Financial Wealth Going Down For The First Time In 15 Years, But It Will Be Short

MILAN: For the first time in 15 years, the value of global financial wealth has contracted, decreasing by 4% in 2022 and reaching 255 trillion dollars. According to the study “Global Wealth 2023: Resetting the Course”, the 23rd annual report on global wealth by the Boston Consulting Group (BCG), one of the triggers is the context of geopolitical uncertainty due to the war in Ukraine, which has determined the rise in inflation, the increase in interest rates and the poor performance of the stock markets. However, this decline is expected to be short-lived, as a 5% rebound is expected this year, which will take the value of global wealth to $267 trillion.

Among the bright spots of 2022 is a 6.2% increase in the value of global cash and personal deposits , as the past year was characterized by a more cautious approach to investing. The value of real assets , ranging from real estate to art, increased by 5.5% to $261 trillion. Overall, absolute global wealth came to $516 trillion in 2022, up 1% from 2021.

“After a record-breaking 2021 with a 10% increase, global financial wealth experienced its first decline since 2008 in 2022 ,” said Graziano Pace, principal at BCG . , inflation and reduced market performance. Italy was no exception with a 3% drop in financial wealth. We expect the improvement in the macroeconomic environment and the rebound in markets to drive a return to growth as early as 2023. However, sector operators will have to continue working on a distinctive offer, an excellent advisory service and an optimized operating model to support the recovery in the medium to long term”.

Geographical areas grow at different paces
While financial wealth declined in North America and Europe in 2022, it continued to grow in Asia-Pacific, the Middle East, Africa and Latin America. Furthermore, as often happens in times of macroeconomic uncertainty, cross-border wealth increased by 4.8% in 2022, reaching $12 trillion globally.

In this context, there has been a transformation in the dynamics of the sector. For example, Switzerland remains a highly attractive financial and wealth management hub, but Hong Kong will be the world’s largest booking center1 by the end of 2025 . Hong Kong has in fact experienced the highest growth rate of assets under management (AuM) among major booking centers over the past five years, with a compound annual growth rate (CAGR) of 13%. However, what is holding this area back is the strong competition with Singapore, which is increasingly perceived as a safe haven for the Asia-Pacific region.

Finally, the UAE has attracted assets from a variety of regions, including Asia-Pacific and Eastern Europe, posting faster AuM growth than any other booking center. Their financial wealth is projected to continue to grow over the next five years at a rate of 10%.

Italy is the eighth country for total financial wealth worldwide , with a total of 5.7 trillion US dollars, slightly less than in 2021. Real assets instead record the same levels (7.4 trillion US dollars), while liabilities have reached 900 billion dollars.

While the market has experienced a downturn over the past year, the combined financial wealth, real asset pool and liabilities grew by 2.1% from 2017 to 2022, totaling US$13.7 trillion. In the last year, our country collected 11.6% of financial wealth, 11.7% of real assets and 6.8% of liabilities in Western Europe.

The BCG analysis estimates 411,000 Italian millionaires , i.e. people who hold assets of at least one million dollars in financial wealth, less than 1% of the population. If we then look at the Ultra-High Net Worth segment, individuals who hold assets of more than 100 million dollars in financial wealth, there are 2,000 in Italy.

According to data, as much as 43% of financial assets in 2022 are held by millionaires , but a large part of the wealth belongs to the so-called affluent and mass customers, individuals with a wealth of up to one million3. Over the next 5 years, the various segments will follow different trends: the number of millionaires with assets ranging from 1 to 100 million US dollars (Lower- and Upper-High Net-Worth) and affluents will remain stable, the number of of individuals with assets greater than 100 million (Ultra-High Net Worth), while the mass customers will decrease by 2%.

Pressure on profits

The Wealth sector had long been dealing with tight margins, but asset managers were buoyed by the favorable financial market climate and rising business volumes. It is precisely the latter that has recorded an 11% decrease in 2022. In addition, costs have increased across the industry, given the expansion of front office teams, higher salaries and an increase in technology spending , and are expected to remain elevated due to higher inflation than in the previous decade.

Pre-tax profit margins for wealth managers also fell by an average of 2.3 basis points (bps) globally. Traders in the Asia-Pacific and North America regions recorded the steepest declines, with increases of 5.5 bps in Asia-Pacific and 3.1 bps in North America respectively, compared with increases of 2.5 bps in Europe and 0. 3 bps in Latin America.

Wealth managers need to adopt new initiatives on both the revenue and cost fronts to stay competitive, according to the study. Key actions on the revenue side include building a scalable growth engine in customer acquisition, designing a distinctive offering in the private market, revising the product shelf in line with interest rate changes and a long-needed shift in the financial advisory offering, driven by advances in generative AI. In parallel, a bold approach to reducing costs must be taken, including an end-to-end process review, careful evaluation of outsourcing decisions.