the first quarter from 2018 to 2019 as well as including the first two months of 2020 there are two points noticeable. In 2018, 30.9% of the assets from portfolios were equity and 27.2% were cash and cash equivalents. In the Q1 of 2019, the equity percentage dropped to 25.7%, the cash and cash equivalents increased a little with 0.7%, while the fixed income increased with 1.8%. The first two months of 2020 showed that the equity percentage rose again to accounted for 30.1% of the portfolio and the cash and cash equivalents dropped again to 25.2% of the portfolio. Whether the percentage of assets in portfolios remain stable for the rest of the year will be a wait and see game as well as the asset allocation for 2021.
According to the report the advisory fees are also under enormous pressure as gaps between HNWI expectations and reality widen amid economic volatility. In 2019, 33% of the HNWIs reported to not be satisfied with the fees their firms charged. It is expected that this number will rise as 2020 progresses. HNWIs preferred performance- and service-based fees instead of an asset-based feed structure. Expectations that HNWIs have and firms have can create gaps between both parties. These gaps can cause HNWIs to swap firms for the sole fact that they are not satisfied with the high-cost fees. This might explain why 22% of the HNWI individuals say they plan to change their primary wealth management firm with high fees being their top reason.
For the image below the questions “How do you currently pay your wealth manager for wealth-related services?” and “In an ideal world, how would you like to pay your wealth manager for wealth-related services?” were asked. Visible is that the ‘based on investment performance’ is mostly desired while ‘as a percentage of assets’ least.
Wealth management firms can also positively influence client experience through value-added services. 43% of the HNWI individuals explained that it will positively impact their experience with the firm. Younger HNWI are even willing to pay more for extra value-added services. The most sought value-added services of ultra HNWIs younger than 40 were: (1) real estate investment advice, (2) tax planning, (3) legal consultation, (4) inheritance advice, and (5) services catering to investments of passion (e.g. art, wine, collectibles, luxury cars, and yachts). The image below shows how important HNWI individuals believe value-added services are and whether they are willing to pay more for these services.
Furthermore, the world wealth report explains that as HNWIs move across essential transition points in their life, wealth firms can support and create opportunities in these critical life transition points. Young investors are entering the HNWI segment through wealth creation or inheritance. However, half of these clients aren’t satisfied with how their current firms meet their unique needs. Besides that, older investors are planning to transfer their wealth. As stated in the report, firms are lacking behind with regard to wealth transfer opportunities. The third segment includes the potential future HNWIs, many of whom are being targeted by new digital players. “With HNWI segments displaying unique preferences and financial goals, especially at key transition points, addressing these needs will be critical, especially during today’s uncertain environment exacerbated by the public health crisis. Technology-driven hyper-personalization is an approach firms can employ to fulfill these urgent requirements.”
Artificial Intelligence and analytics, for instance on emotions, can help firms improve the customer experience in areas such as bespoke risk profiles, personalized portfolio construction and tailored advice, and customized client reporting. To keep in mind though is that one size does not fit all.
Safeguard profits with a focus on critical touchpoints and operating model optimization
The wealth management industry faces disruption on multiple fonts (Mar-Apr, 2020, globally). As shown in the image below the impact of natural events such as pandemic scores high on the question of how much a factor will impact the wealth management firms in 2020. Also the changing clients' profiles and expectations scores high, which is mainly due to the shift in interests by the younger HNWI population.
The world wealth report zoomed in on the client journey touchpoints and the wealth management firm operating model plus where opportunities are and should or could be taken. The take away here? “Instead of trying to do the nearly impossible, recognize the firm’s most important goals, and then align high-impact client touchpoints with those objectives. Once firm executives pinpoint the most critical 20% of the value chain, they can focus on building capabilities that boost client engagement in the aligned touchpoints and explore ways to reduce costs in the lower-impact area. Particularly within today’s uncertain environment, astute prioritization can maximize overall benefits to the firm and positively affect revenues.”.
In addition, firms are missing an opportunity to wow HNWIs in personalized information/services. The visualization below shows on the left the touchpoints with low customer experience (not satisfied with the experience at the touchpoint). On the right, the wow impact of touchpoints in percentages is shown, which represents that a good experience will improve the overall firm perception. Overall, HNWI individuals believe that BigTech companies can deliver better service at several touchpoints. 74% of the HNWIs said they would consider offers by BigTech wealth management firms as they lead in personalized online/mobile customer experience thanks to technology advances. Especially HNWIs younger than 40, nearly 90% saying they are willing to adopt offerings from BigTech firms.
Do not worry, not all hope is lost. There are also touchpoints where wealth management firms can boost the wow factor and hedge against BigTech incursion (see image below). Researching information about the firm, personalized updates about new products/services, receiving eductional market information, and receiving value-added services are opportunities not to be overseen by wealth management firms.
With the global economy currently maneuvring on thin ice, 2020 will be a year for unusual market growth and trends.