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Contents<br />
The State of the World’s Wealth..... 2<br />
HNWIs’ Asset Allocation Strategies<br />
Grow More Conservative .................... 10<br />
Spotlight<br />
Mid-Tier Millionaires Caught in the Middle...................... 14<br />
Solving the Mid-Tier-Millionaire Paradox......................... 21<br />
Evolution of the Mid-Tier-Millionaire Service Model........... 24<br />
Appendix A: Methodology............................................ 26<br />
Appendix B: Selected Country Breakdown........................ 27
To Our Readers,<br />
Merrill Lynch and Capgemini are pleased to present the Ninth Annual World Wealth Report, the latest product of a 20-year<br />
collaboration to measure and monitor changes in the size of the global high-net-worth market, identify the macroeconomic<br />
factors that create and destroy wealth and analyze the behavior of high-net-worth investors (HNWIs).<br />
As in 2003, 2004 saw a continuation of strong economic growth in most parts of the world. While stock market performance<br />
in the developed economies tended to moderate year-over-year, rising oil prices and demand for commodities fueled<br />
dramatic gains in many of the developing markets. Led by North America and Asia-Pacific, the growth of the HNWI<br />
population worldwide remained strong, in the high single digits.<br />
As we have seen in past years, HNWIs frequently try to anticipate future developments and stay ahead of the curve in their<br />
investment behavior. Our research found a slightly more defensive approach to asset allocation, with many HNWIs locking in<br />
some profits from the recent, dramatic appreciation of real estate.<br />
Finally, we shine our spotlight on a wealth segment we’re calling the “mid-tier millionaires,” those with US$5 million to<br />
US$30 million in financial assets. Faced with complex wealth management needs but lacking access to expensive “family<br />
office” services, mid-tier millionaires are finding it increasingly difficult to manage multiple advisors. We predict that to<br />
effectively and profitably serve this growing market segment, financial services firms will need to create “virtual service<br />
networks” using new applications of technology and the internet.<br />
We appreciate your interest in our work. Thanks in part to our many readers, the World Wealth Report has become one of<br />
the most widely cited sources of information on the global high net worth market.<br />
James P. Gorman Bertrand Lavayssiere<br />
Executive Vice President, Managing Director,<br />
Merrill Lynch & Co., Inc, and Capgemini<br />
President, Global Private Client Global Financial Services
The State of the World’s Wealth<br />
HNWI SECTOR GAINS IN 2004<br />
■ 8.3 million people globally each hold at least US$1million in financial assets — an increase of 7.3% over 2003<br />
■ HNWI wealth totaled US$30.8 trillion, an 8.2% gain over 2003<br />
■ Wealth generation was driven by fast-paced GDP performance and moderate market capitalization growth<br />
■ HNWI wealth and population growth in North America outpaced those in Europe for the first time since 2001<br />
■ Singapore, South Africa, Hong Kong, and Australia witnessed the highest growth in HNWI numbers<br />
■ We expect HNWI financial wealth to reach US$42.2 trillion by 2009, growing at an annual rate of 6.5%<br />
While 2003 was recognized as a year of recovery from an economic<br />
slowdown, 2004 can be characterized as a year of stabilization. With<br />
interest rates at historic lows globally, world GDP grew at its fastest<br />
pace in over 20 years. Stock market capitalization also increased<br />
steadily across the world, buoyed by economic stability and low cost of<br />
money. Together, the drivers of wealth — GDP growth and increase<br />
in market capitalization — accelerated gains in personal wealth.<br />
By comparison to 2002 and 2003, which saw the wealth of high-networth<br />
individuals (HNWIs) grow at rates of 2.7% and 7.7%,<br />
respectively, 2004 was a better year, with worldwide HNWI financial<br />
wealth growing at 8.2%. This growth was at the upper end of our<br />
projections, with the United States and Asia-Pacific driving the pace.<br />
Significantly, North America surpassed Europe both in total HNWI<br />
population and wealth for the first time since 2001 (Figures 1, 2).<br />
Despite these gains, HNWIs adopted a more cautious approach<br />
towards investment and asset allocation in 2004, since they recognized<br />
a market that might be leveling off and were in the process of determining<br />
what their next moves should be.<br />
As anticipated, the world’s very richest individuals — the Ultra-<br />
HNWIs (those with at least $30 million in financial assets) —<br />
continued to grow in number in 2004, increasing their ranks by 8.9%<br />
as 6,300 more individuals joined this elite group. This gain brought<br />
the total number of Ultra-HNWIs worldwide to 77,500 (Figure 3).<br />
2 World Wealth Report 2005<br />
Economic Drivers of HNWI Wealth<br />
Last year, the two primary drivers of personal wealth generation —<br />
GDP growth and market capitalization — worked in concert to drive<br />
HNWI wealth growth at a faster than expected rate.<br />
In 2003, resurgent stock markets had promised record economic growth<br />
for 2004. The year fulfilled these expectations as world GDP grew by<br />
3.9% — according to the Economist Intelligence Unit (EIU) — the fastest<br />
in more than 20 years, and well in excess of the 2.6% growth posted in<br />
2003. The United States and China, two of the world’s largest economies<br />
and accounting for nearly one third of the world’s GDP, continued to drive<br />
global economic growth (Figure 4). Although aggregated growth in the<br />
European Union was slow (2.4%), economies like Ireland and the United<br />
Kingdom broke from the trend and posted strong growth.<br />
Stable and low interest rates around the world contributed to the fast<br />
pace of economic growth in 2004, creating an environment that encouraged<br />
businesses to increase their investment spending and consumers to<br />
boost private consumption in most countries. Although interest rates<br />
rose somewhat in the second half of 2004, the increase was incremental<br />
and evenly paced, reinforcing notions of stability and predictability<br />
among investors. Even the United States Federal Reserve’s five interest<br />
rate hikes of 25 basis points each, over the course of six months, did little<br />
to shake investor confidence in 2004.<br />
Low Interest Rates Drive United States’ Growth<br />
The high growth witnessed in the United States in 2004 (Figure 4) is a<br />
record in recent history — the country last saw a higher growth rate in
Figure 1. | HNWI Population by Region, 2002 – 2004<br />
Number of<br />
HNWIs<br />
Worldwide<br />
(in millions)<br />
9<br />
8<br />
7<br />
6<br />
5<br />
4<br />
3<br />
2<br />
1<br />
0<br />
(in Millions)<br />
CAGR<br />
2002 – 2004<br />
7.4%<br />
7.2<br />
Million<br />
1.9<br />
2.2<br />
2.5<br />
0.1<br />
0.2<br />
0.3<br />
7.7<br />
Million<br />
2.1<br />
2.5<br />
2.5<br />
0.1<br />
0.2<br />
0.3<br />
8.3<br />
Million<br />
2002 2003 2004<br />
CAGR<br />
2003 – 2004<br />
7.3%<br />
Figure 2. | HNWI Wealth Distribution by Region, 2002 – 2004<br />
Global<br />
HNWI<br />
Wealth<br />
(in US$<br />
Trillions)<br />
35<br />
30<br />
25<br />
20<br />
15<br />
10<br />
5<br />
0<br />
(US$Trillions)<br />
CAGR<br />
2002-2004<br />
7.4%<br />
3.6<br />
5.9<br />
7.4<br />
8.4<br />
0.6<br />
0.8<br />
3.4<br />
6.6<br />
8.5<br />
8.6<br />
0.6<br />
0.8<br />
2.3<br />
2.7<br />
2.6<br />
0.1<br />
0.3<br />
0.3<br />
0.7<br />
1.0<br />
Note: All chart numbers are rounded. CAGR 2002–2004 uses published rounded numbers.<br />
Source: Capgemini Lorenz curve analysis, 2005<br />
3.7<br />
7.2<br />
9.3<br />
8.9<br />
2002 2003 2004<br />
CAGR<br />
2003-2004<br />
8.2%<br />
US$26.7 US$28.5 US$30.8<br />
% Change Total<br />
HNWI Population<br />
2003 – 2004<br />
Africa 13.7%<br />
Middle East 9.5%<br />
Latin America 6.3%<br />
Asia-Pacific 8.2%<br />
N. America 9.7%<br />
Europe 4.1%<br />
% Change Total HNWI<br />
Wealth, by Region<br />
2003 – 2004<br />
Africa................ 17.3%<br />
Middle East....... 28.9%<br />
Latin America...... 7.9%<br />
Asia-Pacific......... 8.5%<br />
N. America ........ 10.2%<br />
Europe ................ 3.7%<br />
World Wealth Report 2005<br />
3
4 World Wealth Report 2005<br />
1997 and before that in 1983 1 . Last year’s above-average growth also coincided with a peak in worldwide economic recovery.<br />
Interest rates in the United States remained stable and low throughout 2004. The low cost of money drove spending on fixed<br />
investments, which rose 10.2%, compared to a 5.1% increase in 2003.<br />
In 2004, HNWIs in the United States continued to benefit from the Tax Relief Act of 2001 2 . This legislation raised the<br />
threshold of financial assets exempt from estate taxes from US$1million in 2002 - 2003 to US$1.5 million in 2004 - 2005.<br />
Moreover, this protection will steadily increase through the end of the decade; at which point, without congressional action, the<br />
act’s sunset provision will go into effect, returning the tax-exempt level to US$675,000.<br />
Structural Deficiencies Constrain Growth in Europe<br />
2004 witnessed the expansion of the European Union, with 10 new countries admitted as members 3 . While GDP growth<br />
varied from country to country, Germany, France and Italy, which together account for over half of the European Union’s<br />
economic output, remained in an economic trough (Figure 4).<br />
Germany has been plagued by employment problems for the past few years: Rigid labor regulations that make companies<br />
cautious about hiring, coupled with high social insurance benefits, have raised unemployment to unsustainable levels. By March<br />
2005, 5.2 million people were out of work there — the highest number of unemployed citizens since the end of World War II.<br />
These labor problems were compounded further by low workforce productivity. According to Lucas Papademos, Vice President<br />
of the European Central Bank, workforce productivity in Germany stood at about 80% of the United States’ level; in Italy, the<br />
productivity rate was 77%. Jean-Philippe Cotis, Chief Economist of the Organization for Economic Co-operation and Development,<br />
