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Rich and Co.

Digest of Wealth-X World Wealth Report

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Main Take Aways –

  • With an average age of 61, North American UHNW individuals are older than their counterparts in other regions, and have often moved beyond the stage of wealth accumulation, focusing instead on wealth preservation.
  • The rise of the technology industry as a source of wealth for the world’s UHNW population is clearly shown in the United States: it is the second largest industry and 9% of the country’s UHNW individuals made their wealth in this sector
  • New York remains the city with the largest UHNW population in the world.  If New York City were a country, it would be the seventh largest country in terms of UHNW population size.
  • The United States’ economy accounts for a third of the world’s total wealth, and of that wealth, 12.5% is held by UHNW individuals
  • Ensuring smooth and successful wealth transfers is an increasingly relevant issue for UHNW individuals.
  • With referrals being one of the best ways to engage with the ultra-wealthy,
  • UHNW individuals are well connected.  On average, their immediate social network includes seven other UHNW individuals, at least one of whom is a billionaire.
  • Wealth managers are expected to provide unique and bespoke services to ensure that their clients see real value in the expertise and assistance that they offer. For example, given the importance of philanthropy across all clusters of UHNW individuals as well as the shift towards more business-oriented forms of philanthropy such as impact investing – ultra affluent individuals are likely to expect their wealth managers to have an understanding of philanthropy and the non-profit sector
  • Furthermore, UHNW individuals typically hold around two thirds of their net worth in company stakes, and US$12.7 trillion of the world’s UHNW wealth is tied up in privately held companies.
  • Although UHNW wealth is expected to grow slightly slower than this 6% in the next five years, we expect the ultra-affluent population to continue to dominate and influence the global economic landscape with their wealth, whether in total assets under management or luxury purchases, as they have much larger cash balances as well as a longer history of access to wealth.  Individuals typically favour privately held companies: 69% of this population is currently involved in such companies.
  • Self-made UHNW individuals are the oldest group, and as wealth transfers continue to occur, the importance of succession planning and wealth management will become increasingly significant.
  • These male UHNW individuals with partially inherited wealth are the youngest group, with an average age of 57.
  • Male UHNW individuals are, on average, 59 years old.
  • The largest absolute growth was seen in the US$30 million to US$49 million wealth tier, as new UHNW individuals took on new opportunities. Despite the more significant growth rates of the wealthiest wealth tiers, almost three fourths of the entire UHNW population is worth less than US$100 million, yet these individuals collectively only account for 29% of total UHNW wealth.
  • The fastest growth was in the upper wealth tiers, particularly in the size of the population of demibillionaires – UHNW individuals with a net worth between US$500 and US$999 million. The absolute increase of the demi-billionaire population was only of 320 individuals – less than 3% of the total increase in the UHNW population. These individuals were disproportionately involved in industrial conglomerates, which limited their exposure to the volatility in net worth that many individuals in other wealth tiers experienced and allowed for more consistent growth.
  • The world’s ultra-wealthy, on average, hold over two thirds of their net worth in business holdings, and tend to have long-term investment horizons, allowing them to ride out much of the short-term volatility that can occur, particularly in emerging markets.
  • ultra-wealthy individuals account for only 0.004% of the world’s adult population, they control almost 13% of the world’s total wealth

Digest of Full Wealth X Report

Global UHNW population reached an all-time high of 211,275 individuals in 2014, representing a 6% increase from 2013. …These individuals’ influence continues to increase across the globe and across industries: from wealth management to luxury, philanthropy and other domains.

Ultra wealthy individuals typically hold a significant proportion of their wealth in cash or cash equivalents.  Almost a quarter of all UHNW wealth is held in such assets, enabling UHNW individuals to wield tremendous power and influence in the global economy.

Geopolitics, disinflation, and a lack of economic growth have regularly grabbed news headlines lately. However, three other less well publicized factors present as much or more risk, to UHNW individuals’ portfolios and purchasing power in quarters to come.

