Regulation the biggest challenge for wealth management
The investable assets of the world’s wealthy grew by 10 per cent to reach a record $46.2 trillion last year. In 2011, individual wealth had declined by 1.7 per cent, according to the World Wealth Report 2013 released by Capgemini and RBC Wealth Management.
More than one million people joined the population of what the wealth management industry terms high-net-worth individuals. There are now 12 million people who have investable assets of US$1 million or more, not including their primary residence.
North America reclaimed its position as the largest market for wealthy individuals from Asia with $12.7 trillion in assets from 3.73 million people. Wealth in Asia-Pacific, which overtook North America in 2011, reached $12 trillion.
Latin America led growth in 2011, but faltered in 2012 amid slowing gross domestic product growth and challenging equity markets.
“North America’s lead in both population and wealth is likely to be eclipsed again in the future by Asia-Pacific,” said Jean Lassignardie, chief sales and marketing officer, Capgemini Global Financial Services. “While North America led in HNWI population, Asia-Pacific actually had a higher overall wealth growth rate at 12.2 per cent, compared to North America’s 11.7 per cent.”
The group of ultra high-net-worth individuals, people with more than $30 million in investable assets, showed the strongest wealth increases, expanding by 11 per cent in both assets and number of millionaires.
The wealthy maintained a cautious investment approach last year, a survey of 4,400 millionaires worldwide showed. The High Net Worth Insights survey revealed that despite recent market improvements, one third of respondents is more focused on wealth preservation, compared to 26 per cent who placed an emphasis on growth.
This trend was underlined by the choice of asset allocation, as almost 30 per cent of assets were held in cash and deposits.
Equities made up the largest share of North American asset portfolios (37 per cent), whereas millionaires in Latin America and Asia-Pacific, excluding Japan, preferred real estate with 30 and 25 per cent of portfolios, respectively.
“Despite a marked focus on capital preservation and high cash allocations, high-net-worth individuals achieved a record level of wealth in 2012, suggesting further growth lies ahead if trust and confidence in the markets increase further,” said M. George Lewis, group head, RBC Wealth Management & RBC Insurance.
The report predicts 6.5 per cent annual growth of individual wealth during the next three years based on an ongoing economic recovery and improving investor confidence. This is in contrast to the sluggish 2.6 per cent growth since the financial crisis in 2008.
The Asia-Pacific region is expected to lead global growth and projected to grow at 9.8 per cent, one and a half times the global average.
The volume and pace of regulatory change is the single largest challenge facing the wealth management industry, the World Wealth Report found. While many firms are making tactical investments to meet regulatory requirements, more strategic decisions – for example, regarding the use of technology, process automation or training – will be key to enabling business transformation and future growth, while minimising negative impact on clients.
“The financial crisis spurred regulators to take additional steps to ensure clients are well-served and that wealth management firms comply with regulations and enhance market integrity,” Mr. Lewis said. “At the same time, the volume of regulatory change challenges firms to keep pace and limit disruption to clients who have come to prefer and expect a seamless and integrated approach to managing their wealth.”
Regional variation in regulation presents a challenge for global firms, which struggle to provide a consistent standard of client service in different markets.
Firms should aim to minimise the regulatory impact on their service through hiring and retaining top talent, investing strategically in areas including training and technology, and through embedding a culture of compliance within all levels of the organisation, Mr. Lewis added.
As a result of the cost or complexity of compliance, some firms may choose to exit certain markets. Meanwhile, smaller and mid-size firms will struggle due to lack of scale, the report predicted.
Large firms, in contrast, especially market leaders with strong reputations, will be able to minimise regulatory impacts on clients and derive greater value from regulatory investments, while continuing to invest in other strategic areas.
The long-term impact of new regulation will require wealth management firms to invest in compliance for years to come. This will constrain profitability and hurt already high cost-to-income (C/I) ratios, which measure the efficiency of a firm in minimising costs and increasing profits.
Cost of compliance
Compliance costs are driven by investments in legal and regulatory expertise and technology infrastructure, while firms also feel the cost of lost revenues due to lower adviser productivity. In addition, failure to meet regulatory requirements creates a range of costs for firms through fines, legal fees and reputational costs.
The World Wealth Report suggests that wealth management firms use technology as a lever to help reduce cost of service, particularly as clients are increasingly seeking access to digital channels and self management tools.
Many regulatory changes impact long-held operating and revenue models, leading firms to re-evaluate elements of their value proposition including the target client segments they serve and the markets in which they choose to operate. This could drive some firms to move up-market in search of better returns or leave the industry entirely, resulting in possible industry consolidation or narrower service choices for some clients.
“One alternative to counter the high costs of compliance, while driving value for clients, is for firms to analyse and segment portfolios and customer preferences and re-align offerings based on complexity and level of HNWI servicing needs,” Mr. Lassignardie said. “For instance, clients in some wealth bands and geographies may be well served by more standardised services, while face-to-face advice may be predominantly limited for clients with larger, more complex portfolios.”
World millionaires High-net-worth individuals* by country in 2012