Wealth of HNWIs Grew by 12% in 1998 Despite Global Financial Turmoil
Technology Revolutionising Global Private Banking, Research by Gemini Consulting Indicates HNWIs Will Rely More Than Ever on Financial Advisors to Negotiate Increased Range of Choice
LONDON, May 17 /PRNewswire/ -- Merrill Lynch expects the wealth of the world's high net worth individuals ('HNWIs') with financial assets exceeding $1 million to grow by more than 50% by 2003 to $32.7 trillion, according to a report released today by Merrill Lynch in conjunction with Gemini Consulting.
The 1999 Merrill Lynch/Gemini Consulting World Wealth Report, the third in an annual series, found that despite global financial turmoil in 1998, the wealth of the nearly six million high net worth individuals around the world grew by 12%, to approximately $21.6 trillion.
Further, the report found that a sea change has been occurring in the world of private banking in recent years as it becomes a dynamic, innovative environment, augmented by the revolutionary impact of the Internet. HNWIs now have more choice than ever in all aspects of managing their wealth. As a result, HNWIs increasingly will rely on their financial advisors to help them negotiate the maze this increased range of choice creates, the report argued.
"The rise in HNWIs' financial assets shows no signs of stopping despite last year's turmoil, which saw many HNWIs relying more than ever on the advice of their financial advisor," said Michael Giles, chairman of Merrill Lynch International Banking Group. "Further, the continuing sophistication of HNWIs is leading them to utilise a broader range of products, services, delivery mechanisms and channels, including the Internet."
The report showed that the rise in HNWI assets last year continued despite slower economic growth and global stock market turmoil. This was driven by the continued growth in the world economy and the recovery of European and US stock markets in the latter part of last year. In addition, the report noted that HNWIs with well-structured and globally diversified portfolios were protected from last year's decline in the stock markets of the world's emerging economies.
"HNWIs with well-constructed portfolios were not adversely affected by last year's turmoil and those that rode out the storm made significant gains by year-end," said Steven Beck, managing director of Gemini Consulting's North Europe Region. "This year's study also notes that despite the way HNWIs behaved in 1998, the two long-term trends cited in previous reports -- towards investing onshore and the move from cash into equities and equity-linked investments -- will continue."
MARKET SIZE AND GROWTH
This year in the report, for the first time, estimates for HNWI financial wealth in eastern bloc countries such as Poland, Hungary, Slovakia and the Czech Republic have been included. Whilst the impact this year has been relatively small, the growth of new private businesses in these countries is producing HNWIs who need to be served.
US and Western European HNWIs continue to account for the majority of HNWI wealth -- nearly 58% of the total -- increasing slightly in 1998 on the back of strong economic and stock market performance, while HNWIs in Asia and Latin America lost ground, the report showed.
Further, the report estimates that the rise in HNWI assets will grow at approximately 9% per annum over the next five years, reaching $32.7 trillion by year-end 2003, driven not just by re-invested interest payments, dividends and capital appreciation, but by continuing global economic prosperity. The forecasts do not anticipate a significant change in the regional distribution of HNWI wealth over the 1999-2003 period.
EFFECTS OF STOCK MARKET VOLATILITY
In 1998 HNWIs took four key protective measures against stock market volatility, the study showed:
-- they reduced the equity size of their portfolios, moving more into cash and fixed-income bonds.
-- outside the US, especially in Asia and the Middle East, HNWIs shifted assets from local currency to cash deposits in US dollars -- a flight to quality.
-- HNWIs continued to withdraw from Asian markets.
-- HNWIs did not panic but rode out the equity storm.
All in all the study showed that only a minority of HNWIs were caught out by last year's volatility:
-- those HNWIs who converted substantial assets into cash and missed the late upturn in the markets.
-- HNWIs that were not globally diversified and were heavily weighted in emerging markets and hedge funds.
CHANGE AND INNOVATION IN PRIVATE BANKING
Change and innovation in private banking was a key feature of this year's report. New opportunities are increasingly available not just to HNWIs but to institutions serving them in what is becoming an intensely competitive market place.
Innovation in private banking was being driven by three key factors, the report argued: a changing HNWI profile and their evolving needs; emerging technologies; and increased competition.
Further, the study noted that HNWIs were not only growing in numbers and in wealth, but their profiles were also changing. Earned wealth was increasing faster than inherited wealth, the report showed. Today's HNWIs were found to be much savvier than those of the previous generation, taking an increasingly more active role in managing their wealth. They are information-hungry, IT- literate, mobile, global, and require more sophisticated financial products.
New technologies are now affecting the way private banks do business with their customers, the report noted. First, data-mining techniques will allow private banks to offer a more tailored service to HNWIs. Second, the Internet will allow them numerous opportunities to interact with their customer base. The ability to exploit these technologies will be essential to developing a loyal HNWI customer base, the report argued.
Further, solid revenues with high returns are steadily intensifying the competitive battleground for HNWI wealth, the report added, with an increasing number of new providers entering a market that many private banks see as their exclusive domain. These new competitors are targeting clients holding lower wealth levels, specifically the affluent and emerging affluent segments.
INNOVATION IN PRIVATE BANKING
Exploring the consequences of the three key forces in private banking, the report found that these were leading to a plethora of innovations. Forward-looking providers, it said, were increasingly concentrating on sales and marketing and establishing brand awareness in their markets. Further, increasingly providers were seen to be offering a wider and more complex range of new products, including the use of alternative investment avenues such as private equity funds.
The report noted that technology and the Internet are having a dramatic impact on the way HNWIs interact with their relationship managers. Whilst many still use the Internet only for information-gathering HNWIs will conduct more transactions electronically, as fears about security diminish, forcing private banks to make a sustained effort to innovate with the Internet and other services, the report said. And finally, the report argued that the challenge for providers in the years ahead would be in building standard global information technology platforms that meet HNWI needs and deliver seamless services.
IMPLICATIONS FOR HNWIs
Summing up, the report argued that for all their sophistication, HNWIs today need strong financial advisors as much or more than ever to help them negotiate the increased range of choices on offer. Today's private bankers, the report noted, needed to move towards 'open product architecture,' offering the best solution to their customers regardless of who produces it. The value of private bankers depends today on their ability to coach and advise, bringing in product experts where appropriate, the report argued.
Copies of the study are available in hard copy format and on the Internet at <www.ml.com>
SOURCE Merrill Lynch