  1. Cash’s Value Is Dropping – In a zero interest rate environment, cash’s purchasing power continues to erode. This has been less problematic in the recent past as overall price inflation has been muted, consistently registering below expectations. As a result, over the past five years the purchasing power of USD cash holdings has declined “only” some 8.5%. However, this report finds that UHNW individuals hold nearly 25% — an extremely high proportion – of their net worth in cash, and the prices of many large-ticket items that may better represent the consumption patterns of UHNW individuals have significantly outpaced broad inflation measures.

For example, over the last five years, London house prices have increased by 40%, while a luxury Louis Vuitton Keepall Bandouliere duffle bag has risen in price by 30%. This report also shows that UHNW individuals were responsible for 19% of total purchases in the luxury industry in the last year, despite only comprising 0.004% of the world’s adult population.

As a result, inflation may well be eroding the wealth of UHNW individuals at a faster pace than prevalent in the broader community.

  1. Dropping Government Bond Values – , the government bonds which UHNW individuals have been told over many years are safe investments and will help diversify their investment portfolios are no longer safe. In fact, the.  At the time of writing, US 10-year yields were around 2%. If they returned to their all-time lows reached in mid 2012, holders would see the value of these bonds increase by some 6%. Alternatively, if yields instead returned to where they started 2014, ex roll-down holders would face losses of 10%, or five years of coupon, let alone if they returned to their average yield of the last 20 years, which would see holders lose near to 25%. The return asymmetry is even greater for German Bunds, where yields are already at all-time lows.
  2. Over Concentrated Portfolios – Wealth concentration is perhaps the biggest risk facing UHNW individuals. This report finds that the majority of UHNW individuals are self-made and involved in founder-owned private businesses.  As a result, the census finds that UHNW individuals have over two thirds of their wealth in their core businesses, with the value of these private company holdings representing almost twice the amount UHNW individuals in aggregate hold in public company stakes. However, this disproportionality exposes UHNW individuals to exogenous shocks.The macro economy, industry-specific issues such as technological change and competition, regulation changes, and geopolitics can all detrimentally impact the prospects for a previously successful business.  And having such a high share of one’s wealth exposed to just one asset goes against the most basic principle of portfolio construction – that diversification is essential to achieve optimal risk return outcomes.  Concentration biases prohibit a portfolio from generating the most return for a given risk level (i.e. occupying the “efficient frontier”).  And while idiosyncratic factors may lead to short-term outperformance, over the medium to long term, portfolios without concentrated risks will outperform.The most straightforward way for UHNW individuals to address these concentration biases is to divest wealth from their core business and more aggressively allocate to investment portfolios. However, a more pragmatic and practical approach is often to seek hedges for the concentrated exposure.  This can be attempted in a variety of ways, including buying puts on the company if it is listed, or else on the listed equity of similar companies, or constructing “collars,” which involves selling out of the money calls and buying out of the money puts to limit both the downside and upside potential of the concentrated holding.

EXECUTIVE SUMMARY
In 2014, the world’s ultra-high net worth (UHNW) population grew 6% to 211,275 individuals and the world’s UHNW wealth increased 7% to nearly US$30 trillion.  Although these. Even amidst geopolitical conflicts, socio-economic strife, and volatile currency markets, the world’s equity markets displayed strong performances, thereby enabling UHNW individuals’ wealth to increase and their influence across industries and sectors to grow – from their importance in wealth management to their consumption of luxury goods.

For example, UHNW individuals were responsible for 19% of total purchases in the luxury industry in the last year.  Entrepreneurship is one of the salient characteristics of the world’s UHNW population: the majority of them are self-made and are involved in founder-owned private businesses.  Almost US$13 trillion of the world’s UHNW wealth is held in private company holdings, nearly twice the amount held in public company stakes.

Differences exist between segments of the world’s UHNW population. For example,

  • Female UHNW individuals hold almost 16% of their net worth in real estate and luxury assets, more than their male counterparts who only hold about 10% of their net worth in such assets.
  • North America and Europe dominate the global UHNW landscape as the two regions with the largest UHNW population and wealth. Both regions continue to attract capital, financial and human, and their influence over the world’s wealth continues to expand.

