HNW individuals will help drive the size of the global asset management industry to a total of over $101 trillion in AuM by 2020 from $63.9 trillion today - but making a living from this is not a cakewalk, says PwC.

An earlier version of this interview has run on the sister publications of this one. As the arguments made here have global relevance, including for the Europe region, we are repeating it here.

High net worth individuals will help drive the size of the global asset management industry to a total of over $101 trillion in AuM by 2020 from $63.9 trillion today but wealth firms must be sensitive to inter-generational differences to capture this growth, according to PricewaterhouseCoopers.

As each age cohort - typically spanning 12 to 14 years apart - comes to the fore in the world of work and saving, it is noticeable how they tend to react against the habits and behaviour of the previous one, which needs to be understood by professionals seeking to capture potential business, PwC told this publication recently.

Steve Crosby, Americas leader, global private banking and wealth management, PwC, recently spoke to Family Wealth Report - a sister publication of this one - about some of the issues thrown up by the firm’s report, entitled Asset Management 2020: A Brave New World, as well as the insights from its wealth management survey published last year.

There is much talk of the aging Baby Boomer generation and its transfer of wealth and the like (there are around 80 million of such people) but there is less awareness of Millennials (90-plus million) and how they are going to put their inheritance to work, he said.

“The next cohort may not talk to traditional managers. A question is how do you get connectivity with the next generation,” he said, referring to the `70/50/40 rule’, Crosby said.

This rule refers to one of the findings from the Global Private and Wealth Management Survey of last year. It deals with the focus financial advisors have on the family eco-system.

“Our research shows that if wealth managers have a relationship only with the patriarch and not the potential surviving spouse we see risk of loss of assets at close to 70 per cent over the next 18 months following passing of the senior. If a firm has no relationship with the children of a wealthy investor they run the risk of 50 per cent loss. If there is no relationship with the fiduciaries (trustees, foundation heads etc), they run risk of another 40 per cent [loss],” Crosby continued.   

Boomers have been even bigger users of technology than PwC had expected when it sought to research this area. “We see again boomer and older affluent as one of the largest users of smart phones and tablets,” he said.

There is, however, a problem in certain groups’ assumptions about technology – security.

“The younger generation has a presumption of trust in what comes over the Web and that is that generation’s Achilles heel," he said, referring to issues of privacy and security. "That is a big deal and why wealth managers make a point about spending on cyber security,” Crosby said.  

Understanding these issues will be key in getting a chunk of the expected rise of HNW assets in North America between now and 2020. PwC predicts that North America HNW individuals will hold $30.6 trillion by the decade’s end ($21.7 trillion in 2012); for Asia, the figure in 2020 is seen at $22.6 trillion ($12.7 trillion in 2012); in Europe, the figure is seen at $21.6 trillion ($17.0 trillion.) Remaining growth comes from regions such as Latin America and Africa.

Age and guile
One issue Crosby was keen to talk about concerned how wealth managers needed to realise that as some of their clients age, with heirs and younger holders of wealth coming through, firms must ensure their own manager’s ages fit what clients are comfortable with.

“Some wealth managers assume that all you need to do is to talk to a family patriarch,” he said, saying some firms put managers under pressures to do this to build up business at the expense of thorough engagement with a family. “Another concern is that wealth managers themselves are getting older. Patriarchs want to talk to people of the same age. Some of the firms are bringing back apprenticeship programmes …..a younger financial advisor goes to a meeting with a colleague and can talk on the same level as the client’s kids,” said Crosby.  

Among other themes flagged by up Crosby is how financial institutions are, he said, looking to work with clients about issues such as healthcare needs and choices, in areas such as advocacy, tele-medicine, insurance and provision of long term care.

Other services a firm can package to provide are like “extract and evac”: providing emergency services, aircraft to serve people on holiday and other trips with the cover of being helped and taken home in situations where local healthcare is poor, he said.

And another trend is jurisdiction shopping by wealthy individuals within the US; this is not a new issue, however. “There is a lot of interest in jurisdictions that don’t have rules against perpetuities,” Crosby said, referring to states with available structures such as dynasty trusts (Nevada, Delaware, North Dakota, South Dakota, etc). “These new models provide added revenues to the state," he added.

PwC’s Asset Management 2020: A Brave New World report said that in predicting AuM growth between now and 2020, it looked at the correlations between AuM and a number of economic factors over the past 13 years, including two financial crises, such as the boom-bust of the 1990s and early Noughties, and the crash of 2008.

The firm said there was a strong linkage, or correlation, between nominal gross domestic product and overall AuM growth, especially relating to the fund industry. The growth to over $101 trillion is, it said, based on assuming “normal” development of the world economy; PwC expects 5.15 per cent GDP growth from 2012 to 2020. Trends such as ageing of populations in Europe and Asia populations are taken into account.

When assets are divided by type of wealth holder, HNW individuals are expected to hold $76.9 trillion of assets in 2020, up from $52.4 trillion in 2012. The other categories tracked are pension funds; insurance companies, sovereign wealth funds and mass affluent savers.

Within the overall figures, PwC said that the Asia ex-Japan weighting of global GDP was around 18 per cent but this will probably be well over 25 per cent by the end of the decade. As a result, this will lead to “new and substantial money flows into the capital markets of the East”, PwC said. These flows will be boosted if the Chinese renminbi currency becomes fully free-floating over this time.