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Demand for UHNW Services, Family Offices Grows as Rich Get Richer

Tom Burroughes, Deputy Editor, London, 2 July 2008


A continued consolidation of wealth across the globe, particularly in emerging economies and amongst the ultra-wealthy, will drive demand for services such as family offices, industry experts say.

Last week, Merrill Lynch/Cap Gemini issued their annual World Wealth Report 2008, which showed further concentration of assets amongst the world’s wealthy last year as the fortunes of those with $1 million or more in investable assets grew faster than their numbers (9.4 per cent compared to 6 per cent).

However, the credit crunch took its toll and there was a decline in the rate of growth in numbers of wealthy individuals in 2007 from 8.3 per cent in the previous year, as well as a decline in the rate of growth of their wealth (from 11.4 per cent in 2006).

It appears that the super wealthy got rich even faster than their merely rich counterparts as UHNW individuals ($30 million plus in investable assets) posted the highest gains of any wealth band both in population, up 8.8 per cent, and total assets, up 14.5 per cent.

Whilst all areas saw a concentration of wealth, this was driven by Latin America and emerging markets which proved resilient to the credit crunch and converted high commodity prices into profitability and growth through exports. Here wealth grew even more quickly than wealthy populations due to GDP growth and higher savings rates than the G7.

Africa, at 2 per cent, and Latin America, at 2.5 per cent, were found to have greater concentrations of individuals with $30 million than Europe at 0.8 per cent and North America at 1.3 per cent.

The figures imply a new distribution of wealth across the globe and individuals who have already made their fortune seem to be creating even more wealth out of what they already have.

Ted Wilson, senior consultant, Scorpio Partnership, thinks that there will be increased demand for family office services as developing economies grow, wealth moves between generations and family-owned companies mature and the families exit.

“Take Singapore for example, there were relatively few family offices serving the region until recently, but with many families exiting their businesses there has been a surge in private equity crystallisation by entrepreneurial families. This has created a strong increase in demand for true family offices, both multi and single family offices, and family office type services such as those offered by Pictet.”

Mr Wilson points to the recent opening of a Fleming Family & Partners office in Hong Kong as evidence of this growing trend. He also notes the expected rise in independent asset managers in Singapore which are very closely aligned to a family office approach.

Michael Maslinski, director of wealth management consultancy Maslinski & Co, agrees that as wealthy families are expanding their wealth more rapidly in developing parts of the world whilst growth is stuttering in more mature markets, there will doubtless be demand for some form of family office type services to meet their needs. He believes that the challenge is providing the right type of services.

“We should not pretend that it will be plain sailing for firms to offer family office type services in new markets. Assets will often still be tied up in the founding business and so wealth management firms need to look at their orientation, which might mean helping to direct the business rather than traditional asset management capability. It requires a different set of skills,” he said.

Whilst firms with commercial banking or investment banking arms might seem the most obvious candidates to deal with wealthy families, Mr Maslinski contends that such firms often struggle to bridge the gap between their own deal-led culture and that of the private client world.

Meanwhile, as the UK has seen a rush of wealth management regional office openings in the UK and Ireland by the likes of Barclays Wealth, Credit Suisse, HSBC and Kleinwort Benson, sharply slowing growth in the UK implies that this rapid expansion might not be sustainable.

Whilst the number of wealthy individuals in the UK grew from by 10,000 to 495,000 between 2006 and 2007, an increase of 2.1 per cent, this constituted a dramatic slowing of growth compared to the previous year (8.1 per cent) and was well below the European average of 3.7 per cent. The drivers were a weakened financial services industry, a slowing of the housing market and the current account deficit. China is coming up fast and Merrill Lynch believes that at current growth rates it will oust the UK from fourth place in terms of wealthy individuals by the end of 2008.

In Ireland, the numbers of HNW individuals actually diminished by 4 per cent to approximately 20,000 in 2007 as the Irish stock market fell 26 per cent in a year, property prices declined sharply, GDP growth slowed and inflationary pressures increased.

Mr Maslinski believes that very often office openings by wealth management firms are planned during boom times, to be implemented once the boom has come to a halt.

“Like many long term investment projects, the timing is a little off. The flurry of regional openings implies that a little too much demand was predicted and economic circumstances might dictate that firms have to retrench slightly. We might see one or two closures,” he said.

Mr Maslinski believes that for a year or two the UK will see little to no growth, as many wealthy individuals are experiencing declining wealth and it will take a while for the new wealthy to come through and replace them.

He also believes that many cities, such as Leeds, can only accommodate a limited number of private bankers.

“Whilst there are just a handful of private bankers in a region, entrepreneurs are keen to meet them. As bankers' numbers inevitably grow, prospective clients become sick to death of being approached by private bankers and invited to events, and come to view them as just another bunch of salesmen,” said Maslinski.

However, the majority (44 per cent) of those that responded to a recent WealthBriefing poll felt that the recent rapid expansion by private banks into the UK regions was sustainable, although a quarter (25 per cent) did not and the remainder thought it was too early to tell.

Looking forward, Barclays Wealth’s view is that by 2017, in aggregate wealth terms (which includes property), wealth management firms will have the potential to serve 60 per cent more £1 millionaire ($2 million) households, or a total 2.4 million, with a combined wealth in excess of £6.9 trillion. The number of households with £5 million aggregate wealth is expected to increase 120 per cent to 126,000 from 56,000 in 2007.

On this basis, Michael Dicks, head of research and investment strategy at Barclays Wealth, believes that the UK will continue to outperform Europe and remain a significant centre for wealth generation over the next decade.

“The UK’s short-term outlook will be impacted by the housing market slowdown, but this is a cyclical story and the outlook ten years from now is a structural one. In that department, the UK does better than most of its European competitors, and because of this we can confidently predict the number of millionaire households to increase to more than 2.4 million by 2017,” he concluded.

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