…On top of the direct influence that UHNW individuals have on the world’s economy, they also have an indirect impact through their social networks of family or friends, and these connections can also influence trends in UHNW individuals’ lifestyle and choices.   While there are 211,275 UHNW individuals globally, there are over one million people with “access” to ultra wealth (when factoring in family members of UHNW individuals), extending the reach of the UHNW wealthy even further.

Equity markets across the world performed well, with the S&P 1200 growing by more than 20% and world GDP climbing to almost US$77 trillion in 2014.  Last year, the UHNW population and wealth of emerging economies such as Brazil and China declined: this year, they surpassed 2012 levels.  Although many of the world’s emerging economies continue to experience slow or even declining GDP in local currency terms, their business confidence has risen, as reflected in the strong performance of these countries’ equity markets.  The world’s ultra wealthy, on average, hold over two thirds of their net worth in business holdings, and tend to have long-term investment horizons, allowing them to ride out much of the short-term volatility that can occur, particularly in emerging markets. Such promising signs help explain why some of the difficult and disruptive events of the last year have not taken a toll on the aggregate number and total wealth of the world’s UHNW population.

All wealth tiers above the US$30 million threshold experienced growth in both UHNW population and wealth.  The fastest growth was in the upper wealth tiers, particularly in the size of the population of demibillionaires – UHNW individuals with a net worth between US$500 and US$999 million. The absolute increase of the demi-billionaire population was only of 320 individuals – less than 3% of the total increase in the UHNW population.  These individuals were disproportionately involved in industrial conglomerates, which limited their exposure to the volatility in net worth that many individuals in other wealth tiers experienced and allowed for more consistent growth.

The largest absolute growth was seen in the US$30 million to US$49 million wealth tier, as new UHNW individuals took on new opportunities. Despite the more significant growth rates of the wealthiest wealth tiers, almost three fourths of the entire UHNW population is worth less than US$100 million, yet these individuals collectively only account for 29% of total UHNW wealth.

The growth across wealth tiers in both population and wealth is particularly important as it shows that the financial and demographic influence of UHNW individuals is increasingly significant. Each wealth tier’s population growth rate was higher than the world average population growth rate of 1.1%, and for all but two wealth tiers, these individuals’ wealth grew faster than global GDP, which registered an average 3.7% growth rate in the past year according to the latest estimates from the International Monetary Fund. As a consequence, the value of UHNW individuals as consumers and clients, as well as their command over the world’s resources has increased – both in relative and absolute terms.

MALE UHNW INDIVIDUALS
The male UHNW population increased by 4.6% this year, less than the growth rate of the total UHNW population.  Their average net worth rose by 1.3%, equivalent to an increase of US$1.7 million per male UHNW individual.  This net growth in the financial clout of this segment of the UHNW population has far reaching ramifications – from financing the acquisition of a private jet to estate planning for wealth transfers to the next generation.  The latter is particularly important as the male UHNW population continues to age.

Male UHNW individuals are, on average, 59 years old.  Such intergenerational wealth transfers, as baby boomers begin to pass on their fortunes and their business interests to their heirs, are reflected in this year’s numbers.  While the number of male UHNW individuals who fully inherited their wealth dropped by almost 5%, the number of male UHNW individuals with only partially inherited wealth (and who have also partly made their own fortunes) has grown by 24% between 2013 and 2014.

These male UHNW individuals with partially inherited wealth are the youngest group, with an average age of 57.  87% of male UHNW individuals have at least partially made their own wealth, a testament to the continued importance of hard work and entrepreneurialism in attaining and maintaining UHNW status. Not only are many male UHNW individuals carrying on their family’s legacies, many are also directly responsible for creating jobs – for example, the top ten American male entrepreneurs alone employ over 865,000 individuals.  Male UHNW individuals have a particularly significant presence in certain industries. Finance, banking & investment continues to be the leading industry for male UHNW individuals, and its relevance has increased, from 20.0% in 2013 to 23.6% this year. Real estate has also grown in importance, moving from the fourth most significant industry for male UHNW individuals to the second spot.  Not only are male UHNW individuals important players in the finance, banking & investment industry, they are also important clients of this industry, holding almost a quarter of their net worth in cash holdings.