captured the problem succinctly:“Economic rates in the core EuroZone will lag behind those in Asia, Central and<br />
Eastern Europe, and the United States until France, Germany and Italy create and sustain more jobs, particularly for workers<br />
under 25 and over 55 4 .”<br />
Notwithstanding low growth rates in the larger European Union nations, some European economies enjoyed a strong performance:<br />
Ireland led with real GDP growth of 5.6%, having enjoyed relatively high growth rates since the mid-1990s — a result of a<br />
boom in foreign direct investment, fiscal and monetary consolidation, low taxes and favorable demographics. Another strong<br />
Figure 3 | Geographic Distribution of Ultra-HNWIs, 2004<br />
Number<br />
of HNWIs<br />
Worldwide<br />
(in Millions)<br />
Ultra-HNWIs Account for 0.9% of Global HNWI Population<br />
8<br />
6<br />
4<br />
2<br />
0<br />
8.3 77.5<br />
Africa<br />
Middle East<br />
Latin America<br />
Asia-Pacific<br />
North America<br />
Europe<br />
2004 HNWI 2004 Ultra-HNWI<br />
Note: Ultra-HNWI is defined as an individual with more than US$30 million in financial assets<br />
Source: Capgemini Lorenz curve analysis, 2005<br />
1 The growth in both 1997 and 1983 was 4.5% in real terms<br />
2 W.G. Gale and P.R. Orszag, “Bush Administration Tax Policy: Introduction and Background,” Tax Notes [September 13, 2004]<br />
3 Cyprus, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia and Slovenia were admitted to the European Union in 2004.<br />
4 Tony Barber, et al, “In Search of an Antidote to Decline,” The Financial Times, March 7, 2005<br />
80<br />
60<br />
40<br />
20<br />
0<br />
Number of<br />
Ultra-HNWIs<br />
Worldwide<br />
(in<br />
Thousands)<br />
Ultra-HNWIs as<br />
% of HNWIs<br />
Africa................ 1 .9%<br />
Middle East....... 1.0%<br />
Latin America.... 2.3%<br />
Asia-Pacific....... 0.6%<br />
N. America ........ 1.2%<br />
Europe .............. 0.8%
performer in the European Union was the United Kingdom; there, as in the United States, low interest rates fueled growth,<br />
with a 6% increase in fixed investment spending. As a result, the United Kingdom, the second largest economy in the European<br />
Union behind Germany, saw its highest real GDP growth since 2000.<br />
The BRIC Nations Become an Economic Force<br />
Among developing economies, Brazil, Russia, India and China (the BRIC nations) have emerged as an economic force,<br />
together accounting for 41% of the world’s population and 8% of its GDP. Although the combined output of these economies<br />
is a small fraction of world GDP today, the BRIC countries are significant because of their size and fast-paced economic<br />
growth. Goldman Sachs predicts they will overtake the G7 economies in terms of output by 2040 5 . These nations are<br />
geographically large and resource rich, with growth fueled by large inflows of foreign investment. And, as they vigorously pursue<br />
ambitious reform agendas, they are fast becoming regional economic powers.<br />
Similar to 2003, China and India were Asia’s primary success stories in 2004. China, growing at a rate of 9.5%, drove economic<br />
growth across the Asia-Pacific region. Australia, Taiwan, South Korea, Malaysia, Singapore and Japan all benefited, as almost<br />
half of China’s imports came from these countries in 2004.<br />
Looking ahead, however, over-investment and excess capacity are expected to reduce China’s growth in 2005. Last year, the<br />
People’s Bank of China attempted to rein in the overheated economy by raising interest rates for the first time in nine years.<br />
However, as China’s growth slows, many of its neighbors are likely to feel the pinch. India is the lone exception — as its<br />
fortunes are less dependent on China and the overall economy of East/South East Asia.<br />
The other two nations in the BRIC bloc — Russia and Brazil — both scored gains on the strength of their mineral resources.<br />
Russia’s current account balance grew by over 22%. This was hardly surprising since oil and gas, both of which have experienced<br />
a strong run-up in prices, make up over half of Russia’s exports. Brazil, accounting for almost one third of South<br />
American GDP, continued to dominate that continent’s economic landscape. The three pillars of its economic program — a<br />
floating exchange rate, inflation-targeting regime and tight fiscal policy — enabled Brazil to exceed fiscal targets in 2004 and<br />
reduce government debt.<br />
Figure 4. | Real GDP Growth in Selected Economies, 2003 – 2004<br />
10%<br />
8%<br />
6%<br />
4%<br />
2%<br />
0%<br />
3.0<br />
4.4<br />
United<br />
States<br />
2.2<br />
2003<br />
2004<br />
3.1<br />
United<br />
Kingdom<br />
2.8<br />
2.0<br />
Source: Economist Intelligence Unit, March 2005<br />
2.5 2.6<br />
5 “The BRICs Are Coming —Fast,” Business Week, October 2003<br />
0.6<br />
2.3<br />
0.1<br />
1.6<br />
1.0<br />
0.4<br />
0.5<br />
5.2<br />
7.3 7.1<br />
Canada Japan France Germany Italy Brazil Russia India<br />
G7 Nations BRIC Nations<br />
8.4<br />
6.8<br />
9.5<br />
9.3<br />
China<br />
World Wealth Report 2005<br />
5
6 World Wealth Report 2005<br />
However, even as these economies grow, destabilizing forces are at work: The problems surrounding the Russian government’s<br />
intervention in the privatization efforts of Yukos, a large integrated oil producer, made worldwide headlines — and chilled the<br />
interest of foreign investors to such a degree that it drew a statement from United States Secretary of State Dr. Condoleeza<br />
Rice during her trip to Moscow in April 2005.“People are really watching [the Yukos affair] for signals that, indeed, there is rule<br />
of law in Russia," 6 she told reporters.<br />
While strong economic growth is a powerful driver for wealth generation in each of the BRIC nations, there are equally strong<br />
counterbalancing factors — in particular, relatively young and immature stock markets and the slow pace of economic reforms —<br />
that could pose significant risks.<br />
Stock Markets Generate Moderate Gains<br />
2004, as previously noted, was a year of stabilization and an extension of the 2003 recovery. However, while investors rushed<br />
into equities in 2003, a year later they took a more cautious and subdued approach towards stocks. Rising oil prices, too, took a<br />
toll on investor confidence — although, oil and commodity-exporting nations benefited from the higher prices. As a result,<br />
world markets showed mixed returns: Benchmark indices at major stock exchanges rose only moderately, while those in certain<br />
smaller markets showed large increases in market capitalization (Figure 5).<br />
In the United States, small- to mid-cap companies performed well, with the Russell 2000 climbing more than 18%. Market<br />
returns across Western Europe showed a similar range. However, some European economies “imported the growth” of their<br />
Central and Eastern European neighbors: In Austria, for example, the country’s benchmark index (ATX) rose 57%, as the<br />
financial services sector benefited from the prevailing differential in interest rates between Austria and Central/Eastern Europe.<br />
Despite the moderate returns of the world’s major financial markets, certain smaller markets performed well. Oil-and<br />
commodity-exporting nations reaped rich rewards as prices remained strong: The United Arab Emirates’ Shuaa Capital Index<br />
rose by 103%, while South Africa, a net exporter of commodities, saw the market capitalization at its Johannesburg Stock<br />
Exchange ( JSE) rise by 163% in 2004. Driven by high GDP growth rates, market returns were strong in the emerging<br />
economies as well, with the Morgan Stanley Capital International (MSCI) Free index rising more than 24% for the year.<br />
Figure 5 | Returns on Major Stock Market Indices, 2003 – 2004<br />
CAC40<br />
FTSE100<br />
S&P 500<br />
DAX<br />
Nikkei 225<br />
7.6<br />
9.0<br />
8.8<br />
11.2<br />
Source: SunGard PowerData accessed March/April 2005<br />
12.9<br />
13.0<br />
13.0<br />
0 10 20 30 40<br />
6 “Rice talks up Russian Democracy,” BBC News [April 20, 2005]<br />
% Return<br />
24.5<br />
26.4<br />
Price Returns 2004<br />
Price Returns 2003<br />
30.0
HNWI Ranks Continue to Swell<br />
GDP growth and stock market capitalization drove wealth accumulation around the world. In 2004, HNWI populations<br />
grew most in regions that showed both high economic growth and high market returns: most notably the Asia-Pacific region<br />
(Figure 6). Significantly, North America exceeded Europe in both the size and wealth of its HNWI population.<br />
In 2004, North America, with a HNWI population of 2.7 million and total HNWI wealth of US$9.3 trillion, exceeded all<br />
other regions in both the number and accumulated wealth of its HNWI population. The United States, the country with the<br />
largest HNWI population, saw 226,000 more people join the ranks of wealthiest Americans. With an annual growth rate of<br />
9.9%, the United States leads the developed nations in the number of HNWIs created each year. Canada also performed well,<br />
adding almost 17,000 HNWIs to its rolls, owing in large part to rising oil prices.<br />
Europe’s HNWIs grew at the far slower rate of 4.1%, a result of the continued low growth of its largest economies: France,<br />
Germany and Italy. Despite low interest rates across most of Western Europe, high tax burdens in the region hindered personal<br />
wealth accumulation. Against this backdrop, HNWI population growth in the United Kingdom and Spain, at 8.9% and 8.7%,<br />
respectively, appears to be significant. Both of these economies also outperformed the rest of Europe in 2003 in terms of<br />
HNWI growth.<br />
Germany, with the third largest economy in the world and the largest in the European Union, saw its GDP grow by only 1.6%<br />
in 2004. Although this was significantly higher than the 0.1% growth recorded in 2003, it did little to boost HNWI numbers.<br />
The country’s complex and burdensome tax system, high fiscal deficit and record high unemployment constrained growth —<br />
and limited the number of additional HNWIs in 2004, to only about 4,400.<br />
France saw its economy recover as domestic demand drove GDP growth by 2.3% (compared with 0.6% in 2003). However, a<br />
surge in imports and reduced exports took their toll: In early 2005, France experienced a trade deficit for the first time in 12<br />
years. Still, a large number of French multinationals benefited from the global recovery, pushing the CAC40 up by 12.9% in<br />
