Unsurprisingly after equity and bond markets fell in 2022, the annual BCG report showed that financial wealth took a fall. It also highlighted how a period of inflation and weaker markets took their toll on the profit margins of banks and other institutions.

Falls in global equities, rising interest rates and strong inflation hit the value of global financial wealth in 2022 for the first time in 15 years, according to an annual study by Boston Consulting Group. The report showed that profit margins came under pressure.

The data, coming a few days after Capgemini found that HNW wealth dropped last year, said total wealth shrank by 4 per cent to $255 trillion last year from a year earlier. 

However, BCG said the decline is expected to be brief, and predicts a 5 per cent rebound to $267 trillion in 2023.

“The first downturn in the global financial wealth market since the 2008 crisis came after a 10 per cent rise in value in 2021, which was one of the sharpest in over a decade,” Michael Kahlich, a BCG managing director and partner, and co-author of the report, said. “We expect that the improving macroeconomic outlook and rebound in stock markets will drive a return to growth in financial wealth as early as 2023, and our five-year compound annual growth rate forecast to 2027 remains a healthy 5.3 per cent.”

The findings came from the BCG Global Wealth Report 2023: Resetting the Course.

Among the details, the study said bright spots in 2022 included a 6.2 per cent rise in the value of personal cash and deposits, as a more risk-averse approach to investments prevailed. The value of real assets, ranging from real estate to art, also rose by 5.5 per cent to reach $261 trillion. 

Domiciles and regions 
Financial wealth continued to grow in Asia-Pacific, the Middle East, Africa, and Latin America in 2022, but fell in North America and Europe. In addition, as is often the case in the context of macroeconomic uncertainty, cross-border wealth rose by 4.8 per cent in 2022 to reach $12 trillion globally. Against this backdrop, the year saw a shift in booking centre dynamics, as follows:

Switzerland remains a highly attractive wealth management and financial hub but is expected to be overtaken by Hong Kong as the world’s largest booking centre by the end of 2025.

Hong Kong has achieved the highest assets under management growth rate among top booking centres over the last five years, with a compound annual growth rate (CAGR) of 13 per cent. However, it is facing strong competition from Singapore, which is increasingly perceived as a safe-haven gateway to the Asia-Pacific region, the report said. 

Finally, the United Arab Emirates attracted assets from across regions, including Asia-Pacific and Eastern Europe, growing its AuM faster than any other booking centre. Its financial wealth is expected to continue to grow over the next five years at a healthy rate of 10 per cent.

Under pressure
Margins in the industry had been eroding for a while, but wealth managers were buffered by the favourable climate in the financial markets and rising client business volumes, the report continued. However, last year business volumes fell 11 per cent and costs continued to rise, driven by larger front-office teams, wage inflation, and technology spending, and are expected to remain high as inflation persists at levels above the previous decade. 

Pre-tax profit margins for wealth managers decreased by an average of 2.3 basis points (bps) globally. Players in the Asia-Pacific and North America regions saw the steepest declines, with 5.5 bps in Asia-Pacific and 3.1 bps in North America, compared with a 2.5 bps rise in Europe, and 0.3 bps increase in Latin America.

“Wealth managers need to adopt fresh initiatives on both the revenue and cost sides to remain competitive,” Ivana Zupa, a co-author of the report, said. “Key actions on the revenue side include building a scalable growth engine in client acquisition, designing a distinctive private market offering, revising the product shelf in line with shifting interest rates, and leading a long-overdue change in how financial advice is offered, driven by generative AI technology,” Zupa said.

“In parallel, a bold approach is needed to reducing costs, including conducting an end-to-end process review, getting shoring decisions right, exploring third-party tech and operations' solutions, and simplifying products and services via advice-like discretionary portfolio management,” she continued.