For the most part, male UHNW individuals’ businesses are private, and 44% of male UHNW individuals’ net worth is held in private holdings.  The oldest UHNW individuals globally, by wealth source clusters, are those with fully self-made wealth – although this is not the case for female UHNW individuals.  This is in large part due to the impact of the continued inter-generational wealth transfers and of the greater share of male individuals in the UHNW population: the younger heirs form the largest portion of the inheritance/self-made category.

Self-made UHNW individuals are the oldest group, and as wealth transfers continue to occur, the importance of succession planning and wealth management will become increasingly significant.  This is particularly true as individuals from different wealth sources typically have different methods of maintaining and growing their wealth.  Private wealth is particularly important for individuals who are currently actively growing their fortunes. In fact, there are clear differences in wealth creation strategies depending on wealth source:

  • UHNW individuals with inherited wealth tend to keep more of their money in cash holdings and real estate & luxury assets than self-made individuals;
  • Self-made UHNW individuals keep a large part of their wealth in private holdings;
  • Individuals with partly inherited wealth are more likely to be involved in publicly held companies than other wealth sources, although privately held companies remain more significant.

The growth in the number of UHNW individuals with both inherited wealth and self-made wealth demonstrates that entrepreneurship continues to be one of the key cornerstones of financial success.  Many of these individuals received their inheritance only after they had already advanced in their own professional careers.

Strikingly, across all wealth source clusters, certain industries are particularly important: finance, banking and investment as well as industrial conglomerates are the most common industries for UHNW individuals across all wealth source clusters.

Philanthropy is a popular hobby among all UHNW individuals, irrespective of wealth source. Although its relative importance may appear lower for self-made individuals, they are the most generous donors in terms of average

FORECAST
Our UHNW population growth forecast has risen from 4.0% to 4.4%, reflecting our expectation that the members of the next generation – even those who inherited some of their wealth – will continue to pursue entrepreneurial endeavours in sectors such as technology and cross the UHNW threshold.

…The movement of UHNW individuals from emerging economies to the more stable economies in North America and Europe has contributed to the two regions’ strong performance this year. We expect these two regions to be the world’s most attractive UHNW relocation destinations as unstable economies and less transparent capital markets continue to compel UHNW individuals to seek second citizenship opportunities.  These economies are exhibiting strong and stable performance overall domestically and their core markets – such as the United Kingdom, United States and Switzerland – are also proving increasingly attractive to foreign individuals.

… As the developing world continues to grapple with socio-political, institutional and environmental issues in the coming years, we expect North America and Europe to remain the world leaders in terms of UHNW population and wealth.  Even in stable economies, we have seen a movement towards greater diversification of business interests and holdings in the UHNW population, with an increased preference for internationally diversified businesses as a way to ensure stable performance.

Within the next five years, the world’s total UHNW wealth will almost surpass US$40 trillion, and the global UHNW population will exceed 250,000.  It is interesting to note that the growth of the UHNW population is occurring at a significantly faster rate than that of the global population – which has averaged just over 1% of growth over recent years – but the increase in UHNW wealth is less than the roughly 6% average annual growth rate of world wealth since the start of the century.

Although UHNW wealth is expected to grow slightly slower than this 6% in the next five years, we expect the ultra affluent population to continue to dominate and influence the global economic landscape with their wealth, whether in total assets under management or luxury purchases, as they have much larger cash balances as well as a longer history of access to wealth. individuals typically favour privately held companies: 69% of this population is currently involved in such companies.

Furthermore, UHNW individuals typically hold around two thirds of their net worth in company stakes, and US$12.7 trillion of the world’s UHNW wealth is tied up in privately held companies. UHNW individuals with fully self-made wealth tend to be entrepreneurial, and many started their own business ventures based on their initiatives and ideas.  While the majority need to seek outside capital to start up and sustain their businesses, they typically prefer to remain in charge and steer their business’ future direction.

Many of the world’s family-owned businesses seek to maintain control over their operations. Privately held businesses are effective channels through which values can be passed down across generations.  In publicly held companies, the constant pressure of hitting quarterly targets can make it difficult to achieve the long-term vision that many UHNW individuals first have when starting their business.  Yet publicly held companies have their own advantages – in many cases, successful businesses go public to raise further investment capital, once the initial venture has proven to deliver a degree of sustainability.