2004. This upturn carried over into householders’ financial assets, growing the French HNWI population by 2.6%.<br />
Figure 6. | HNWI Population Growth by Country, 2003 – 2004<br />
HNWI<br />
Population<br />
Growth<br />
HNWI<br />
Population,<br />
2004<br />
(in Thousands)<br />
25%<br />
20%<br />
15%<br />
10%<br />
5%<br />
0%<br />
22.4%<br />
21.6%<br />
Singapore South<br />
Africa<br />
18.8%<br />
Note: Growth rates and absolute HNWI numbers are rounded<br />
Source: Capgemini analysis 2005 based on Lorenz curve<br />
14.8% 14.6%<br />
12.3%<br />
Hong Kong Australia India United<br />
Arab<br />
Emirates<br />
10.5% 9.9%<br />
South<br />
Korea<br />
United<br />
States<br />
49 37 67 134 70 53 71 2,498 418 141<br />
8.9%<br />
United<br />
Kingdom<br />
8.7%<br />
Spain<br />
World Wealth Report 2005<br />
7
8 World Wealth Report 2005<br />
In contrast to Western Europe, and continuing last year’s trend, the Asia-Pacific region enjoyed much higher growth rates, with<br />
the HNWI population increasing by 8.2% and HNWI wealth advancing by 8.5%. Within the Asia-Pacific region, Singapore,<br />
Hong Kong and Australia showed impressive growth in HNWI populations, gaining 22.4%, 18.8% and 14.8% more members,<br />
respectively. As noted earlier, these nations benefited from the fast-growing Chinese economy. Hong Kong recorded a boost as<br />
the second phase of the Mainland-Hong Kong Closer Economic Partnership Arrangement (CEPA II) was concluded. That<br />
move, in August 2004, further liberalized trade between the two governments. With tourist arrivals surging by 40% and hotel<br />
occupancy rates averaging 88%, Hong Kong’s GDP expanded by 8.1%, providing an ample base for gains in HNWI wealth.<br />
In export-oriented South Korea, the flow of outbound goods increased by about 20%, which more than compensated for the<br />
low rate of domestic demand. This led to an increase in personal wealth last year and 10.5% population gains among the<br />
country’s HNWIs.<br />
The Outlook for 2005<br />
Economic growth has been on a roller coaster ride since 2001, when stock markets around the world plummeted. In 2002<br />
economies remained in the doldrums. Then came 2003, a year of euphoric recovery; 2004 built upon those gains. Looking<br />
ahead into 2005, we expect a period of slower growth, with the EIU forecasting 3.0% real growth for the world.<br />
As oil prices continue to rise and inflationary fears build, stepped-up monetary tightening will slow GDP growth. As the cost<br />
of borrowing increases, consumers will spend less and outsized debt, easily obtained in 2002 and 2003, will weigh them down<br />
further. This trend is already evident in the United Kingdom, where household debt of 140% of income constrained private<br />
consumption in 2004. Indications of a slowdown also are evident in the United States, where the economy grew at 3.1% in the<br />
first quarter of 2005, its slowest pace in two years, and down from the 3.9% posted in 2004.<br />
Furthermore, in response to monetary tightening, China’s growth is expected to cool off — which may help ease the strains on the<br />
country’s over-heated economy. However, by Chinese standards, slower growth equates to an 8.4% rise in real GDP, which is still<br />
significant when compared to other economies. As we noted earlier, any slowdown in China will be mirrored in the economies of<br />
other countries in the region. India, somewhat less reliant on its northern neighbor, is expected to continue on a growth path.<br />
Figure 7 | HNWI Financial Wealth Forecast by Region, 2004 – 2009E<br />
(US$Trillions)<br />
0.6<br />
0.8<br />
US$<br />
26.7<br />
3.6<br />
5.9<br />
0.6<br />
0.8<br />
US$<br />
28.5<br />
3.4<br />
6.6<br />
0.7<br />
1.0<br />
US$<br />
30.8<br />
3.7<br />
7.2<br />
7.4 8.5 9.3<br />
8.4 8.6 8.9<br />
At 6.5%<br />
Global<br />
Growth<br />
Note: The more conservative growth estimate is based on assumptions that HNWI wealth growth demonstrates cyclical trends similar to economic growth trends.<br />
Expecting an economic slowdown in 2005 and 2006, the CAGR for 2004 – 2009E at 6.5% is slightly lower than the CAGR in last year’s report projected for 2003 – 2008E.<br />
Source: Capgemini Lorenz curve analysis May 2005<br />
All chart numbers are rounded.<br />
0.9<br />
1.5<br />
US$<br />
42.2<br />
5.0<br />
10.1<br />
13.9<br />
10.7<br />
2002 2003 2004 2009E<br />
Annual Growth Rate<br />
2004 – 2009E<br />
Global............... 6.5%<br />
Africa................ 5.6%<br />
Middle East....... 9.1%<br />
Latin America.... 6.4%<br />
Asia-Pacific....... 6.9%<br />
N. America ........ 8.4%<br />
Europe .............. 3.8%
Economic growth prospects on the European Continent remain lackluster. With fiscal deficits exceeding limits allowed by the<br />
European Union’s Growth and Stability Pact, governments have little room to maneuver. Much-needed structural reforms will<br />
have to be enacted in the region if Europe is to emerge from its doldrums.<br />
While a gradual economic slowdown can be expected to follow 2004’s impressive GDP growth, concerns are mounting that the<br />
world economy might hit an air pocket — which could happen if the United States’ dollar were to crash. The dollar’s decline<br />
since early 2002 has made American exports more competitive and has limited the increase in the United States’ current<br />
account deficit. With the United States’ dollar currently trading at close to its 30-year price-weighted average, we believe that<br />
fears of its plunging into a free-fall are largely unsubstantiated.<br />
Still, as world economic growth slows, wealth creation is likely to follow suit. And with geopolitical turmoil, record trade<br />
deficits, low savings rates and high debt levels shaping financial markets, HNWIs will have to navigate carefully to maintain<br />
and enhance their wealth.<br />
In this climate, we expect HNWI wealth to grow at a 6.5% compound annual growth rate and to reach US$42.2 trillion by<br />
2009 (Figure 7).<br />
World Wealth Report 2005<br />
9
HNWI Asset Allocation Strategies<br />
Grow More Conservative<br />
■ Allocations among equities, fixed income and cash/deposits remain stable<br />
■ Private equity investments regained popularity in the second half of 2004<br />
■ Hedge funds begin to move downstream<br />
■ Regional cultures continue to shape allocation strategies<br />
■ Foreign investments keep gaining ground<br />
■ Allocation behaviors are a reaction to a recovering economy<br />
HNWIs Behave More Cautiously<br />
2004 became a “hold-and-see” year for HNWIs. Following two years<br />
of their making more radical changes to their holdings, HNWIs<br />
focused on diversifying their portfolios and adopting more conservative<br />
asset allocations (Figure 8). In 2002, which was not a good year for<br />
equities — stock markets under-performed and overall investor confidence<br />
cooled — HNWIs sought refuge in low-risk asset classes, such<br />
as fixed income and cash/deposits.<br />
2003’s return to more favorable economic conditions, including a<br />
marked upswing in stock market performance and a record low in<br />
interest rates, lured HNWIs back into equities and heightened their<br />
interest in alternative investments. The Dow Jones World Stock Index<br />
gained 33.4% in 2003 — compared to 14.4% a year later, as rising oil<br />
prices and interest rates produced lower stock market returns.<br />
With returns drifting lower and market volatility increasing in 2004,<br />
HNWIs leveled off their commitments to equities. As the year<br />
progressed, HNWIs’ allocation strategies grew more conservative and<br />
more diversified. This trend — illustrated by the US State Street Index,<br />
which saw consumer confidence drop from 98.0 in January 2004, to<br />
89.8 in January 2005 — prompted HNWIs to move allocations somewhat<br />
away from more risky asset classes and into more stable fixed<br />
income and cash deposits. While the rise of interest rates might theoretically<br />
lead investors to postpone investments in bond markets, HNWIs<br />
kept to a more conservative tack, eschewing short-term profits in favor<br />
of safer returns.<br />
7 Cambridge Associates LLC<br />
8 “The Case for Taking a Company Private Grows on Executives,” The Wall Street Journal, April 2005<br />
9 US Hedge Fund Index, Van Hedge Fund Advisors International, LLC. This index is produced from the company's database of hedge funds, one of the world's largest.<br />
10 World Wealth Report 2005<br />
HNWIs Regain Interest in Private Equity<br />
HNWIs’ maturing financial sophistication can be seen in their growing<br />
interest in — and reliance on — a wide range of alternative investments.<br />
In fact, the extent of HNWIs’ diversification in this asset class is such<br />
that some products must now be considered on their own merits.<br />
Private Equity: One of the most striking investment trends of 2004<br />
was HNWIs’ renewed interest in private equity investing. Investment<br />
specialists widely interpret the considerable flow of funds into this asset<br />
class in the second half of 2004 as further evidence of HNWIs’ growing<br />
conviction that high valuations can be a much more dependable wealth<br />
development strategy than volatile stock markets. Indeed, the United<br />
States Private Equity Index, with returns of 23.5%, outperformed other<br />
major market indices in 2004 (Figure 9) 7 . This growth continued into<br />
2005 — amid whispers that records set during the peak of the dot-com<br />
era in 2000 may soon be broken — as investments flowing into private<br />
equity funds near the $200-billion mark 8 . For now, Ultra-HNWIs and<br />
institutions remain the primary investors in private equity. According to<br />
financial advisors, the United States remains the most important geography,<br />
but Europe is in a fast-growing second position.<br />
Hedge Funds: This asset class accounts for a growing share of HNWIs’<br />
alternative investments, having become an integral part of most private<br />
banks’ standard offerings. In fact, there are now nearly as many hedge funds<br />
in existence as there are mutual funds. However, financial advisors report<br />
that the rate at which HNWIs are betting on these investments has slowed<br />
since 2003, as returns have declined from 17.2% in 2003 to 7.5% in 2004 9 .<br />
More often today, hedge funds are seen as a route to portfolio diversification<br />
rather than as a heavy-return generator.
