Losses shake trust in industry

The financial crisis and the exceptional market volatility in 2008 caused unprecedented drop in the world’s population of high net worth individuals (HNWs) and their overall wealth, wiping out two years of strong growth in 2006 and 2007, according to the latest annual world wealth report released by Merrill Lynch Global Wealth Management (GWM) and Capgemini. The number of super-rich in the world – worth at least $1bn (E710m) excluding their homes – decreased by 15 per cent to 8.6m last year, while the wealth they control fell by 19.5 per cent to $32,800bn; both figures shrank below 2005 levels. Remarkably, the trend to wealth concentration seen in past years clearly reversed in 2008, as the ranks of the world’s ultra-wealthy – defined as those with at least $30m – reduced at much faster rate, by almost 25 per cent, a decline which was matched by a 24 per cent drop in their assets. Exposure to equities This result is explained by the typically higher exposure of the ultra high net worth individuals to the equity markets, hedge funds and private equity, which suffered significantly last year, said Nick Tucker, managing director at Merrill Lynch GWM. In spite of last year’s negative results, overall wealth is forecast to grow by 8 per cent per annum to top $48,500bn by 2013, mainly driven by the recovery of the global economies. But the market downturn has profoundly shaken the trust and confidence that HNWs have in wealth managers and regulators. Around 46 per cent of them stated they lost confidence in wealth management firms and advisers, while 78 per cent said to have lost confidence in regulatory bodies, according to the research. Market losses and diminished confidence drove many HNWs to diversify their wealth across multiple institutions as a means of reducing risk. Around 25 per cent of them withdrew assets or left their wealth management firm altogether last year. As each high net worth individual holds on average of $3.8m, there was potentially trillions of dollars of HNW financial wealth changing firms in 2008. While research shows that client satisfaction remains a top priority, there is clear evidence that firms and advisers may not fully understand what drives clients to leave or stay, said Ed Merchant, head of financial services at Capgemini. Bridging the gap Clients place higher emphasis than their advisers on reporting quality, transparency and education as the factors that would drive them to leave. Risk management, due diligence capabilities, online access and fee structure are the main gaps between client and wealth manager understanding on retention. “The opportunity right now is for wealth managers and institutions to close these gaps between what clients are looking for and what their current capabilities are,” said Mr Merchant. Client retention and acquisition is even more critical in the current climate, as wealth management institutions are facing serious profitability challenges due to lower assets under management, caused by market losses and attrition, and increased allocation to lower margin asset classes, such as cash and fixed income. “This year, and we are seeing it already, investors are going to review their wealth, review who to work with and how to work with that wealth manager, and consolidate back again,” said Mr Tucker. “The current environment is a huge opportunity for those wealth managers who are able to focus on their clients and understand their needs, most of which have changed considerably over the last 12 months,” he said. Investors are very much getting back to basics and want advice and engagement from their advisers. “The wealth managers who do that in the next 12 months will be the winners of the future,” said Mr Tucker.