The Rise of The Family Office
In other cases, heirs and heiresses may sell their stakes in businesses they do not wish to be involved in, in many cases raking in significant profits. On average, an individual should have more than US$250 million in net worth to benefit from the services of a single family office (SFO), and around US$100 million for a multi family office (MFO).

Globally, there are 16,545 individuals with net worth in excess of US$250 million; and 56,525 individuals with net worth in excess of US$100 million.  We estimate there are currently between 7,000 and 11,000 family offices (including both SFOs and MFOs), which collectively manage over US$2.5 trillion of the global UHNW population’s wealth.  Personal preferences play a large role in determining the perceived value of such services, with first generation UHNW individuals often reluctant to start their family office or use multifamily offices.

The growth in the number of UHNW individuals who have inherited at least some wealth indicates that we can expect large growth in the family office industry.  As more and more of today’s ultra wealthy pass on their wealth and business holdings, this type of wealth management vehicle will become increasingly attractive.

We estimate that over US$3.2 trillion of the UHNW population’s wealth is managed through private banking. UHNW individuals have large cash balances and the services they require differ from those required by less affluent individuals.  Despite a marked preference for private banking services, ultra wealthy individuals rely on more than just past performance when it comes to assessing their wealth managers.  Wealth managers are expected to provide unique and bespoke services to ensure that their clients see real value in the expertise and assistance that they offer. For example, given the importance of philanthropy across all clusters of UHNW individuals as well as the shift towards more business-oriented forms of philanthropy such as impact investing – ultra affluent individuals are likely to expect their wealth managers to have an understanding of philanthropy and the non-profit sector.

An ever-increasing number of UHNW individuals have international business stakes, and frequently need to travel abroad to manage their business affairs. As of yet, however, the proportion of the world’s wealthiest who have relocated abroad remains smaller than one would expect.  Just over 6% of the world’s UHNW by individuals’ primary business interests are located outside their home countries.

NEXT GENERATION OF INFLUENCERS
UHNW individuals are well connected.  On average, their immediate social network includes seven other UHNW individuals, at least one of whom is a billionaire. The value of this social graph is US$6.5 billion, on average.  As groups, these individuals often have similar beliefs, interests and hobbies.  Social graphs show how extensively connected UHNW individuals are.

With referrals being one of the best ways to engage with the ultra wealthy, the social graph is an invaluable tool across industries: by impressing one individual, there is the possibility to gain seven new contacts, and thereby access a larger pool of resources.  Such social graphs matter: the reputation of relationship managers, loyalty to certain brands or awareness of certain philanthropic causes are discussed within these social groups, amongst other topics, and the individuals in these groups have the power to influence each other.

Already, the impact of intergenerational wealth transfers is being felt, as the proportion of individuals with at least partly inherited wealth is steadily increasing.  The effects of such transfers also depend on the ways in which wealth is passed along. Splitting a fortune between heirs can have large ramifications for the UHNW population….

Ensuring smooth and successful wealth transfers is an increasingly relevant issue for UHNW individuals. Looking at the countries with the oldest UHNW population on average, and the ones most likely to see large shares of their UHNW wealth be passed to the next generation in the coming years, we notice that the conditions under which such transfers will occur can differ vastly.  There is wide variation in terms of the development levels and the number of potential heirs in these countries. Succession planning must take into account the variety of expectations and requirements that are possible in these diverse contexts. …

The importance of UHNW individuals as consumers or clients cannot be overstated. There are 211,275 individuals with net worth in excess of US$30 million, and these individuals generally have large extended families – including their parents, children and spouses. Accounting for spouses and children alone, there are over one million individuals that have access to UHNW resources. This expanded market provides further evidence of the value of UHNW individuals as consumers, clients and economic forces. Furthermore, it underscores the need for various industries to understand their client base better: for example, UHNW individuals from large families require more

NORTH AMERICA MARKET
North America remains the region with both the largest UHNW population and wealth.  Home to the world’s biggest economy – the United States – the region has a stable institutional infrastructure and offers world-class educational facilities.  North America is often a frontrunner when it comes to the development of new and rewarding economic opportunities.  For example, North America has the largest concentration of UHNW “technopreneurs”, who made their fortunes in the technology industry. North America’s position as the world’s most powerful economic centre also helps explain the region’s leading position as a hub for UHNW population and wealth.

