Advisors benefit as business owners create wealth at an unprecedented rate. A recent article in Financial News Online points out that the California gold rush of the 1850s didn't just make the miners rich; it also benefited equipment manufacturers, hoteliers, and a host of purveyors in what might politely be termed the entertainment industry. In a similar vein, today's entrepreneurial boom and the subsequent surge in private wealth has proved bountiful to wealth managers.

Sic transit

"Given the likelihood of natural resource depletion and climate change, it is feasible the next decade could represent the high watermark for wealth generation," says a report by Barclays Wealth, one of a host of private banks, asset managers, and luxury-goods and services purveyors that cater the wealthy, and gets paid handsomely for it.

One study says that top private bank advisors can generate revenues of $3.5 million a year, and get around $1 million for the trouble. Demand for such keen-edged advisors outstrips supply, and the firms compete aggressively for them.

Through the last 10 years, the wealthy have increased their assets by 8% a year, according to Merrill Lynch. The Economist Intelligence Unit forecasts that the number of people worthy over $1 million in the G7 nations will increase 160%, to more than 16.3 million by 2016. Developing economies are engendering U.S.-dollars millionaires at an even faster rate.

Reasons why

There are a number of reasons for this. Capital market conditions have encouraged wealth creation. Interest rates, though rising, are still favorable. Banks are offsetting risk through credit-default swaps, so companies are finding it easier to borrow money and plow it into their businesses. Technology, outsourcing and imports have increased cost efficiency. M&A activity is also spinning off personal wealth.

"We believe managers are finding it increasingly difficult to sell a product, even if it's best in class, outside the context of a client relationship based on a deep understanding of goals," says Joe Ujobai, an executive at Oaks, Pa.-based multi-manager specialist SEI, as quoted in a piece published last week in Financial News Online.

These wealth managers are recommending private equity, structured products and hedge funds as optimum management options. This gives banks the chance to take as much as 250 basis points as a front-end fee, as well as a separate trail fee, which can boost profit margins significantly -- and open the door to conflicts of interest. -FWR

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