The hedge fund industry has responded to broader interest in its products, targeting smaller — i.e., less affluent — investors<br />
with funds composed of hedge funds. Minimum investment levels in these new funds can be as low as US$25,000, significantly<br />
less than the $250,000+ stake amounts typically required by hedge funds 10 . This is just one more example of how high-end<br />
investment opportunities that were once the exclusive domain of institutions and Ultra-HNWIs are being modified and made<br />
available to HNWIs and “mass affluent” individuals. Currently, funds of hedge funds account for more than 25% of the hedge<br />
fund market.<br />
Real Estate’s Glow Flickers<br />
HNWIs’ real estate allocations declined over the last year, from 17% in 2003 to 13% by the end of 2004. While our research<br />
does not show a net outflow in this asset class, we believe this relatively low allocation rate signals HNWIs’ desires to harvest<br />
returns from now premium-priced holdings to direct profits into other asset classes.<br />
This is in sharp contrast with broader market trends of price inflation and stepped-up speculation brought on by record low<br />
mortgage-interest rates 11 . The price of the median single-family home in the United States rose by 7.4% in 2004, following a<br />
7.5% increase in 2003 12 . And even though interest rates increased in 2004, pushing borrowing costs higher and pricing countless<br />
potential home buyers out of the market, property prices have not yet dropped. Furthermore, prices in many regions have<br />
grown faster than household income or rent, providing more evidence that real estate has become overvalued.<br />
Further indication of a pending slowdown: Real estate investment trusts’ (REITs) returns were lower in 2004 than in 2003.<br />
Indeed, overall, apartment REITs were hurt in previous years as the affordable housing market turned renters into homeowners.<br />
As we observed earlier, with HNWIs growing steadily more risk averse in 2004 than they were in 2003, the fact that they now<br />
perceive real estate as a riskier investment justifies HNWIs adopting a more cautious approach towards this asset class. And, in<br />
fact, total assets for real estate mutual funds in the United States decreased by 0.5%, from $43.9 billion at year-end 2004, to<br />
$43.7 billion by April 2005 13 .<br />
This behavior, which appears to be in anticipation of the sector overheating, is consistent with our belief that HNWIs are, in general,<br />
more informed than the average investor and, also, that they possess the means to reallocate resources ahead of main market trends.<br />
Figure 8 | HNWI Asset Allocations by Investment Class, 2002 – 2004<br />
100%<br />
10%<br />
15%<br />
25%<br />
30%<br />
20%<br />
2002<br />
100%<br />
13%<br />
17%<br />
10%<br />
25%<br />
35%<br />
2003<br />
Alternative Investments*<br />
Real Estate**<br />
Cash/Deposits<br />
Fixed Income<br />
Equities<br />
Note: * Includes: Structured products, hedge funds, managed funds, foreign currency, commodities (including precious metals), private equity and investments of<br />
passion (fine art & collectables)<br />
**Includes: Direct real estate investments and REITS, which are not common instruments outside the United States<br />
Source: Capgemini/Merrill Lynch Relationship Manager Surveys, March 2003, April 2004, April 2005<br />
10 “Hedge Funds Target Small Investors,” The Wall Street Journal, April 2005; SEC filings; company reports<br />
11 National Association of Realtors: United States home sales increased 4.9% from 2003 to end of Q1 2004, establishing a record of new homes sales in March.<br />
12 National Association of Realtors<br />
13 Merrill Lynch research report<br />
100%<br />
14%<br />
13%<br />
12%<br />
27%<br />
34%<br />
2004<br />
World Wealth Report 2005<br />
11
12 World Wealth Report 2005<br />
Regional Differences Shape Allocation Strategies<br />
In North America, equities remain the asset class of choice among HNWIs, winning 41% of their investment dollars. While<br />
this trend now seems to be fading slowly, North American portfolios remain the least balanced among asset classes, with<br />
HNWIs here showing far less interest/allocation in alternative investments than their counterparts in Europe, Asia-Pacific and<br />
the Middle East. However, in Canada, hedge funds were quite successful in 2004, and currently account for a higher share of<br />
HNWIs’ financial assets (7.5%) than in either the United States or in Europe, according to the 2004/2005 Canadian Wealth<br />
Management Market Report from Capgemini Canada. The report further points out that alternative investments, such as<br />
hedge funds and private equity, were among the fastest growing assets held by Canadian HNWIs in 2004.<br />
In 2004, the portfolios of HNWIs in the Asia-Pacific region held the most equally distributed asset classes of wealthy individuals<br />
in any region. Real estate allocations were high in this region, accounting for 19% of HNWIs’ portfolios. Only European<br />
HNWIs allocated more — 21% — of their investment holdings to this asset class, the majority of which are in direct real<br />
estate. Portfolios of European HNWIs also are well diversified, with 25% in equities and 24% in fixed income assets.<br />
While HNWIs continue to view managed futures as an efficient diversification product, financial advisors in Europe<br />
mentioned that the high fees associated with these products kept HNWIs from investing deeply in this asset class.<br />
In 2004, Latin American HNWIs made a concerted effort to sidestep volatile financial markets by limiting their exposure to<br />
equities and moving into revenue-generating, risk-balancing products such as hedge funds and managed futures. Consequently,<br />
Latin American HNWIs’ equity allocation was the lowest of any region in the world, at 18%. And alternative investments,<br />
especially private equity bets, won a higher share — 25% — of Latin American portfolios than elsewhere.<br />
In Latin America, HNWIs’ asset allocations are largely shaped by traditional investment behaviors. Wealthy individuals typically<br />
adopt conservative investment strategies to preserve their wealth in the region’s high-risk, difficult-return environment.<br />
Thus, allocations tend to favor safer asset classes, with almost one third held in fixed income (a large portion of which is held in<br />
the United States).<br />
Figure 9 | Private Equity Outperformed Other Market Indices in 2004<br />
US Private Equity Index<br />
Russell 2000<br />
Dow Jones Wilshire 5000<br />
Russell 1000<br />
S&P 500<br />
Nasdaq Composite<br />
Dow Jones Industrials Average<br />
0 5 10 15 20 25<br />
Source: Cambridge Associates LLC, Russell, Dow Jones, Wilshire Associates, Standard & Poor’s, Nasdaq<br />
5.3<br />
9.2<br />
10.9<br />
11.4<br />
% Return<br />
12.5<br />
18.3<br />
23.5
HNWIs Use Foreign Investments to Diversify<br />
Two diversification trends gathered momentum in 2004: Emerging economies continued to attract HNWIs’ investments, with<br />
the MSCI Emerging Markets Free Index returning 24.3% in 2004, far higher than the 6% to 13% returns possible in either<br />
European or American markets. And Asia-Pacific benefited from an outflow of investments from North America, Europe and<br />
Latin America.<br />
Overall, HNWIs increased their foreign investments, continuing a trend we reported a year earlier. North America remained<br />
the preferred region for investment, drawing a substantial range of allocations from offshore investors, from a low of 28%<br />
among Asia-Pacific HNWIs to a high of 46% from wealthy Latin Americans 14 . However, growing fear of a crash in the United<br />
States dollar led to broader foreign-investment diversification among HNWIs in all regions. Consequently, North America’s<br />
overall share of non-North American HNWIs’ assets dropped from 48%, to 38% in 2004 15 . Even in the United States, where<br />
investors traditionally favor domestic assignment of their investments, overseas holdings grew to 30% 16 of American HNWIs’<br />
financial assets. Still, the Americans’ ratio is the smallest allocation to offshore assets of HNWIs worldwide.<br />
Furthermore, while 2003 saw North Americans seeking to leverage what were almost exclusively domestically held tax-efficient<br />
holding structures, our 2004 research revealed an important shift by this group into offshore tax havens. Moreover, this trend<br />
has continued into 2005, according to The Sovereign Group.<br />
Europeans also increased their share of assets invested in offshore tax havens, while HNWIs from Asia-Pacific showed they<br />
were more averse to offshore investing than they were a year earlier. Bermuda, the Cayman Islands and the British Virgin<br />
Islands continued to be the locations of choice for HNWIs’ tax-protected investments 17 . However, in light of HNWIs’ more<br />
sophisticated investment behaviors, specialized safe havens have become increasingly popular, with Panama, Liechtenstein,<br />
Hong Kong and the Isle of Man most often cited as preferred destinations for specific asset classes 18 .<br />
Some institutional investors, such as pension funds, that have traditionally held assets in stocks and bonds also have begun to<br />
invest abroad as well as in currency markets to improve performance and counter low bond yields and volatile equity markets.<br />
These foreign-exchange market trades currently account for $2 trillion daily — but this is still a relatively early point in the<br />
HNWI adoption cycle.<br />
While we expected HNWIs’ foreign currency investments and speculation to increase with the asset class’s growing volatility,<br />
their interest was dampened by mounting anti-terrorism concerns and the recent passage of legislation — such as the United<br />
States’ Patriot Act — seeking to monitor individual behavior in the area of currency investing.<br />
United States Dollar’s Decline Impacts Allocations<br />
HNWIs’ fear of the falling dollar drove significant shifts in their allocation strategies. As we observed in the past, for example,<br />
during the dollar’s devaluation in the late 1980s, investors typically respond to falling currencies by investing in more stable asset<br />
classes such as commodities or gold. This investment flow usually benefits countries with stable currencies and emerging<br />
economies where commodities and gold attract funds. In 2004, this shift towards commodities led HNWIs to allocate more to<br />
alternative investments and also to increase their offshore holdings. HNWIs outside of the United States adapted their portfolios<br />
to the fall of the dollar, moving more of their assets into regions such as Asia-Pacific and away from North America, as<br />
noted previously.<br />
14-17 Capgemini/Merrill Lynch Relationship Manager Survey, March 2005.<br />
18 The Sovereign Group, www.sovereigngroup.com<br />
World Wealth Report 2005<br />
13
Spotlight<br />
Mid-Tier Millionaires Caught in the Middle<br />
THE MID-TIER MILLIONAIRE PARADOX<br />
■ The mid-tier millionaires – HNWIs with between US$5 million and US$30 million in financial wealth – stand out in the<br />
affluent market as an under-served group<br />
■ Mid-tier millionaires have responded to increasing wealth management complexities by hiring more advisors and are<br />
overwhelmed with “managing their managers”<br />
■ Family offices present a ready solution, but are often unaffordable for many in the mid-tier millionaire market<br />
What does it take to be truly wealthy? Opinions on this question vary<br />
greatly, but by most accounts, people with at least US$1 million in<br />
financial wealth are members of an elite group of individuals around<br />
the world. They account for 0.2% of the global adult population and<br />
nearly one fourth of the world’s wealth 19 . Yet, for all their resources,<br />
HNWIs must consistently manage their wealth extremely well in<br />
order to maintain their affluent lifestyles. For an increasing number of<br />
HNWIs, this task is growing more difficult.<br />
These challenges are most acutely felt by a burgeoning segment of<br />
HNWIs: Those with investable assets between US$5 million and<br />
US$30 million. We call this group mid-tier millionaires (MTMs). Why<br />
is this extraordinarily wealthy group of individuals so adversely affected?<br />
The answer is remarkably simple: It is a “tweener” wealth band.<br />
The majority of HNWIs have between US$1 million – US$5 million,<br />
and while their financial lives are by no means simple, they have not<br />
achieved the level of wealth that triggers a geometric increase in the<br />
complexity of managing their assets and liabilities. At the other end of<br />
the spectrum, uber-wealthy multi-decamillionaires — the ultra-highnet-worth<br />
set — have access to and can afford the cost of running a<br />
family or private office to which they can comfortably delegate nearly<br />
all of their wealth management activities.<br />
From a service standpoint, MTMs are trapped between these two<br />
groups: They have product and service needs that often are as complex<br />
as those of much wealthier individuals, yet they lack the wealthiest<br />
group’s deep financial resources. As a result, they are forced to do<br />
19 Capgemini Lorenz curve analysis, 2005<br />
20 Forrester Research, 2004<br />
14 World Wealth Report 2005<br />
business with a wide range of specialist providers as they attempt to<br />
manage their own wealth.<br />
This year, approximately 9% of the world’s HNWIs fit the MTM<br />
profile. While the total HNWI population grew at 7.3% from 2003<br />
to 2004, the number of MTMs grew 7.9%. These individuals tend<br />
to be corporate executives or small- and mid-sized business owners,<br />
who are usually the first in their respective families to have become<br />
wealthy. Generally, earned income represents the largest portion of<br />
their financial assets.<br />
The Complex Lives of the “Not-so-Jet Set”<br />
Many factors contribute to the MTMs’ increasing difficulty in managing<br />
their wealth. According to our most recent survey of relationship<br />
managers, MTMs:<br />
■ Demand disciplined approaches to managing risk:<br />
MTMs today seek to counterbalance their increased appetites for<br />
risk-taking with a more disciplined approach to managing wealth and<br />
cash flow. Why? More than two thirds of MTMs saw their wealth<br />
fluctuate significantly during the recent bear market, and more than a<br />
quarter of this group was forced to change their lifestyles and/or<br />
spending habits 20 . To make up for lost ground, MTMs tended to<br />
pursue wealth building strategies in recent years that forced them to<br />
assume greater risk. As a result, within this group there is an emphasis<br />
on risk management and optimizing cash flow to ensure that<br />
spending needs are met.
