Written By: Steven Winter – Corporate Finance
According to the recent study “Global Wealth 2107” from Boston Consulting Group (BCG), the worldwide private financial wealth reached $166 trillion by the end of 2016. On average, the global financial wealth of households grew by 5.3 percent in 2016, compared to 4.4 percent the previous year. All regions experienced an increase, with Asia-Pacific recording the fastest growth at nearly 9.5 percent, and a potential average of 9.9 percent per year until 2021. Western Europe posted the smallest regional growth with 3.2 percent in 2016.
In Europe, a slight acceleration in private financial wealth growth is predicted by BCG, with an average 3.5 percent per year until 2021.
In 2015, a growth of 2.4 percent was estimated for Western Europe by BCG. Many reasons could be easily found to explain the poor wealth growth of Western Europe. The first one could be the uncertainty over Brexit and its impact on the European Union. But there is also a pure financial reason to be found out in the composition of the assets placed by rich investors.
Indeed, Western Europe is a region in which bonds, cash and deposits represent 61 percent of portfolios, while equities represent 39 percent. And if we look at the better progression in the United States (+4.5 percent) and take into account that equities represent 70 percent of US portfolios, US wealth growth has been largely boosted by the increase in equities’ values on already existing assets. Stock prices at the end of 2016 also benefited from the market optimism after Donald Trump’s election as president.
Europe still has interesting potential in the wealth-management market.
The good news for the future of wealth management in Europe comes from the fact that the market remains wide:
- Western Europe represented in 2016 $40.5 trillion out of the $166 trillion total wealth market. It remains at the second position after the North American region.
- Future 2021 estimations of the European market would place it at the third position after North America and Asia-Pacific regions, with a total value estimated at $48.1 trillion.
But also, as BCG mentioned: “In 2016, about 60 percent of the growth in wealth in Western Europe was driven by the creation of new wealth”. Creation of new wealth is definitely illustrating a certain dynamism in Europe. Wealth growth, stemming from GDP (gross domestic product) growth and new savings, even in a region in which the potential for economic expansion remains modest, is showing good signs for the future.
Private banks are still highly attracted to the Western European wealth-management market.
Western Europe has the highest private-banking penetration rate, with 85 percent of assets held by millionaire households being managed by private-banking players. This concentration is a real opportunity for private banks, which should remain the main players for wealth management. They should be able to obtain very good levels of revenue and returns on assets, despite recent unfavourable trends.
Indeed, private banks have to face multiple challenges, such as:
- new types of wealth-management organizations (structured funds, on-line asset managers and fintechs, for instance),
- low-priced investments from asset managers aimed toward affluent segments,
- constant pressures on commissions from investors themselves,
- regulator constraints working toward greater transparency and investor protection.
But they have resisted and decreased their costs with heavy reorganisations and prioritizations of their target markets. According to BCG, costs relative to assets under management have declined from 52 basis points in 2007 to 49 basis points in 2016.
At the end of 2016, the Western European zone had 3.8 million millionaire households, as many as in the Asia-Pacific region. This should be enough to keep the current players covering a large number of large-scale customers, including large international, European, American and Swiss brands, who are fighting over the table for more than $20 million in assets.
Under the condition that private banks keep a good pace toward transformation, they should definitely remain in the European wealth-management market.
The next step of transformation in which private banks have to succeed is the implementation of digital technology. It is not only about integrating digital experiences for the clients in their processes, it is also being able to meet clients’ expectations in a world of the competition’s transparency. Private banks have to be able to meet the needs of clients who are increasingly better informed, thanks to MIFID (Markets in Financial Instruments Directive) regulations.
Indeed, improving clients’ overall experiences, including distributions of middle- and back-office information, becomes crucial. Understanding better the specificity of each and every client in automated processes is also one of the key technological questions to be solved by private banks.