Client residence: the old world and the new

Saturday, 01 October 2011
A report on the findings of a STEP survey about the global trust and estate planning industry

It has become a commonplace in recent years that the global centres of wealth are gradually shifting from the developed countries, mostly of the western and northern hemispheres, to emerging economies. Individual wealth in the so-called BRIC (Brazil, Russia, India, the People’s Republic of China (PRC)) economies, as well as in many other developing countries, is growing rapidly. In particular, the number of wealthy Asian families is soaring.

So it could be expected that trust providers and wealth management firms that have traditionally pitched for clients in Europe and the US are looking further afield. There is certainly some truth in this. But a survey of 52 trust companies, commissioned by STEP and conducted by the London-based research firm Spence Johnson, indicated that the reality is more complex.

The Trust Company Benchmarks survey found that the industry’s internationalist attitude is mostly concentrated in Swiss, Caribbean and Channel Islands firms. Elsewhere, estate planning practitioners still tend to work where their clients live, or in a neighbouring jurisdiction.

This is especially true for the UK, where the vast majority of clients are serviced by British or Channel Islands trust companies. Some 98 per cent of the dealings of UK-based trust companies are with clients within the UK. But it is also the case for high-net-worth families in developing countries: in particular, 57 per cent of Asian practitioners deal mostly with clients within Asia.

Developed countries stay in front despite rapid Asian growth

A study conducted by the Deloitte Center for Financial Services in May 2011 found that Europe and the US are expected to remain the principal places of residence for wealthy clients over the next decade, even though the emerging market economies are a bigger source of growth.

There is a huge disparity in the projected growth of client bases in developed and emerging economies. The wealth of millionaire households in all 25 economies included in Deloitte’s study – both developed and emerging – will approximately double in ten years, with growth in developed markets at only 107 per cent. By contrast, taking only the emerging markets, growth over the next decade is expected to exceed 250 per cent.

However, even this faster growth will not take the wealth of millionaire households in emerging markets past that in developed countries. Households in the USD5 million to USD30 million category are expected to grow substantially in developed countries over the next decade.

Thus, the top ten wealth management markets in 2020 will still mostly be in developed countries – with the possible exception of the People’s Republic of China, where wealthy families will have estimated assets of USD8.2 trillion in 2020.

Australia is expected to experience a 13 per cent growth rate of millionaires, the fastest in the developed world. This should take it into the top ten wealth management markets by 2020, with 1.6 million millionaire households. The next highest growth rate is likely to be Singapore’s, at 10 per cent, while France will have one of the world’s slowest growth rates, at 2 per cent.

The US will continue to be a key source of clients over the next decade, as it maintains its share of the wealth management market at 42–43 per cent. With its millionaire population growing at about 9 per cent a year, it will continue to be the residence of the largest number of millionaires, potentially rising from 10.5 million households in 2011 to 20.5 million households in 2020. Per capita wealth in millionaire households (including the value of primary residences) will rise to USD4.2 million by 2020, the fifth highest in the world.

Deloitte reckons that aggregate wealth of millionaire households in the US is likely to grow from USD39 trillion in 2011 to USD87 trillion in 2020. California is likely to have the largest number of wealthy households, while the East Coast will probably see the highest growth rates. The states of New York and Florida alone could add a million-and-a-half more millionaire households by 2020. Conversely, Japan, with its continuing, apparently insoluble, economic problems, is likely to see its numbers of wealthy clients decline. Yet it will remain the US’s nearest rival in terms of individual wealth, with an estimated 8.6 million millionaire households in 2020.

Deloitte makes some startling predictions for the world’s most prosperous jurisdictions. For example, almost half of Hong Kong households are expected to have more than USD1 million in wealth by 2020 (including their principal residence). Singapore will be next, with 37 per cent of residents being millionaires – while nearly one in 50 of its households will have assets over USD30 million. Switzerland will come third, with 24 per cent of its population being millionaires.

The survey’s authors, Spence Johnson, noted that this finding is significant because Asia is easily the fastest-growing source of new clients for trust providers. Practitioner firms in almost every region are actively pitching to clients in Asia above all other regions in their search for new business, the survey found. According to Spence Johnson, this trend implied that practitioners in the more mature financial centres will have to become less dependent on their traditional sources of clients.

Jersey and Guernsey will reduce their reliance on the UK: indeed both have already begun to swing their marketing efforts eastwards to India, the PRC, Russia and the Middle East. For example, in March 2011, Jersey Finance opened offices in Mumbai and Abu Dhabi, and it launched a website written in Mandarin Chinese as part of its Asian business development drive.

Trusteeship is changing from an international to a global business

All three Crown Dependencies are looking closely at Russia, where the potential to find new clients is huge. The country had 114 dollar-billionaires at the end of 2010, and around 100,000 millionaires. Some estimates put the investable liquid assets in the country at USD90 billion, of which less than 15 per cent is invested at the moment.

Switzerland is to some extent following suit, as its traditional appeal to German and American clients has been sapped by international tax compliance measures. Caribbean centres will also focus less on North America, the STEP survey found. They will probably turn more attention to Central and South America, as well as to Asia. And everyone will spend less time canvassing western European clients.

Prospects for new clients

Emerging markets, are very diverse in terms of the number of millionaire households and the amount of wealth they hold.

China will continue to be the most powerful engine of millionaire wealth. Assets held by millionaire families will grow by 392 per cent, taking the country into the top ten wealthiest economies by 2015, with an estimated USD3.6 trillion of investable assets. It is expected to have 1.48 million households with assets between USD1 million and USD5 million by 2020, and a further 689,000 households with assets between USD5 million and USD30 million.

Among other BRIC economies, India is likely to see the strongest growth in total millionaire wealth, going up by a factor of five in the next decade. Brazil’s millionaire wealth will grow by 258 per cent and Russia’s by 242 per cent; by 2020, Russia will probably take 11th place in the world rankings, with 153,000 millionaire households, said Deloitte.

South Korea is predicted to have 1.51 million households worth between USD1 million and USD5 million by 2020 – the highest number of any emerging economy. Along with China, it is the most likely country to join the top ten wealth management markets by 2020, with a predicted per capita income among millionaires of USD1.4 million.

The focus on emerging regions is made even more attractive by the fact that new clients there are likely to have fewer historical tax compliance issues, said the Spence Johnson analysts. They concluded that trusteeship and administration is changing from an international to a global business. Future centres of wealth creation and management will not be the same as those of the past, and globalisation will force practitioners to follow the money.

The exception appears to be the UK trust industry. Here, practitioner firms’ quest for new clients is still aimed almost exclusively at the UK itself, the survey found. Whether this is due to parochialism, to the UK’s continuing attractiveness to high-net-worth families, or to the ever-increasing complexity of UK tax law, Britain’s trust industry appears to be dragging its feet in the race to globalisation.

Do you wish to participate in the next STEP trust company benchmarks survey later this year or do you want a more detailed report of the findings? If so, contact report author Nils Johnson by email at nils@spencejohnson.com

 

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Peter Mitchell

Peter Mitchell is News Editor of STEP Journal

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