Lower tiers of wealth pyramid a potential goldmine for wealth managers

Wealth managers will need to reduce costs and build scalable business models to successfully tap into the less affluent client segments

The UK government’s recent tax cut for its richest segment of citizens may suggest so-called ‘ultra’ high net worth (UHNW) individuals have the greatest long-term buying power in a society troubled by a series of economic crises.

The reality, however, is much more nuanced. While this top tier remains a core target for global wealth managers, it is the affluent and lower HNW segments which will represent the largest revenue growth opportunity, predicts global consulting firm Oliver Wyman.

UHNW investors with more than $50m in wealth – defined as investable personal financial assets – will continue to drive wealth creation. They will account for more than 40 per cent of total wealth growth by 2026. However, this segment represents less than 15 per cent of the overall potential wealth management revenue pool and less than 20 per cent of its growth, according to an Oliver Wyman study, carried out in partnership with Morgan Stanley

“For more than a decade, many wealth managers have put their growth focus on the UHNW and HNW segments,” says global head of Oliver Wyman's Wealth and Asset Management practice Christian Edelmann. “But only players with a premium brand or strong investment banking capabilities have been able to profitably grow in the highest wealth band segments, as the UHNW market as a whole is both hard to scale and highly competitive.”

Wealth managers are increasingly realising they are leaving money on the table in the “undervalued and underinvested” affluent and lower HNW segments, representing those with more than $300,000 and less than $5m in wealth. This segment is expected to account for a revenue pool of $230bn, of which only 15-20 per cent is today penetrated by wealth managers.

Individuals in this wealth bracket are expected to create $45bn of new revenues and account for about 60 per cent of the total wealth management revenue pool by 2026.

To serve this client segment profitably, wealth managers need to reduce costs, particularly at the lower end. “The next decade will be about the transformation to a scalable and modular wealth management proposition,” predicts João Miguel Rodrigues, principal, financial services, private capital at Oliver Wyman.
Empowered by technology, wealth managers can offer financial advice and investments to a more diverse client base at lower, differentiated costs. Clients must be allowed to pick and choose different modules of advice, products and services to create their own, personalised solution. Wealth managers will need to support their clients along the journey through different channels, from human- to digital-led.

Digital solutions will also form the base layer to cater to more traditional, higher wealth bracket clients, who increasingly expect enhanced digital experiences along with traditional human-led bespoke service offerings, adds Mr Rodrigues.
“To win market share profitably in the future, many wealth managers will need to make significant changes and invest in their coverage and service models, as well as operating models and technology.”

Perfect storm

However, the equation is far from a simple one. The many private banks which are competing for the wallets of a small number of super-rich families also have some statistical trends on their side. In 2021, soaring house prices and booming stockmarkets created “a perfect storm”, which led to “an explosion of wealth”, as the world recovered from the Covid pandemic, says Anthony Shorrocks, an economics professor and an author of the latest Credit Suisse Global Wealth Report.

Aggregate global household wealth, defined as the value of financial and real assets owned by households, minus their debts, swelled by 10 per cent ($41.4tn) to reach $463.6tn. This is the fastest annual growth rate ever recorded, well above the average annual 6.6 per cent since the beginning of the century, according to the study.

This growth comes together with increasing inequality, mainly driven by large scale central banks’ quantitative easing, which fuelled asset price inflation. The exceptional stockmarket performance - global stocks surged 17 per cent, with the S&P 500 returning 27 per cent last year – mainly benefitted individuals at the top of the wealth pyramid, who tend to hold a greater proportion of financial assets.

Numbers of Individuals with assets worth more than $50m increased globally by 46,000 to 264,200 in 2021, following strong growth the year before. As a result, the number in this UHNW segment surged more than 50 per cent over the two-year period. The US accounted for two thirds of the global increase in this wealth bracket. With 141,140 UHNW members, equivalent to 53 per cent of the world total, the US leads by a huge margin. China is in second position with its 32,710 UHNW individuals, followed by Germany (9,720), Canada (5,510) and India (4,980).

The share of the world’s wealth held by the richest 1 per cent of the global population, which is a measure of inequality, last year increased for a second year running to 46 per cent, up from 44 per cent in 2020.

This top percentile includes individuals with wealth above $1m, who increased by 5.2m last year, to a total of 62.5m globally, just above the 60m population of Italy. US dollar millionaires now account for 1.2 per cent of the 5.3bn global adult population, having more than doubled in number since 2011.

Worthless millionaires

Millionaires are expected to exceed 87m individuals over the next five years, with inflation also facilitating this rise. A million dollars may become “almost worthless”, in 20 years’ time, predicts Professor Shorrocks.

The aggregate wealth of HNW adults has grown five-fold, from $41.4tn in 2000 to $221.7tn in 2021, bringing their share of global wealth from 35 per cent to 48 per cent. Today, the richest decile, the top 10 per cent of adults, owns 82 per cent of global wealth, while the bottom 50 per cent of adults together accounted for less than 1 per cent of total global wealth at the end of 2021.

The picture varies when examining longer-term global trends since the beginning of the century. This indicates the growing prosperity of emerging economies, especially China, and the expansion of the middle class in the developing world has led to a more equal distribution of wealth, at least at global level, according to Credit Suisse.

This trend is likely to continue, as low and middle-income countries are predicted to grow at a faster rate than more developed countries. Today they account for 24 per cent of wealth, but they will be responsible for 42 per cent of wealth growth over the next five years, with global wealth expected to increase by 36 per cent to $169tn by 2026.

By 2024, global wealth per adult should pass the $100,000 threshold, from $87,489 today, which is close to three times the level recorded at the turn of the century.

But to complicate things further, when analysing wealth distribution trends within countries, over the past 20 years the share of wealth held by the wealthiest 1 per cent of population  has increased in several countries, including China, India, Brazil, Russia and the US.

In “transition countries”, such as China and India, the rise in inequality can be ascribed in large part to market reforms, rising asset prices and changes in portfolio composition, and it may be seen as a “by-product of fast growth”, states Professor Shorrocks.

When private banks and wealth managers plot their expansion strategies, the understanding of each segment at a deeper level will prove key to success.