Despite a year of economic uncertainty, financial assets, including stocks, bonds, and other investment funds, globally reached a record $250 trillion in 2020, according to a report by BCG released on Thursday. An additional $235 trillion was in real assets, led by real estate ownership, making up 48 percent of total global wealth.
Contrary to analysts’ projections, the total all-time high of financial wealth rose by 8.3 percent over the previous year, due largely to robust stock market performance and increased savings by individuals. The result: More wealth directed toward investment funds, private equity, private debt and real estate, among others. The capital into equities and investment funds rose 11.5% in 2020, according to BCG.
Real assets tend to make up the bulk of wealth in developing countries, where capital markets are still in their infancy. “Over the next five years, however, a combination of greater financial inclusion and growing capital market sophistication will change the wealth composition in growth markets,” according to the report. “In Asia, for example, financial asset growth is likely to exceed real asset growth (7.9 percent versus 6.7 percent). In particular, investment funds will become the fastest-growing financial asset class, with a projected CAGR [compound annual growth rate] of 11.6 percent through 2025. This spike comes as more individuals embrace viable alternatives to investments in traditional real assets.”
Providing greater access to private equity, hedge funds, and venture capital to what BCG calls simple-needs clients is a key opportunity for wealth managers and asset managers alike. “For example, a pre-IPO investment that might normally require a minimum stake of millions of dollars could be sold to mass wealth clients at much smaller investment levels by aggregating individual demand,” the report stated.
Breaking down complex financial products into easily understandable content for the simple-needs segment was also an important requirement as well as “access to subject matter experts, private equity deal talks, and hedge fund investing master classes.”
What’s more, digital advice platforms don’t have to be viewed by wealth managers as a threat. In fact, many of these managers use these platforms as a way to differentiate services for different client segment in-house. “Digitization, long a tool of disruption, can be a source of inclusion and revitalization, allowing WMs [wealth managers] to reach a mass audience in a cost-effective and scalable way,” according to the findings.
The Appeal of the Ultra High Net Worth Pool
Last year more than 6,000 people became “ultras,” individuals whose financial wealth exceeds $100 million. The segment now makes up a total 60,000 people worldwide with a combined $22 trillion in investable wealth or 15 percent of the world’s total. With $5.8 trillion in 2020, the U.S. topped the list as the most concentrated market for investable wealth; followed by Mainland China with $3.6 trillion, which was the fastest growing wealth market, increasing 26.5 percent between 2019 and 2020.
Ultra high-net-worth investors have long been an attractive target for asset managers. But, “Offerings that were considered leading edge a few years ago, such as impact investments and exposure to alternative asset classes, can seem stale today. Service must be highly differentiated to suit client needs...” according to BCG.
Among the ultras, BCG highlighted “Next Gens,” those between ages 20 and 50, as a driver for future growth, and includes self-made individuals as well as those who inherited their wealth. These investors not only have a higher appetite for risk and a longer time horizon in which to invest, but they also have “...a desire to use their wealth to create positive societal impact as well as solid returns,” the report stated. That opens up the field for asset managers with impact and sustainable investments.
Through a series of interviews, BCG identified a mix-and-match approach preferred by Next Gens, who are comfortable picking their own stocks but seek exclusive opportunities and expertise in “high-value alternative investments, deal opportunities, private placements, and bespoke credit.” Generic presentations were also considered a turn off among this group, yet BCG reported that many wealth managers continue to use these ineffective standard approaches.
“They treat ultras as a homogenous group, which is not okay. Secondly they’re very much looking at it from a transactional basis. They push products instead of focusing on delivery and client-led solutions,” said Anna Zakrzewski, global leader of BCG’s wealth management segment, who co-authored the report. “Some [clients] really want unique investment opportunities in the angel, venture capital or PE space; others are more interested in [investments tied to] sustainability and impact,” she said.