High-net-worth individuals are low on trust and confidence because of the financial market meltdown and global recession, according to the 2009 World Wealth Report, released last week by Merrill Lynch Global Wealth Management and Capgemini. The wealthy don’t believe in the markets, the financial sector, regulators, or the cherished mantras of portfolio management, according to the survey, which analyzes responses from more than 1,350 advisors, 200 individuals, and 60 senior executives at wealth management companies.
The numbers are stark. “At the end of 2008, the world’s population of HNWIs was down 14.9 percent from the year before to 8.6 million, and their wealth had dropped 19.5 percent,” according to the report. HNWIs defined as those with investable assets of $1 million and up (excluding primary residence, collectibles, consumer durables, and consumables). The U.S. population of HNWIs dropped by 18.5 percent but leads the world with 2.5 million; by comparison Germany saw a 2.7 percent decline, while Hong Kong slumped 61.3 percent.
More than 26.6 percent of these investors withdrew assets or abandoned their wealth management firms last year; meanwhile “global net inflows into money market [exceeded] $455 billion for the year.” Cash-based holdings rose to 21 percent of portfolios, up 7 percent from pre-recession 2006, and fixed-income investments accounted to 29 percent of portfolios, compared with 21 percent in 2006.
“No one really anticipated how quick the decline would be,” says Ileana Van Der Linde, a principal at Capgemini. Just as striking has been the decline in trust: 46 percent of HNWIs lost trust in their advisers and financial institutions, while 78 percent lost trust in regulators.
These trends are continuing 2009. “There is a lot of money in motion,” Van Der Linde notes. “Clients’ demands are heightened. There have been requests-for-proposals asking firms for evaluations of client reporting, real-time capabilities.” Local and regional banks and trusts have gained customers from large global financial institutions, but “they will have to continue to prove themselves with 24-hour real time access and risk management.” Simplicity is also important. Clients don’t want products that advisors and wealth management firms can’t explain.
The wealth management sector faces balance sheet pressures because of increased client interest in fixed income products. “These firms are very challenged to carve out costs without cutting services,” Van Der Linde says. “Advisors and wealth management firms shouldn’t underestimate their clients. Clients want answers on fee structure, transparency, and risk management. They want to slow down the conversation. Firms that understand that will be more successful.” Honesty pays, too. Client retention is higher for companies who admit they were surprised and hurt by the severity of the financial market mess and economic downturn.