The wealth management sector continues to experience rapid growth across the world. A lot of people have a lot of money that needs managing and the range of weapons in the wealth manager’s arsenal is having to change to keep up.
The EY Wealth Management Outlook for 2018 puts the total market today for net investable assets (NIA) as over USD55,000 billion. According to their model, that figure will reach USD69,607 billion by 2021, increasing by almost one-quarter of the current volume, or at an annual growth rate of 4.7 per cent through 2021.
The firm writes that wealth managers should be anticipating and seizing this market potential and enormous growth now. The geographical breakdown for wealth reveals that more than half of global NIA growth through 2021 stems from the top five ranking countries, with the US and China alone accounting for over 45 per cent.
Russia, Brazil and India rank three to five and represent 10 per cent of the increase.
North America, with its mature and well-established wealth management sector, is where most of the NIA is predicted to appear. There is a cultural element to this growth as well. The EY team writes about North America that: “The pursuit of personal success and a healthy risk appetite are embedded in a corporate culture that drives innovation and contributes to private wealth accumulation.”
Entrepreneurial success also drives the Asia-Pacific growth in wealth with a well-educated workforce, growing infrastructure and a strong work ethic.
But to bring the study back a little closer to home, the EY model notes that Western Europe, with the UK and Germany, sees major growth for global NIA, although the study warns that Brexit is putting a spanner in the works to a certain extent.
The EY report finds that with a total of eight of the top 20 NIA growth nations, Europe will contribute over 20 per cent to global NIA growth, with 4.5 per cent will come from Western Europe, with its strong onshore markets like the UK, Germany, France, Italy and the Netherlands – plus Sweden and Norway.
The interviewees and other winners in our 2018 Wealth Adviser awards have all noted that client demands are changing and it is easy to see that the old traditional wealth management model is under attack from a new breed of wealth manager in the post digitalisation world.
Wealthy individuals want to be able to access their wealth managers through new technology. The fintech revolution means that they want to be able to make decisions and changes to their portfolios in real time on their smart phones – activities that used to take a month of paperwork and patience.
Today’s client is also more involved with their wealth and looking for a plan for life, rather than just a return on their funds.
The new clients are also more sensitive to price so not only do they want new things, they want them cheaper.
A new report from the US’s Investment Company Institute (ICI) found that the average expense ratios of equity, hybrid, and bond mutual funds – including both actively managed and index mutual funds in these asset classes – have trended downward for more than two decades.
In 2017, the expense ratios of the three major asset classes of mutual funds continued to decline. Investors paid, on average, 43 per cent less for equity mutual fund expense ratios in 2017 than in 1996.
The ICI writes that the trend reflects investor interest in lower-cost funds, as well as industry competition and economies of scale driven by asset growth.
Price sensitivity has also come from the long period of ultra-low interest rates which has driven a demand for products that mirror cash, designed to be ultra-safe while producing a small return.
The EY report found that loss of trust, stemming from the Global Financial Crisis, and the combination of low interest rates and volatility, have driven wealthy investors to alternatives and away from conventional asset classes such as shares, bonds or cash.
The net beneficiaries of this development are hedge funds – which are slowly seeing a recovery in assets – or private equity funds but on top of that, wealthy investors are increasingly turning to real assets investments, such as those described by Signia Wealth or Octopus in this Special Report.
And, of course, we have seen a strong growth in demand for so-called passion investments which while they can mean fine wine, cars, coins or art, can also mean passion with an ethical background.
The growth of Environmental, Social and Governance (ESG), Socially Responsible Investment (SRI) and Impact Investing is undeniable. Tatton’s Lothar Mentel reports in the firm’s piece in this Special Report that demand for all things ESG has driven the firm to expanding its ESG offering across the risk spectrum. Modern times ethical investing no longer means losing on return. Many studies show that well governed companies produce better returns.
The Exchange Traded Fund (ETF) industry has caused a great deal of disruption in the wealth management space over the last few years. Its significant fund raise must be coming from somewhere and its ability to adapt to investor demand in a relatively quick timespan means it can indicate key trends in investment tastes.
This has been reflected in the growth of specialist ETFs in ESG, SRI and Impact investing. The recent Morningstar study of passive ESG investment found that as of 31 December 2017, there were nearly 270 sustainable index mutual funds and exchange-traded funds (ETFs) worldwide, with collective assets under management of approximately USD102 billion.
Passive sustainable funds’ market share has increased globally from less than 6 per cent five years ago to about 12 per cent, coinciding with the overall trend towards passive investing and the development of more sophisticated indexes on the back of better environmental, social, and governance (ESG) data.
The universe of passive sustainable funds represents a broad range of approaches addressing various sustainability and investment objectives. While broad-based ESG funds dominate the landscape, Morningstar found that thematic funds are gaining prominence, especially those focused on climate change and gender diversity, two issues that are increasingly resonant with investors.