North America Trumps Asia-Pacific in HNWI Wealth Growth for First Time in 8 Years
High Net Worth Individual (HNWI) wealth and population grew by almost 9 per cent globally in 2019 despite a global economic slowdown, international trade wars and geopolitical tensions, finds the World Wealth Report 2020 from Capgemini. North America and Europe took the lead with around 11 per cent and 9 per cent growth respectively, surpassing Asia-Pacific (with 8 per cent) for the first time since 2012. Yet the boom of the previous year has been cloaked with uncertainty as global economies brace for a projected 4.9 per cent decline in 2020 as per the International Monetary Fund.
In North America, an 11 per cent increase in both HNWI population and wealth (compared with a 1 per cent wealth decline in 2018) meant the region accounted for 39 per cent of global HNWI population gains and 37 per cent of wealth growth in 2019. European performance topped that of Asia-Pacific and Latin America, with HNWI population and wealth growing at almost 9 per cent. Despite robust market performance from several Asian countries including Hong Kong, China and Taiwan, APAC overall expanded by 8 per cent in 2019, falling behind the average global HNWI growth rate of 9 per cent.
That was then, this is now
As per World Federation of Exchanges reports, Covid-19 erased more than $18 trillion from global markets over the course of February and March 2020, before a slight recovery in April. Analysis from Capgemini, detailed in its new report, projects a decline of between 6 per cent and 8 per cent in global wealth until the end of April 2020 (compared with December 2019). Investment priorities have also shifted—sustainable investments that uphold environmental and social priorities, are gaining significant prominence post-pandemic.
Sustainable investing and value-added services gain traction
Growing interest in sustainable investing (SI) is offering firms a high-potential engagement opportunity. Among the ultra-HNWI segment, SI is building considerable momentum. While 27 per cent of HNWIs overall expressed interest in SI products, 40 per cent of ultra-HNWIs were willing to put cash into sustainability.
HNWIs plan to allocate 41 per cent of their portfolio to SI products by the end of 2020, and 46 per cent by the end of 2021. Wealth management firms have recognised the trend and are prepared to meet the demand as 80 per cent now offer SI options. Funds focused on socially responsible investing have been a rare bright spot in 2020 market activity, and while HNWI investment in SI recognises social/environmental impact, they are also motivated by financial value. The top reasons driving HNWI interest in sustainable investing are higher returns and lower risks—39 per cent expect to receive higher returns from SI products, while 33 per cent view SI as sound and less speculative. Interestingly, already 26 per cent of HNWIs cite a desire to give back directly to society.
Hyper-personalisation is needed to meet evolving expectations
Unpredictability in 2020 is set to drive asset adjustments as well as higher client expectations and scrutiny around advisory fees. Equities became the most significant asset class in early 2020 and accounted for 30 per cent of global HNWIs’ financial portfolios, largely due to robust equity markets and financial stimulus restoring trust. HNWIs are also becoming increasingly critical over wealth managers’ fees, with 33 per cent uncomfortable with rates in 2019. Discomfort is expected to rise as a result of volatile markets. According to the report, more than one in five HNWIs might switch firms in the next year with high fees being the top reason for 42 per cent of HNWIs. HNWIs are also citing a preference for performance and service-based fees over asset-based ones, indicating higher expectations on value delivered for fees charged.
Digital capabilities have become central to business continuity for wealth management firms. Hyper- personalised offerings powered by AI, analytics and other technology can meet the evolving HNWI expectations in areas including 1. Bespoke risk profiles 2. Personalised portfolio construction and tailored advice 3. Customised client reporting—using APIs and multiple data sources to create a comprehensive view of client investments
Pre-Covid-19, investors reported being least satisfied with touchpoints related to personalised information or services from their firm in the client journey, and more than 60 per cent of HNWIs reported unsatisfactory experiences during their attempts to access information about new wealth management offerings or market information. HNWIs aged 50-59 were the most dissatisfied with their experience related to information access and value-added services.
The BigTech trojan horse
Less-than-stellar customer experience at touchpoints related to information access and value-added services represents a missed opportunity to ‘wow’ clients. More than 40 per cent of the HNWIs interviewed by Capgemini say good experiences at these touchpoints profoundly impact their overall impression of a firm, and this is likely to increase as a result of Covid-19.
While only 26 per cent of wealth managers rank BigTech competition among the top potential disruptors, HNWIs certainly believe that BigTechs can outperform incumbent firms when it comes to information access and value-added services. 74 per cent of HNWIs report a willingness to consider wealth management offerings from BigTechs, jumping to 94 per cent among the 22 per cent of HNWIs who say they may switch their primary wealth management firm in the next 12 months.
HNWIs in Latin America and Asia-Pacific (excl. Japan) expressed the highest likelihood to adopt wealth management offerings from BigTechs. In Japan and North America, BigTech adoption increases dramatically for HNWIs who are likely to switch within 12 months. Unsurprisingly, HNWIs younger than 40 are most inclined, with willingness reaching nearly 90 per cent.
As BigTechs gain financial services ground, wealth management firms have little choice but to enhance digital customer engagement quickly. A side-by-side look at touchpoints that evoked the least HNWI satisfaction and those most vulnerable to BigTech encroachment reveals three stages of the client journey as areas of focus: acquisition, advisory, and value-added services.
For wealth management firms, a two-pronged strategy based on Open X5 principles will allow wealth managers to quickly and cost-effectively enhance capabilities across the value chain. For acquisition, advisory and value-added services, firms should invest in tech to build capabilities in-house and leverage ecosystem collaboration and WealthTech partnerships to enhance capabilities.
While the immediate focus for wealth managers might be on business retention, building capabilities—both now and in anticipation of recovery—may pave the way to future opportunities and new revenue streams. Successful firms will be those that can harmonise with their ecosystem to quickly meet high net-worth clients’ demand for easy-to-access personalised information and tailored investment strategies.