In hard times, many UHNW individuals tend to gravitate towards the world’s largest economies, which they believe will be safer than emerging markets, particularly with respect to luxury real estate investments and other such long-term capital placements.  For example, …almost a quarter of all UHNW individuals with residences abroad own a property in North America.  Such trends are expected to continue, thereby ensuring the continued clout of North America in the world’s ultra affluent landscape.

Even though North America was strongly affected by the Global Financial Crisis, recovery for the region’s wealthiest was swift.  By 2011, growth in both UHNW population and wealth in North America had picked up, demonstrating the resilience of the region’s UHNW population as a wealth group.

Despite North America’s strong UHNW population growth, it is the only region where UHNW wealth grew slower than UHNW population, across all wealth tiers.  This is surprising, considering the strength of the region’s equity markets, but there are several factors that explain this phenomenon.

With an average age of 61, North American UHNW individuals are older than their counterparts in other regions, and have often moved beyond the stage of wealth accumulation, focusing instead on wealth preservation.  In addition, North American UHNW individuals tend to hold a significant share of their wealth in cash – 29% – which typically delivers lower returns than equity investments. This characteristic reflects the cautious investment strategy of the region’s UHNW population in the last year, with most individuals waiting on the sidelines to see just how strong and stable the region’s growth is before investing their cash.

The largest absolute growth in North America’s UHNW population – as expected, and as was the case around the world – was in the lowest wealth tier.  While we did not see an overall increase in the average net worth of the region’s UHNW population across wealth tiers, this was compensated by the upward mobility of many UHNW individuals across wealth tiers, driven by the strong performance of the equity markets.  New York remains the city with the largest UHNW population in the world.  If New York City were a country, it would be the seventh largest country in terms of UHNW population size. The continued dominance of New York can be largely attributed to the city’s status as the financial capital of the world.  This role further enhances the city’s attractiveness to other industries, as proximity to developed capital markets is a particularly important factor for businesses looking to achieve further growth.  Such clustering is not unique to New York: San Francisco overtook Los Angeles in terms of UHNW population this year, indicating the growing importance of the city as a hub not only for technology entrepreneurs, but as a centre of wealth accumulation. Over a quarter of San Francisco’s UHNW population is involved in the technology industry, but as wealth in this sector accumulates and spreads, other sectors such as real estate and finance grow in importance as well.

The rise of the technology industry as a source of wealth for the world’s UHNW population is clearly shown in the United States: it is the second largest industry and 9% of the country’s UHNW individuals made their wealth in this sector.  The United States remains the country with the largest UHNW population and wealth in the world.  The United States alone has a larger UHNW population and wealth than any of the regions around the world, even Europe. It accounts for almost a third of the world’s UHNW population and wealth.  This year, the country’s UHNW population continued to swell, adding over 4,000 new individuals, more than the entire UHNW population of Australia, the 11th largest UHNW country.  This growth was in no small part due to the strong performance of the country’s equity markets – the S&P500 surged by 21.4% during this period – and unemployment also decreased, from 7.3% in July 2013 to 6.1% in June 2014.  Yet not all economic indicators were positive: productivity across the economy declined slightly according to the Bureau of Labor Statistics – even adjusting for seasonal changes – and GDP grew at a rate of only 2.3%.

The United States’ economy accounts for a third of the world’s total wealth, and of that wealth, 12.5% is held by UHNW individuals.  In relative terms, this is far lower than the share of national wealth held by UHNW individuals in most of the Middle East and Latin America, however the United States’ UHNW population holds the largest absolute amount of global wealth…. Even after decades of being the world’s largest economy, more than three quarters of the country’s UHNW individuals are fully self- made. In fact, there are more self-made American UHNW individuals than there are UHNW individuals in any other country.

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Written by Rich and Co.

November 28, 2014 at 5:22 pm

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