■ Face wealth transfer challenges:<br />
Around the globe, the tens of thousands of baby boomers retiring every day are suddenly being confronted with their own<br />
mortality and the legacies they will leave — financial and otherwise. A majority of the relationship managers we surveyed<br />
reported that a rapidly growing number of their HNWI clients, including those in the MTM segment, have begun involving<br />
other generations in the wealth management process (Figure 11). At the same time, 45% of relationship managers said that<br />
MTMs are ill-prepared to pass on their wealth to their heirs. When brought together, these data points suggest a storm<br />
brewing around wealth transfer. As MTMs attempt to address the concerns of younger generations, which are often very<br />
different from those of their parents, there is potential for significant conflict.<br />
■ Juggle global assets and relationships:<br />
Today, more than a quarter of MTM clients invest in offshore safe tax havens — and many more are interested in investment<br />
opportunities in emerging economies, according to relationship managers. Pursuing these strategies puts additional pressure on<br />
MTMs to find reliable investment information and then coordinate relationships with service providers around the globe. A<br />
comment from one MTM European illustrated the scope of this challenge:“I work with a bank in France that focuses<br />
primarily on execution, another in Germany that I rely on for investment advice, and a third in Singapore, where I need the<br />
local knowledge.”<br />
■ Demonstrate increasing sophistication:<br />
Our research found that 89% of relationship managers believed that their MTM clients are looking more strategically, rather<br />
than opportunistically, at investment return and performance. This, coupled with the adoption of more complex investment<br />
strategies and asset allocations, has prompted greater numbers to take active roles in the management of their wealth.<br />
Reflecting this trend, 83% of relationship managers said that clients in the MTM segment have become more engaged in<br />
their investments over this past year than they have in years past.<br />
Painted into a Corner<br />
Mid-tier millionaires have responded to the growing complexity of wealth management by expanding their network of<br />
specialist providers. Today, for example, it is not uncommon for an MTM with US$5 million in investable assets to have more<br />
Figure 10. | HNWI Population by Financial Assets, 2004<br />
Mid-Tier<br />
Millionaires<br />
Ultra–HNWIs<br />
+ US$30<br />
Million<br />
US$5 Million –<br />
US$30 Million<br />
US$1 Million – US$5 Million<br />
Note: Growth rates and HNWI population numbers are rounded”<br />
Source: Capgemini Lorenz curve analysis, 2005<br />
Number of HNWIs<br />
Worldwide, 2004<br />
(in Thousands)<br />
77.5<br />
744.8<br />
% Change<br />
in HNWI Population<br />
2003 – 2004<br />
8.9%<br />
7.9%<br />
7,445.8 7.2%<br />
World Wealth Report 2005<br />
15
16 World Wealth Report 2005<br />
For the Ultra-Wealthy, the Cost of Living Escalates<br />
Even as they work to protect their assets, price inflation takes its toll on the world’s wealthiest consumers.<br />
In 2004, the ultra-wealthy population segment grew more quickly than those more broadly termed high-net-worth<br />
individuals: During the year, 6,300 people, a 8.9% gain, joined the uppermost ranks of the world’s richest individuals,<br />
compared to a more moderate 7.3% population increase for HNWIs overall.<br />
While this trend meant that more people could afford the finest things the world has to offer, price inflation for<br />
top-of-the-line luxury goods and services rose at a faster pace than mass-produced consumer products.<br />
According to Forbes Magazine’s Cost of Living Extremely Well Index (CLEWI), price changes to a “basket” of<br />
luxury goods and services rose by 4.2% in 2004. By contrast, during the same 12-month period, the United<br />
States’ Consumer Price Index rose by only 3% — evidence that luxury goods and services are subject to different<br />
inflationary pressures than those consumed by the public at large.<br />
Using CLEWI as a base, the World Wealth Report has created two modified indices that separate Ultra-HNWIs’<br />
luxury consumption from that of the HNWIs. The Ultra-HNWI index focuses on price changes of products and services<br />
typically reserved for the wealthiest individuals (private jets, Rolls Royces, luxury yachts, etc.), whereas the HNWI<br />
basket of goods contains relatively lower-priced items in the same categories (first-class airfare, BMWs, motor<br />
yachts, etc).<br />
According to our analysis, the Ultra-HNWI index rose by 11.3% — while goods and services more broadly favored<br />
by HNWIs increased by only 6.4% between 2003 and 2004. Clearly, in this time period, the price inflation for<br />
ultra-luxury products was considerably stronger than that of more moderately priced luxury items.<br />
This rising trend-line translates into a two-fold challenge for Ultra-HNWIs: To maintain their lifestyles and<br />
purchasing power, the world’s wealthiest must not only closely manage the people who manage their wealth,<br />
they also must contend with an inflation rate that is nearly four times higher than the “regular” inflation.<br />
Price Inflation of Luxury Goods, 2003-2004 (%)<br />
Price<br />
Inflation<br />
2003-2004<br />
(%)<br />
12%<br />
10%<br />
8%<br />
6%<br />
4%<br />
2%<br />
0%<br />
6.4%<br />
Source: Jody Yen, “The Cost of Being Rich,” Forbes Magazine, October 11, 2004<br />
11.3%<br />
WWR HNWI Index WWR Ultra-HNWI index<br />
3% United States<br />
Consumer Price Index
than three service providers managing a portion of their portfolios 21 . Add to that the MTMs’ equally pressing needs for<br />
banking, insurance, trust and estate planning, accounting and legal services and it quickly becomes clear just how daunting a<br />
challenge overseeing the management of their wealth is for these individuals. Moreover, this is a challenge that is not likely to<br />
diminish any time soon: Thirty-six percent of relationship managers noted an increase in the number of external providers for<br />
their HNWI clients, including those in the MTM segment, in 2004. An even greater number, 62%, said this number would<br />
continue to climb in 2005.<br />
For their part, MTMs struggle with this paradox: They thirst for simplification (over one third said they want to consolidate<br />
the number of financial firms they work with 22 ) — even as they continue to adopt more complex wealth strategies and add<br />
advisors. Few are satisfied with their current situation. As Jay Welker, Senior Vice President at Wells Fargo Private Client<br />
Services said:“This notion that clients want to disaggregate functions and do five different things with five different advisors is<br />
not true. Clients are constantly testing to see if their advisor can truly be quarterback for all of their relationships."<br />
Finding a solution will not be easy — though the solution requirements are becoming increasingly apparent. MTMs need:<br />
■ A trustworthy maestro:<br />
MTMs want a central advisor who can sit in the middle of all the financial activity, make sense of it and play maestro to<br />
ensure that all parties are working from the same script. Elevating a single advisor to this kind of a position requires trust —<br />
which is in short supply in today’s world. In fact, consumer research indicates that investors’ trust in wealth management<br />
service providers has steadily eroded in recent years 23 .<br />
■ Transparency:<br />
MTMs want increased transparency from the investment managers handling their financial affairs. One sign of this trend is<br />
evident in HNWIs’ increased demands for customized reporting, as noted by more than 90% of the relationship managers<br />
we polled. Nearly the same number, 89%, said client reporting has become more complex, driven by a combination of<br />
factors: increased diversification of holdings, demand for more indexed performance measures, and a growing desire to see<br />
information presented in a way that measures progress against financial or life goals.<br />
Figure 11. | Growth of Multi-Generational Client Relationships, by Client Type, 2002 – 2004<br />
75%<br />
50%<br />
25%<br />
0%<br />
44%<br />
13%<br />
Mass Affluent<br />
(US$250,000 – US$1 Million)<br />
21 MLIM marketing research<br />
22 Spectrem Research, 2005<br />
23 Spectrem Research, 2005 and Forrester Research, 2003-2005<br />
60%<br />
1%<br />
HNWI Clients<br />
(US$1 Million – US$30 Million)<br />
Source: 2005 Capgemini/Merrill Lynch Relationship Manager Survey, April 2005<br />
% of Relationship Managers reporting changes in number of<br />
multi-generational client relationships over 2 years<br />
Increase Decrease<br />
35%<br />
2%<br />
Ultra-HNWI Clients<br />
(>US30 Million)<br />
World Wealth Report 2005<br />
17
18 World Wealth Report 2005<br />
To meet client demand for transparency, ABN AMRO recently launched the first international index, which provides visibility<br />
on how effectively its private bank is managing client portfolios 24 . This is a change from the traditional — i.e., more<br />
confidential — nature of the private banks.<br />
■ Collaboration among third-party providers:<br />
MTMs and their advisers need to closely coordinate activities among third-party service providers — such as accountants<br />
and estate and tax attorneys — to execute complex wealth strategies. However, many MTM primary advisors today lack the<br />
tools, processes or personnel to efficiently and effectively take on such a burden.<br />
■ Institutionalized wealth management processes:<br />
More and more MTMs are adopting institution-like processes to manage their wealth, asking service providers for financial<br />
and estate plans, philanthropic and charitable giving plans, investment policy statements and regular risk assessments. But<br />
according to relationship managers, less than half of MTMs have actually created formal plans and supported them with<br />
appropriate documentation and processes. Firms and relationship managers who step into this breach will find a tremendous<br />
opportunity to play a valuable and central role in their clients’ financial lives — and win trusted maestro-status. Creating<br />
standardized and repeatable processes are essential to make these services scalable.<br />
Family Offices: So Close, But Yet So Far<br />
The family office dates back to the early 1800s, when tycoons capitalizing on the opportunities of the industrial revolution brought<br />
financial, legal and accounting experts together under one roof to focus solely on managing and protecting their family’s wealth and<br />
far-flung business interests. Then, as now, establishing a family office or joining forces with others to form a multi-family office is a<br />
privilege only the most affluent individuals — those with US$100 million or more in investable assets — can afford.<br />
Yet, the classic family office model is exactly what the MTM is looking for: A simplified service model that delivers consolidated<br />
reporting, a broad and multi-generational view of wealth management, unbiased advice and coordinated and well-timed<br />
service delivery from multiple providers. Moreover, MTMs’ interest in the family office model will intensify in coming years,<br />
according to 44% of relationship managers surveyed.“[This is the next] logical phase for the financial planner of the 80s and the<br />
investment manager of the 90s…,” said Peter Wheeler from FamilyOfficeNetwork LLC 25 .<br />
Figure 12. | HNWIs Add External Providers, 2004-2005<br />
2005 Survey Results<br />
Number of<br />
Relationship<br />
Managers<br />
Polled<br />
75%<br />
50%<br />
25%<br />
0%<br />
Source: Capgemini/Merrill Lynch Relationship Manager Survey, April 2005<br />
24 “ABM AMRO Launches Performance Index for Private Banks,” The Financial Times, April 21, 2005<br />
25 Lisa Gray, “The New Family Office,” Institutional Investor Books, 2004<br />
36%<br />
RMs Saw HNWI Clients Add External<br />
Providers in 2004<br />
62%<br />
RMs Believe HNWI Clients Will Add<br />
External Providers in 2005
The challenge for service providers has always been to sustain profitability while providing the highest possible levels of service<br />
to affluent clientele. Family offices, with access to top talent, can easily cost more than US$2 million a year to operate — which<br />
raises the critical question: How will firms deliver family-office-like features, such as larger service teams, improved access to specialists,<br />
aggregated reporting, and increased advice on and access to third-party products, to mid-tier millionaires? (See page 20.)<br />
Figure 13. | Mid-Tier Millionaires Like What They See in the Family Office Model<br />
