Asia will overtake Western Europe as the world's second wealthiest region next year, according to BCG's latest Global Wealth report.

Global private wealth expanded by 5.2 per cent in 2015 from a year before to $168 trillion, and total wealth is predicted to reach $224 trillion by 2020, according to a survey by Boston Consulting Group. The growth rate slowed last year, however, from 7 per cent in 2014. 

All regions of the world experienced a slower pace of wealth growth last year apart from Japan, where the country’s accommodative monetary policy had a positive impact, BCG said in Global Wealth 2016. 

On a regional basis, North America remains top of the heap, with $60.4 trillion of private wealth in 2015. BCG estimates that will reach $76 trillion this year. In Asia-Pacific, private wealth last year stood at $36.6 trillion, and that figure is predicted to rise to $59.8 trillion this year. For Western Europe, the 2015 and estimated 2016 figures are $40.8 trillion and $48.7 trillion, respectively. In Japan, the figures are $13.6 trillion and $15.3 trillion. In the Middle East and Africa, they are $8.0 trillion and $11.8 trillion. 

Looking ahead, BCG expects Asia-Pacific to produce the fastest growth in private wealth and to overtake North America soon after 2020. The region is also expected to surpass Western Europe as the world’s second wealthiest region in 2017.

Overall, private wealth globally is expected to rise at an annual rate of 6 per cent over the next five years, reaching $224 trillion in 2020, it said.

As far as distribution of wealth is concerned, the upper-high net worth segment saw the strongest growth in 2015, rising 7 per cent, especially in Asia (21 per cent). (Upper-HNW is defined as between $20 million and $100 million; ultra-high net worth is set at more than $100 million, and lower-HNW set at between $1 million and $20 million.)

The number of millionaire households rose 6 per cent globally last year and their share of global wealth reached 47 per cent, which is expected to swell to 52 per cent in 2020.

“Unlike in recent years, the bulk of global wealth growth in 2015 was driven more by the creation of new wealth (such as rising household income) than by the performance of existing assets, as many equity and bond market stayed fairly flat or even fell,” the annual report said.

The study is based on a survey of more than 130 wealth managers and involves more than 1,000 data points related to growth, financial performance, operating models, sales excellence, employee efficiency, client segments, products, and trends in different markets and client domiciles. 

Asset allocation
In terms of where wealthy individuals are putting money to work, the vast majority of such assets last year were split between cash/deposits on one side and equities on the other, accounting for more than 80 per cent of wealth assets in total. Regionally, allocations varied: North America had a more pronounced tilt to stocks than was the case in other regions, for example.

Offshore headwinds
The report said private wealth held in offshore centres stood at almost $10 trillion in 2015, a rise of 3 per cent on a year earlier. The relatively modest growth rate was caused by the “strong repatriation of offshore assets by investors in developed markets”, the report said, referring to moves by countries, such as the US and UK, to crack down on alleged tax evaders using offshore facilities.

Wealth held offshore by investors based in North America, Japan and Western Europe fell 3 per cent in 2015. The largest regional sources of offshore wealth were Western Europe (mainly UK, France and Germany), Asia (mainly China, Taiwan, Hong Kong and Indonesia), and Middle East and Africa (mainly Saudi Arabia, Nigeria and the United Arab Emirates). The three top source nations were the US, China and the UK. 

One trend is that there has been a shift to the developing world from developed world as being primary sources of offshore wealth. At present, 65 per cent of offshore wealth comes from developing nations, up from 57 per cent five years ago.

Switzerland, although buffeted by the demise of its bank secrecy regime, remains the largest offshore centre, holding almost a quarter of all offshore assets globally, followed by the UK and Caribbean. The BCG report said the outlook for offshore centres in the developing world is positive; Hong Kong and Singapore will profit from their proximity to high-growth nations. Offshore wealth booked in these two Asian jurisdictions is expected to rise 10 per cent annually through 2020, increasing their combined share of the world’s offshore assets to 23 per cent in 2020 from around 18 per cent at the moment.

The BCG report examined how banks and other wealth management players are changing their operating models in the offshore space. It noted that as a result of rising compliance burdens and other pressures, relationship managers are focusing on fewer markets. For banks that have made this adjustment, the number of markets served per RM has shrunk from an average of 15 to 20 to an average of three to five in any specific region.

The report also noted that the level of interaction between offshore clients and RMs has actually increased, notwithstanding the use of technology. Compliance and other requirements make offshore banking more resource-intensive; front-office costs per client are close to those of onshore operations, at 21 basis points on client asset and liabilities. 

Regulation costs and responses
BCG found that among firms that have changed business models to reduce reliance on trail commissions and inducement fees, those firms where regulation is not yet in place take 21 per cent of revenue from such fees, down from 24 per cent in 2014. In regions where rules are about to be enforced, that share has already shrunk to an average of only 9 per cent.

There is a shift away from commissions to fee-based advisory services; fee-based revenues accounted for 43 per cent of total revenue in 2015, up from 38 per cent in 2012.

Fintech has been a big focus for the wealth sector in recent years. BCG estimates that the number of asset- and wealth management-focused financial technology firms has more than doubled, from about 315 (with funding of about $1.7 billion) in 2012 to about 700 (funding of $4.9 billion) last year.