Wealthy lose trillions to hungry bear, report says

(July 22, 2003) The attitudes and needs of the high-net-worth (HNW) client have changed, presenting their investment managers with new challenges in a shaky market, according to a report from the Boston Consulting Group (BCG).

In the past four years, the wealthiest people in world have seen over $5.3 trillion US wiped out from their combined net worth, thanks to the prolonged bear market. In 2002 alone, the losses topped $1.9 trillion US. With the loss of those assets comes the loss of revenues for the asset managers.

In Canada, the HNW have seen their fortunes drop by 11.7% in 2002 to $794 billion US. The loss for their financial advisors and private banks has been even steeper, with revenues dropping 15.1% to $7 billion US. A “wealthy Canadian” is defined in this report as having at least $250,000 US in assets under management.

“Many [wealth management] firms have already cut costs significantly, but even so these have not kept pace with the continuing decline in revenues,” said Paul Orlander, vice-president and director in BCG’s Toronto office. “Many companies have not yet redefined their competitive positions in the face of this reality. The major markets appear to be in a period of slow growth that could last for a number of years.”

Orlander says there was a broad range of profitability among wealth managers, with the margins ranging from over 30% all the way down to posting losses. Firms following a fee-based model had a median profit margin of 24%, compared to a 6% median margin for commission-based advisors.

He says the best firms managed to not only maintain their client base, but find new clients as well. They managed to outperform the other firms by maintaining their focus on serving the wealthy and not get bogged down with too many “non-target” clients.

“Among the better performing firms is a very clear sense they have of what their basis of advantage is. They have a clear view of who their target client is, they have a business model and a cost structure that’s aligned to serve that client.”

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High-net-worth clients have had their confidence in both the markets and their financial advisors shaken and they’re looking to stem the losses, the report found.

“Here in Canada, the reality is not only are there fewer wealthy investors, but those who have maintained their wealth are much more cautious and have greater distrust of the markets and of the investment industry,” says Orlander.

The report discovered that in North America, the asset allocation model has gone from 49% equities in 2001 to 41% in 2002. Fixed-income allocations rose from 21% to 24%, and cash holdings were up from 30% to 35%. It is unclear how much of this was due to an intentional shift, rather than simply reflecting the loss of value in equities, but it appears that the affluent were in no rush to put more money into stocks.

The report says that the goal for many HNWs is wealth preservation, with strategies focusing on absolute rather than relative returns. This shift has seen the “big money” moving out of the equity markets and into safer investments. The report points out, though, that these strategies are often less profitable for asset managers.

The bond market has been bid up to the point where returns are scarcely realized and many alternative investments are under-performing in the “less volatile, lower-interest-rate environment.”

“The recent rise in equity markets is positive for investors and wealth managers, but the damage done over the past three years to wealth managers and their clients, as well as to trust and confidence, will take time to repair,” said Bruce M. Holley, BCG vice-president and director in New York, and one of the four authors of the report. “Careful management and good strategy is essential to winning in challenging times.”

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Have you noticed a change in your HNW clients’ approach to investing? What strategies have you tried to rebuild your clients’ confidence in you and in the markets? Share your thoughts or ideas with your peers in the Talvest Town Hall on Advisor.ca.

Filed by Steven Lamb, Advisor.ca slamb@rmpublishing.com

(07/22/03)