Characteristics Traditional FSI* Approach Family Office Model<br />
Wealth<br />
Management<br />
Methodology<br />
Process<br />
&<br />
Pricing<br />
Products<br />
&<br />
Services<br />
• Product-oriented<br />
• Investment-management focused<br />
• Advice centered on “in-house” portfolio only<br />
• Little or no coordination/collaboration with<br />
third-party providers<br />
• Service oriented toward individual mid-tier millionaires<br />
• Transaction-based pricing now moving towards AUM or<br />
“by service” fee-based model<br />
• Ad-hoc investment process; reacts to market conditions<br />
• Portfolio reviews based on standard templates<br />
• Advice & Planning to develop personalized wealth<br />
management plan:<br />
• Set objectives<br />
• Develop strategy<br />
• Implement solutions<br />
• Review progress<br />
• Banking Services:<br />
• Direct deposit, check writing, funds transfer, etc.<br />
• Business Financial Services:<br />
• Integrated cash management, business banking, etc.<br />
• Credit & Lending:<br />
• Home, personal, investment and business financing<br />
• Estate Planning:<br />
• Trust services, tax assessments, etc.<br />
• Investment Management<br />
• Retirement planning<br />
Note: * Financial Services Institution<br />
Source: John Carrol, “The Functions of a Family Office,” The Journal of Wealth Management, Vol. 4 No. 2, Fall 2001<br />
• Product neutral<br />
• Investments are managed in the context of the<br />
family “balance sheet”<br />
• Advice reflects a full view of client’s assets<br />
• Coordinates/collaborates with all providers to<br />
develop an integrated wealth strategy<br />
• Service focuses on the mid-tier millionaire<br />
family “entity”<br />
• Historically AUM-based pricing<br />
• Investment process is often documented and<br />
standardized, according to agreed-upon<br />
investment policy<br />
• Portfolio reviews are regularly scheduled and<br />
customized, according to client’s needs and<br />
preferences<br />
• Chief Advisor: Oversees relationships with all product<br />
and service providers, external counselors/advisors;<br />
provides personalized service, technical expertise and<br />
creative business leadership<br />
• Investment Manager: Manages, analyzes and reviews<br />
family’s financial capital, including: investment policy,<br />
manager selection/review, asset monitoring/review<br />
and due diligence<br />
• Financial Administrator: Ensures asset allocation<br />
mirrors client’s investment philosophy; tax<br />
compliance; financial control; project management;<br />
and financial reporting<br />
• Trustee: Educates and mentors: administers family<br />
trusts, ensures timely communications; and oversees<br />
philanthropic management<br />
• Back Office Manager: Provides investment and<br />
partnership accounting, client reporting, internal<br />
controls and technology support<br />
World Wealth Report 2005<br />
19
20 World Wealth Report 2005<br />
Can the Family Office Resolve the MTM Paradox?<br />
In Spectrem Group’s 2005 Ultra High Net Worth Study, mid-tier millionaires (MTMs) themselves confirm what we<br />
heard from relationship managers and financial services executives around the globe: Despite their seemingly<br />
vast fortunes, MTMs don’t have it easy when it comes to managing their wealth.<br />
As financial firms bring institutional wealth management strategies down market, they have made available a raft<br />
of new, highly complex products and services to the under US$30-million set. But when many MTMs buy these<br />
new instruments and approaches, they are not doing so from their existing providers. In fact, 44% believe that<br />
they should use different specialists for each financial need because no single provider can be good at everything.<br />
The number of investment advisors MTMs use continues to rise as well — with an average of 2.82<br />
advisors per MTM, up from 2.66 just two years ago.<br />
So what’s the problem? MTMs struggle to validate the advice they receive from multiple providers, coordinate<br />
different provider’s activities and track the progress of their wealth strategies across their numerous portfolios.<br />
Paradoxically, even as they continue to add providers MTMs long for a simpler solution: Nearly four in ten are<br />
looking to consolidate the number of firms they work with and almost 70% want a single provider to coordinate<br />
their financial affairs and their growing list of providers.<br />
How can this paradox be resolved? We think family-office-like services form the basis of the solution, but it will<br />
not be a clear-cut or simple path by any means. More than half of MTMs want to work with firms that have<br />
specialized practices targeted to their wealth levels. Just 15% consider themselves very familiar with the<br />
concept of single- or multi-family offices and only 4% say they are very likely to use one in the near future. Until<br />
firms make these services affordable, accessible and specific to the unique needs of this market segment,<br />
family offices will remain a far-off concept for all but the supremely wealthy.<br />
Can Family Offices Resolve the MTM Paradox?<br />
40%<br />
35%<br />
30%<br />
25%<br />
20%<br />
15%<br />
10%<br />
5%<br />
0%<br />
45%<br />
40%<br />
35%<br />
30%<br />
25%<br />
20%<br />
15%<br />
10%<br />
5%<br />
0%<br />
MTMs Looking to Consolidate<br />
their Relationships to Fewer Firms<br />
31%<br />
Source: Spectrem Group 2005 Ultra High Net Worth Study<br />
38%<br />
2004 2005<br />
MTMs Need to Go to Different<br />
Specialists for their Financial Needs<br />
43%<br />
44%<br />
2004 2005<br />
75%<br />
50%<br />
25%<br />
0%<br />
3.00<br />
2.50<br />
2.00<br />
1.50<br />
1.00<br />
0.50<br />
0.00<br />
60%<br />
68%<br />
2004 2005<br />
2.66<br />
MTMs Prefering to<br />
Work with One Advisor<br />
MTMs’ Average Number of<br />
Different Types of Advisors Used<br />
2.82<br />
2004 2005
Solving the Mid-Tier-Millionaire Paradox<br />
■ VSNs will allow providers to scale family-office-like services to mid-tier millionaires<br />
■ Some institutions are beginning to offer such “downstream” solutions but a VSN model has yet<br />
to emerge<br />
■ Firms will need to invest in account and data aggregation, online collaboration and wealth<br />
management workflow tools to make VSNs a reality<br />
While there is clearly a gap today between what mid-tier millionaires want and need and what is available to them in the<br />
marketplace, we found many signs that this gap is rapidly closing. We believe that a new model of service will emerge over the<br />
next three to five years that will enable MTMs to better manage their multiple provider relationships and better orchestrate<br />
multi-generational wealth strategies. This new model will bring the simplicity and convenience of the family office to MTMs at<br />
a price point more appropriate to their wealth level.<br />
We use the term virtual service network (VSN) to describe this new model. The VSN combines state-of-the-art technology<br />
and standardized processes to allow collaboration among the multiple service providers attending to an MTM’s interests.<br />
Geographically disbursed teams will be able to work together in a virtual environment using a workflow-oriented process to<br />
“assemble” various parts of a wealth management strategy into a coordinated whole. This model should enable firms to cost<br />
effectively and affordably deliver family-office-like services to MTMs.<br />
Figure 14. | The Operating Model for the Virtual Service Network<br />
External<br />
Investment<br />
Managers<br />
Investment<br />
Management<br />
Data<br />
Aggregation<br />
Financial<br />
Planning<br />
Other Providers<br />
(accountants, lawyers, etc.)<br />
Primary Advisor<br />
Workflow<br />
MTM Clients<br />
Client Service<br />
& Reporting<br />
Online<br />
Collaboration<br />
Banking &<br />
Financial<br />
Administration<br />
MTM Family<br />
Members<br />
World Wealth Report 2005<br />
21
22 World Wealth Report 2005<br />
What will the VSN look like? In the hypothetical example of the sale of an investment property, a geographically dispersed set<br />
of bankers, investment managers, accountants and lawyers can work together via a VSN website set up by an MTM’s primary<br />
advisor. After logging-in, each service provider is prompted through a discrete set of tasks, tailored to each one’s respective role<br />
in the transaction. Next, the proceeds of the sale are transferred for investment in three separate portfolios — all without<br />
anyone, including the client, having to leave the comfort of their own office.<br />
By contrast, for MTMs conducting similar transactions today, the process would likely entail a series of face-to-face meetings<br />
with numerous groups of service providers, using processes that would be time-consuming, manual and costly.<br />
Some early examples of VSN-like infrastructure are beginning to emerge today, with providers not only offering online access<br />
to all of their clients, but also allowing external providers access to log-in IDs. This allows external service providers to view and<br />
even transact in the accounts custodied there upon appropriate client approval.<br />
The “virtual” part of the VSN will do more than just eliminate the need for co-location: Workflow-oriented processes would<br />
enable complex transactions to be handled efficiently in large volumes, further reducing costs. By giving self-service access to the<br />
ever-increasing number of service providers with whom they share clients, firms will reduce the burden placed upon their<br />
maestro-playing relationship managers, thereby allowing them to maintain high levels of productivity and serve more clients —<br />
while keeping overhead low.<br />
The Path to Trusted Maestro Leads to Value<br />
Though the challenge of establishing the network and persuading third-party providers to participate in it will be a steep one, it<br />
is likely to be a task many relationship managers will volunteer for, seeing a chance to become a MTM’s trusted maestro — and<br />
win the higher wallet share and asset retention that come with the job.<br />
In fact, many Ultra-HNWI providers already have begun positioning themselves to capture maestro-status within the MTM<br />
market. Firms such as Bessemer Trust have built platforms to support multi-family office (MFO) models, which has helped<br />
them grow efficiently and scale their service delivery while at the same time reducing account minimum requirements. From a<br />
competitive standpoint, however, these entrepreneurial MFOs may not necessarily be in the best position to capitalize on the<br />
MTM opportunity because of the significant investment required. As Jeff Roush, Senior Managing Principal with CEG<br />
Worldwide and former Harris Private Bank/MyCFO Family Office executive noted:“The infrastructure [in terms of talent<br />
and technology] that is required to really scale the MFO model is significant.”<br />
Major HNWI service providers such as Merrill Lynch also are expanding their focus and investment in family-office-like<br />
services, putting resources into technologies and processes that could allow these efforts to scale and lower account minimums,<br />
but the game is certainly far from over. The traditional family-office focus on open architecture, integrated professional services<br />
and highly customized services is dramatically different from the typical bank or brokerage model. Added Roush:“Getting large<br />
banks and brokerages [who have the capital to invest in building the necessary infrastructure] to re-train their people culturally<br />
to accept this challenge is the biggest problem.”<br />
Leveraging Emerging Technologies<br />
Though many firms are beginning to experiment with VSN-like capabilities, none are capable of fully supporting the VSN model<br />
today. According to our market survey, to fully support such a network, firms must invest in and refine at least three key technologies:<br />
■ Account/data aggregation:<br />
Having a complete view of a HNWI’s financial picture, regardless of asset class or account location, is the core function of a<br />
family office, and at the heart of its ability to set broad wealth management strategies. As one relationship manager pointed<br />
out:“Imagine running a company without having a full view of the company’s assets. You couldn’t do it.” Account aggregation<br />
and other data management technology can give MTMs and their service providers a 360-degree view without the need for<br />
significant manual processing and data entry. Vendors such as Wealthtouch and Investment Scorecard have already made<br />
significant advances in this space. At the moment, however, account aggregation technology providers face considerable challenges<br />
