Written By: Steven Winter – Corporate Finance
The world’s high-net-worth individual (HNWI) population in 2015 stood at 15.36 million and accounted for a total wealth of $58.7 trillion. During the year, the HNWI population grew by 4.9 percent, while their wealth expanded by 4 percent. Both the growth in the number of people in the HNWI category as well as the increase in their wealth declined from the rates of 7.7 percent and 7.2 percent registered in the period 2010 to 2014. But the greatest challenges that are facing the wealth-management industry have little to do with the slowdown in the expansion rate of the HNWI population or the total quantity of their wealth.
HNWIs are increasingly looking to their wealth managers for lending solutions, an area that wealth-management firms are giving greater importance to now. Additionally, the wealth-management industry is focusing on cybersecurity, as the number of breaches and the resultant losses grow. Wealth-management firms are also trying to reduce expenses as compliance and regulatory costs have risen in the period since the great financial crisis.
Demand for loans by HNWIs is on the rise.
Wealth-management firms are shifting focus to cater to the requirement for loans. Younger HNWIs and those from emerging markets are asking their wealth managers to arrange credit for them. Capgemini’s report titled “Top 10 Trends in Wealth Management in 2016” points out that UBS, the Zurich-headquartered global financial-services company, increased lending in its non-US wealth-management business by 30 percent in 2012-14.
What do HNWIs use credit for? According to a survey carried out in 2015 by RBC Wealth Management in collaboration with Capgemini, 40.2 percent of respondents indicated that they use credit for investment opportunities, while 22.1 percent said that they required funds for investment in real estate. Credit facilities are used most extensively in Latin America, where 28.6 percent of HNWIs borrowed funds. Providing loans is also important in the Asia-Pacific region (excluding Japan), where 25.5 percent of HNWIs require access to credit.
Many wealth-management firms have been quick to adapt to the changing market and offer mortgages and Lombard lending (a loan that is secured by securities held by a client in a custody account) to their HNWI clients. A Lombard loan is a popular financial product for this segment as it provides immediate cash without requiring assets to be sold.
Many clients of wealth-management firms, especially younger HNWIs, prefer to use digital channels for obtaining information and for communications. While this trend has many advantages, it also throws up a major challenge for wealth-management firms. A survey of Registered Investment Advisors in April-May 2015 by the ACA Compliance Group found that 15 percent reported that they had been victims of a cybersecurity breach in the last 18 months. The corresponding percentage in the previous year was 11 percent. Wealth-management firms face multiple threats of identity theft and personal financial crime. If their systems are breached, the implications could be serious both from a financial and legal perspective.
- Cybercrimes can lead to loss of business for firms. Clients will tend to shift to wealth-management companies that are perceived to offer greater security.
- The wealth-management firm’s image could suffer irreparable damage. New clients would hesitate before signing up, and there could be a slowdown in the firm’s growth.
- There is a risk of lawsuits and investigations.
Managing cybersecurity has become even more challenging as many HNWIs have their business operations spread across continents and have multiple wealth- management relationships. This exposes them to a greater degree to hackers and cybercriminals.
Rising expenses and compliance costs
Wealth-management firms have not been able to increase their profitability despite the rise in the number of HNWIs and the total wealth that they have. An important reason for this is the rise in operating costs and the expenses connected with new regulations. There is also a greater demand for fee transparency by clients.
In an effort to reduce costs, wealth-management firms have taken some measures, but they need to do much more. Several routine activities have been outsourced in an attempt to cut down on expenses. Some wealth-management companies are also adopting a “utility model”, which has several firms using common facilities for routine tasks.
The years ahead promise to be more difficult.
The wealth-management industry is undergoing rapid changes. New technologies and analytical tools are becoming available. There are also a greater number of young HNWIs who have a different set of requirements. Firms also need to prepare for the transfer of wealth from Baby Boomers to the next generation. As wealth changes hands, there is a greater likelihood of HNWIs switching over to new advisors.
But the greatest challenges before wealth-management firms are presented by technological advancements and regulatory changes. These two factors have resulted in a much greater degree of information being available to clients. This requires wealth-management firms to work in a highly transparent manner so that clients can see that their advisors are truly working for their benefit.