in the industry’s lack of standardized data and the struggle to assuage consumers’ concerns about security.<br />
■ Secure online collaboration:<br />
Family offices have traditionally been dependent on advisors/experts sharing a single location to coordinate workflow and<br />
work processes. Today, online collaboration technologies — such as file sharing, net meetings and document-sharing tools —
allow geographically separate individuals or teams to work seamlessly together. These kinds of technology tools are becoming<br />
increasingly sophisticated, winning broad commercial, and even retail, acceptance. Firms such as eVault and eMoney Advisor<br />
are examples of technology providers who are furthering this concept in wealth management. However, in the ultra-sensitive,<br />
and often ultra-secretive, world of wealth management, security is always a paramount issue. But as the technology matures<br />
and comfort levels increase, the application of these technologies in a VSN to facilitate the coordination of multiple<br />
providers and family members in a virtual environment becomes a nearer-term reality.<br />
■ Workflow-based wealth management platforms:<br />
A key function of the family office is to coordinate the activities of multiple service providers through an organized and<br />
strategic wealth planning and investment management process. Co-location of all these service providers in the family office<br />
environment typically has been a key to making this feasible. Several emerging technologies are likely to remove these physical<br />
constraints and make it possible for multiple providers to work apart yet coordinate their work processes through a<br />
prescribed workflow. These technologies can be leveraged to help investment managers, tax attorneys, estate planners and<br />
other advisors collaborate on an investment strategy in a coordinated and prescribed fashion — in much the same way UPS<br />
uses technology and workflow optimization to coordinate and manage the logistics of multiple providers in order to successfully<br />
deliver packages.<br />
World Wealth Report 2005<br />
23
24 World Wealth Report 2005<br />
Evolution of the Mid-Tier-Millionaire Service Model<br />
■ VSN can simplify the MTM wealth management burden for clients, advisors and providers alike<br />
■ Though many technological and business barriers have been removed, a number of<br />
organizational, process, regulatory and financial challenges will have to be addressed<br />
■ For those who are able to successfully evolve MTM service, significant value in asset retention,<br />
profitability and competitive position can be gained<br />
That mid-tier millionaires need the service and value proposition inherent in the VSN is clear. In concept, it could dramatically<br />
simplify their lives by pushing the burden of managing their wealth back on their advisors, especially their primary one.<br />
At the same time, it would provide MTMs with a structured process to manage their fortunes and give them the transparency<br />
and control that they desire.<br />
The incentive for wealth management providers to embrace VSN-like models is clear as well. In the face of competitive<br />
pressures to retain MTM primary provider relationships and the desire to maintain high margins, firms must avoid being<br />
positioned as distributors of increasingly commoditized products versus trusted providers of value-added advice. The VSN<br />
model could provide firms with the operational excellence and technology necessary to enhance and scale their value-added<br />
relationship management services, and position them as gatekeepers to MTM clients.<br />
Figure 15. | Evolving to the Next Level of a Global Trusted Advisor<br />
HNWI Demands<br />
Simplified & collaborative approach<br />
to managing multiple relationships<br />
Coordinated and orderly wealth<br />
transfer strategy and execution<br />
Disciplined risk management<br />
approach<br />
Transparency in fees & pricing<br />
Customized reporting & accounting<br />
Long-term,<br />
Profitable,<br />
Collaborative<br />
Relationship<br />
Collaborative internal & external culture<br />
Institutionalized wealth management processes<br />
Well understood and grounded ROI<br />
Technology to drive scalability<br />
Holistic account aggregation<br />
Robust data warehouse structures<br />
Enablers<br />
Provider Incentives<br />
True 360-degree client view to drive<br />
relationship value<br />
Primary and trusted client advisor to<br />
deepen client relationship<br />
Increased client profitability due to<br />
asset retention & tenure<br />
Avoid commodization and retain<br />
control of client relationship<br />
Additional revenue flows
Development of the VSN will not be without its challenges. Some of the key hurdles that will need to be addressed revolve<br />
around understanding how providers can depreciate the cost of capital investment; ensuring that processes respect client<br />
confidentiality and security; complying with regulatory constraints; delivering a transparent pricing model both to clients<br />
and external partners; leveraging scale to deliver the desired solution at an acceptable cost, and, not least of all, overcoming<br />
cultural barriers that may arise across both geographical and organizational boundaries. These are not insurmountable, but<br />
they should not be dismissed without an understanding of the implications for all stakeholders.<br />
The VSN is a natural path of evolution for an industry that is undergoing significant change. A similar evolution occurred in<br />
the late 1970s and early 1980s within the institutional money management industry when a handful of companies, such as<br />
Merrill Lynch, UBS and Capital Guardian, began to shift their focus to providing solutions instead of simply trying to sell<br />
products. The firms that adopted this approach were able to successfully position themselves as trusted advisors and other<br />
firms as merely sub-contractors. These firms have now emerged as some of the dominant competitors in the space. Firms<br />
that are able to capitalize on the opportunity to meet the demands of MTMs have the potential to reap similar rewards.<br />
World Wealth Report 2005<br />
25
Appendix A: Methodology<br />
The World Wealth Report covers 68 countries in the market-sizing<br />
model, accounting for over 98% of global gross national income and<br />
99% of world stock market capitalization.<br />
We have estimated the size and growth of wealth in various regions<br />
using the Capgemini Lorenz curve methodology, which was originally<br />
developed during consulting engagements with Merrill Lynch in the<br />
1980s. It is updated on an annual basis to calculate the value of HNWI<br />
financial wealth at a macro level.<br />
The model is built in two stages: first, the estimation of total wealth by<br />
country, and second, the distribution of this wealth across the adult<br />
population in that country. Total wealth levels by country are estimated<br />
using national account statistics from recognized sources such as the<br />
International Monetary Fund and the World Bank to identify the total<br />
amount of national savings in each year. These are summed over time<br />
to arrive at total accumulated country wealth. As this captures financial<br />
assets at book value, an adjustment is made based on world stock<br />
market indices to ensure that the final figures reflect the market value of<br />
the equity portion of HNWI wealth. Other adjustments include<br />
accounting for undeclared savings and foreign investments.<br />
The wealth distribution, which differs by country, is based on known<br />
relationships between wealth and income. Data on income distribution<br />
is provided by the World Bank or by countries’ national statistics. We<br />
then use the resulting Lorenz curves to distribute wealth across the<br />
adult population in each country. To arrive at financial wealth as a<br />
proportion of total wealth, we have used statistics from countries with<br />
available data to calculate their financial wealth figures and extrapolated<br />
these findings to the rest of the world.<br />
The financial wealth figure we publish includes the values of private<br />
equity holdings stated at book value as well as all forms of publicly<br />
quoted equities, bonds, funds and cash deposits. It excludes collectibles,<br />
consumables, consumer durables and real estate used for primary residences.<br />
Offshore investments are theoretically accounted for, but only<br />
insofar as countries are able to make accurate estimates of relative flows<br />
of property and investment in and out of their jurisdictions. We accommodate<br />
undeclared savings in the report.<br />
In response to industry and media requests, last year we revised the<br />
methodology to move from reporting our annual findings at a regional<br />
to a country level. In addition to applying the up-to-date-annual statistics,<br />
we modified areas to ensure the model more precisely estimated<br />
the number of HNWIs and their financial wealth at a country level.<br />
We have continued with this approach in this year’s report.<br />
This year we enhanced our macro-economic model with increased<br />
analysis of domestic economic factors that influence wealth creation.<br />
We have worked, for example, with colleagues from Capgemini and<br />
Merrill Lynch in over 20 countries to better account for the impact of<br />
domestic fiscal and monetary policies over time on HNWI wealth<br />
26 World Wealth Report 2005<br />
generation. We also refined our approach for gathering data and<br />
expertise from Merrill Lynch’s Relationship Managers by moving to an<br />
electronic survey. This elicited higher response rates and ensured greater<br />
accuracy of our results.<br />
Given the exchange rate fluctuations over the past years, especially with<br />
respect to the United States dollar, we specifically assessed the impact of<br />
currency fluctuations on our results. From our analysis, we conclude<br />
that our methodology is robust and exchange rate fluctuations do not<br />
have a significant impact on our results.<br />
The translation to United States dollars is made using a yearly average<br />
exchange rate. As our model calculates cumulative wealth in United<br />
States dollar terms using a time series of data going back over 100 years,<br />
the impact of a sharp currency appreciation for a year or two has a negligible<br />
effect. For example, our analysis shows that if exchange rates had<br />
remained at the same level as in 2003, global wealth in 2004 would have<br />
been only 0.24% lower than our reported figure of US$30.8 trillion.<br />
Model adjustments and continuous refinements mean that figures in<br />
the current report do not map directly back to those reported previously;<br />
in order to accurately compare wealth growth in 2004 to earlier<br />
years, the numbers for 2002 and 2003 were adjusted. Nevertheless,<br />
detailed analysis of our changes revealed that trends outlined in the<br />
previous reports hold largely true. Overall, global HNWI wealth in<br />
2003 declined slightly, by 1.04%, as a result of these changes.<br />
The data supporting the analysis is drawn from a wide range of<br />
sources. We cannot, therefore, warrant its exactitude; nor can<br />
we accept liability in that regard.<br />
We thank the following people for helping to compile this report:<br />
Benjamin Beauvalot, Louise Brakenhielm, Swati Chaturvedi and<br />
Valerie McCabe from the Strategic Research Group. They toiled<br />
many hours checking and double-checking multiple data points<br />
and sources to protect the integrity and objectivity of this report.<br />
Petrina Dolby, Jaime Punishill, Alex Sion and Robert Crespi from<br />
the Wealth Management Practice, who have taken primary and<br />
secondary learnings from the Capgemini global network to<br />
shape a cohesive story.<br />
Jennifer Grigas, Erik Hendrickson, Tricia Nestfield, James Wiggins,<br />
Ken Winch, Kathy Bostjancic and Martin Mauro from Merrill<br />
Lynch. They have provided invaluable industry perspective and<br />
research to ensure development of topical issues being<br />
addressed in the Financial Services industry.<br />
In addition to our own primary research, we extend a special<br />
thanks to: Capgemini Canadian Wealth Management Report, CEG<br />
Worldwide, Economist Intelligence Unit, Family Office Metrics LLC,<br />
Ferretti Group, Rolls Royce, Forrester Research, The United States<br />
Internal Revenue Service, MSCI, Merrill Lynch Financial Advisors,<br />
and Spectrem Group. We also acknowledge the many individuals<br />
and external groups who have engaged in ongoing dialogue to<br />
provide additional validation and perspective.
Appendix B: Selected Country Breakdown<br />
Number<br />
of<br />
HNWIs<br />
(000)<br />
Number<br />
of<br />
HNWIs<br />
(000)<br />
Number<br />
of<br />
HNWIs<br />
(000)<br />
450<br />
300<br />
150<br />
0<br />
450<br />
300<br />
150<br />
0<br />
450<br />
300<br />
150<br />
0<br />
117<br />
134<br />
2003 2004<br />
287<br />
Australia<br />
Growth (03-04)<br />
14.8%<br />
300<br />
2003 2004<br />
84<br />
China*<br />
Growth (03-04)<br />
4.3%<br />
88<br />
2003 2004<br />
Russia<br />
Growth (03-04)<br />
4.2%<br />
Number<br />
of<br />
HNWIs<br />
(000)<br />
Number<br />
of<br />
HNWIs<br />
(000)<br />
Number<br />
of<br />
HNWIs<br />
(000)<br />
450<br />
300<br />
150<br />
0<br />
900<br />
600<br />
300<br />
0<br />
450<br />
300<br />
150<br />
0<br />
92<br />
98<br />
2003 2004<br />
756<br />
Brazil*<br />
Growth (03-04)<br />
7.1%<br />
760<br />
2003 2004<br />
383<br />
Germany<br />
Growth (03-04)<br />
0.6%<br />
Growth (03-04)<br />
8.9%<br />
418<br />
2003 2004<br />
United Kingdom<br />
* Based on refined data, HNWI numbers for 2003 have been restated this year. For more information, see Appendix A – Methodology.<br />
Source: Capgemini Lorenz curve analysis; base data from multiple sources, including MSCI<br />
Number<br />
of<br />
HNWIs<br />
(000)<br />
Number<br />
of<br />
HNWIs<br />
(000)<br />
Number<br />
of<br />
HNWIs<br />
(000)<br />
450<br />
300<br />
150<br />
0<br />
450<br />
300<br />
150<br />
0<br />
3,000<br />
2,000<br />
1,000<br />
0<br />
200<br />
217<br />
2003 2004<br />
61<br />
Canada<br />
Growth (03-04)<br />
8.3%<br />
70<br />
2003 2004<br />
2,272<br />
India<br />
Growth (03-04)<br />
14.6%<br />
2,498<br />
2003 2004<br />
United States<br />
Growth (03-04)<br />
9.9%<br />
World Wealth Report 2005<br />
27
Capgemini – Financial Services<br />
With more than 75% of the World’s Top 25 financial services firms as clients and over 5,000 financial services professionals worldwide, Capgemini is<br />
uniquely positioned to serve the financial services industry. Capgemini has a 30-year history of helping financial institutions solve problems and<br />
achieve faster, more sustainable results by working hand-in-hand with our clients to share knowledge, create leading-edge ideas and establish<br />
industry-wide competencies that ensure all of our clients receive the best possible advice and assistance<br />
Over 700 companies in 30 countries collaborate with us today for a distinctive difference in financial services. Our clients know that working with<br />
Capgemini provides measurable results that move their banking, wealth management, insurance and leasing/asset management businesses forward.<br />
Our local and international clients rely on us to provide proven solutions in consulting, technology and outsourcing.<br />
Capgemini’s Wealth Management practice is continuously working to help clients in developing and operationalizing innovative growth strategies<br />
and successfully implementing customer relationship management solutions, wealth advisor workstations, internet-based “self-directed” and “fullservice”<br />
offerings, as well as front- and back-office systems and business process outsourcing. Last year, The Banker and the Financial Times Group<br />
awarded Capgemini the prestigious award for “Wealth Management Solution of the Year” in the 2004 Banker Technology Awards.<br />
The Strategic Research Group is a team of experienced strategy analysts and researchers that provides market and strategic-issue research and<br />
analysis across industries for Capgemini.<br />
The Capgemini Group, one of the world's foremost providers of consulting, technology and outsourcing services, has a unique way of working<br />
with its clients, which it calls the Collaborative Business Experience. Our clients tell us that what makes Capgemini different is the unique way we<br />
collaborate to help them take advantage of opportunities and solve their problems Our approach is to combine what our clients do best with what<br />
we do best. Together, we can achieve better, faster and more sustainable results. Capgemini employs approximately 59,000 people worldwide and<br />
reported 2004 global revenues of 6.3 billion euros.<br />
Selected Capgemini Offices<br />
Beijing +86 10 650 52935<br />
Brussels +32 2 708 1111<br />
Cambridge +1 617 768 5600<br />
Chicago +1 312 395 5002<br />
Copenhagen +45 70 11 22 00<br />
Frankfurt +49 69 9515 0000<br />
Helsinki +358 9 452 651<br />
Lisbon +351 21 412 2200<br />
London +44 1483 764 764<br />
Madrid +34 91 657 7000<br />
Milan +39 024 2261<br />
Mumbai +91-22 518 7000<br />
New York +1 917 934 8000<br />
Oslo +47 2412 8000<br />
Paris +33 1 47 54 52 00<br />
28 World Wealth Report 2005<br />
Prague +420 224 505 270<br />
San Francisco +1 415 738 1300<br />
Singapore +65 6484 3188<br />
Stockholm +46 853 68 5000<br />
Sydney +61 292 93 4000<br />
Tokyo +81 3 4560 2200<br />
Toronto +1 416 365 4400<br />
Utrecht +31 306 89 0000<br />
Vienna +43 1 211630<br />
Warsaw +48 22 850 9200<br />
Zurich +41 44 560 2400
Merrill Lynch<br />
Merrill Lynch is one of the world’s leading financial management and advisory companies, with offices in 36 countries. The firm has commanding<br />
positions around the world in its complementary core businesses of:<br />
• Global private client wealth management<br />
• Global markets and investment banking<br />
• Investment management<br />
Merrill Lynch’s Global Private Client group is a leading international provider of wealth management and investment services, including asset and<br />
liability management, private banking, trust and generational planning services, and retail brokerage. Its global network of 14,100 financial advisors<br />
is entrusted with $1.3 trillion in private client assets. The Private Banking and Investments Group of Merrill Lynch is a prominent provider of<br />
financial advisory, banking, and trust services to America’s wealthiest families.<br />
As an investment bank, Merrill Lynch is a top global underwriter and trader of debt and equity securities and a leading strategic advisor to corporations,<br />
governments, institutions, and individuals worldwide.<br />
Through Merrill Lynch Investment Managers, the firm is one of the world’s largest managers of financial assets, with assets under management of<br />
US$480 billion.<br />
© 2005 Merrill Lynch, Pierce, Fanner & Smith Incorporated.<br />
Printed in the U.S.A. Member, Securities Investor Protection Corporation (SIPC).<br />
The information herein was obtained from various sources; we do not guarantee its accuracy or completeness.<br />
Selected Merrill Lynch Offices<br />
Amsterdam +31 20 592 5777<br />
Atlanta +1 404 231 2400<br />
Bahrain +973 530 260<br />
Bangkok +662 685 3538<br />
Beirut +961 1 983 004<br />
Beverly Hills +1 310 285 6888<br />
Boston +1 617 946 4000<br />
Buenos Aires +5411 4317 7500<br />
Chicago +1 312 269 5100<br />
Dubai +9714 397 5555<br />
Dublin +353 1 605 8877<br />
Geneva +41 22 703 1717<br />
Hong Kong +852 2844 5678<br />
Houston +1 713 658 1282<br />
London +44 20 7628 1000<br />
Los Angeles +1 213 627 7900<br />
Luxemburg +352 49 49 111<br />
Madrid +34 91 432 9900<br />
Melbourne +61 3 9659 2666<br />
Miami +1 305 416 6600<br />
Milan +39 02 655 941<br />
Montevideo +598 2518 2602<br />
Mumbai +91 22 5632 8000<br />
New York City +1 212 236 2181<br />
Panama +507 263 9911<br />
Paris +33 1 5365 5555<br />
Rome +39 06 683 931<br />
San Francisco +1 415 288 2576<br />
Santiago +562 370 7000<br />
São Paulo +5511 3175 4100<br />
Seoul +82 2 3707 0400<br />
Singapore +65 6331 3888<br />
Sydney +61 2 9225 6500<br />
Taipei +88 62 2376 3666<br />
Tel Aviv +972 3 607 2000<br />
Tokyo +81 3 6225 7666<br />
Washington, D.C. +1 202 659 7578<br />
Zurich +41 1 289 48 00
Merrill Lynch<br />
Merrill Lynch is one of the world’s leading financial management and advisory companies, with offices in 36 countries. The firm has commanding<br />
positions around the world in its complementary core businesses of:<br />
• Global private client wealth management<br />
• Global markets and investment banking<br />
• Investment management<br />
Merrill Lynch’s Global Private Client group is a leading international provider of wealth management and investment services, including asset and<br />
liability management, private banking, trust and generational planning services, and retail brokerage. Its global network of 14,100 financial advisors<br />
is entrusted with $1.3 trillion in private client assets. The Private Banking and Investments Group of Merrill Lynch is a prominent provider of<br />
financial advisory, banking, and trust services to America’s wealthiest families.<br />
As an investment bank, Merrill Lynch is a top global underwriter and trader of debt and equity securities and a leading strategic advisor to corporations,<br />
governments, institutions, and individuals worldwide.<br />
Through Merrill Lynch Investment Managers, the firm is one of the world’s largest managers of financial assets, with assets under management of<br />
US$480 billion.<br />
© 2005 Merrill Lynch, Pierce, Fanner & Smith Incorporated.<br />
Printed in the U.S.A. Member, Securities Investor Protection Corporation (SIPC).<br />
The information herein was obtained from various sources; we do not guarantee its accuracy or completeness.<br />
Selected Merrill Lynch Offices<br />
Amsterdam +31 20 592 5777<br />
Atlanta +1 404 231 2400<br />
Bahrain +973 530 260<br />
Bangkok +662 685 3538<br />
Beirut +961 1 983 004<br />
Beverly Hills +1 310 285 6888<br />
Boston +1 617 946 4000<br />
Buenos Aires +5411 4317 7500<br />
Chicago +1 312 269 5100<br />
Dubai +9714 397 5555<br />
Dublin +353 1 605 8877<br />
Geneva +41 22 703 1717<br />
Hong Kong +852 2844 5678<br />
Houston +1 713 658 1282<br />
London +44 20 7628 1000<br />
Los Angeles +1 213 627 7900<br />
Luxemburg +352 49 49 111<br />
Madrid +34 91 432 9900<br />
Melbourne +61 3 9659 2666<br />
Miami +1 305 416 6600<br />
Milan +39 02 655 941<br />
Montevideo +598 2518 2602<br />
Mumbai +91 22 5632 8000<br />
New York City +1 212 236 2181<br />
Panama +507 263 9911<br />
Paris +33 1 5365 5555<br />
Rome +39 06 683 931<br />
San Francisco +1 415 288 2576<br />
Santiago +562 370 7000<br />
São Paulo +5511 3175 4100<br />
Seoul +82 2 3707 0400<br />
Singapore +65 6331 3888<br />
Sydney +61 2 9225 6500<br />
Taipei +88 62 2376 3666<br />
Tel Aviv +972 3 607 2000<br />
Tokyo +81 3 6225 7666<br />
Washington, D.C. +1 202 659 7578<br />
Zurich +41 1 289 48 00