Hong Kong is set to overtake Switzerland as the world's largest cross border hub next year, with Singapore coming close to ousting Switzerland from second place, according to Boston Consulting Group (BCG) in its heavyweight annual overview of the industry.
Globally, BCG said in its report called ‘Global Wealth 2022: Standing Still Is Not an Option' that cross-border activity is expected to rise around 5% to 5.6% through to the end of 2026.
"But crisis effects could reshuffle the leader board, with Hong Kong replacing Switzerland as the world's largest booking centre next year, and Singapore coming close to ousting Switzerland from second place," it said. "Aided by healthy inflows from Hong Kong, Singapore could see annual growth of 9% to 10% from now through 2026.
"And Russia could edge out Saudi Arabia and Turkey as the largest source country to book in UAE, with total assets on track to more than triple over the next five years, albeit from a very small starting base.
"By contrast, booking centres in Western Europe may experience outflows. Switzerland alone could see upward of $6 billion annually exit the country through 2026, and asset growth will struggle to exceed 2.4 per cent during this period. Still, Switzerland's booking centre base is huge, and 2.4 per cent growth will generate roughly $320 billion in additional assets by 2026," it said.
Overall, global financial wealth reached a record high of $530trn in 2021, fuelled by strong equity markets and a surge in demand for real assets.
Despite geopolitical and economic destabilizers such as inflation and Russia's invasion of Ukraine, approximately $80trn in new wealth is likely to be created over the next five years.
In a notable industry shift, Hong Kong will probably overtake Switzerland in 2023 as the domicile managing the largest amount of private cross-border wealth, ending a run of more than 200 years of Swiss dominance.
"Wealth development is resoundingly resilient, and even against the backdrop of geopolitical turmoil the growth rate will remain positive," said Anna Zakrzewski, global leader of BCG's wealth management segment and a coauthor of the report.
"Although this stability provides tremendous opportunity for wealth managers, they must make strategic choices to remain competitive. Wealth clients are looking for next-generation offers and next-level service—including net zero, crypto, personalization, and digitization.
The most important question facing wealth managers today is not which initiatives to prioritize, but how best to implement them."
The report predicts that wealth assets will continue to rise in value in all regions. But Asia-Pacific will maintain the fastest rates of wealth growth, with asset values poised to increase by a compound annual growth rate (CAGR) of 8.4% through 2026. If that rate holds, the region could be home to nearly one-quarter of the world's wealth by 2026.
Wealth in the Middle East and Africa is on track to rise by a CAGR of 5.4% over the next five years, the biggest overall leap in regional wealth growth.
In North America, wealth growth will be slower than in years past, with an estimated CAGR of 4.7% through 2026, down from a prior five-year average of 9.1%. Likewise, in Western Europe, wealth growth is likely to slow from roughly 4.5% over the past five years to less than 4% annually until 2026.
Net Zero Is an Immediate Imperative
Sustainable investing—of which net zero is a key component—is growing three to five times as fast as traditional investments, and by 2026 this asset class could account for 8% to 17% of privately invested wealth, up from 4% to 11% today. Although people tend to think of net zero as a 2050 goal, the report notes that wealth managers must act immediately to embed sustainable investing across the entire client life cycle.
Crypto: An Untapped Market for Wealth Managers
Nontraditional wealth managers currently manage up to $1 trillion in crypto-related wealth, and the market capitalization for crypto could increase four- to fivefold by 2030. The opportunity for wealth managers is clear: nearly 80% of clients surveyed said that they would consider increasing their crypto holdings if wealth managers offered advisory and education services.
Two-thirds of clients who sourced their crypto investment with third parties said that they did so because they didn't think their wealth managers offered such services. To determine whether crypto is right for their businesses, wealth managers must consider if, when, and how they want to participate.
Personalization as a Driver of Top-Line Growth
On average, wealth managers that excel at customizing offers and interactions see higher rates of client satisfaction and lower rates of churn than others do. While these metrics translate into increased returns on client assets and liabilities, along with annual growth of more than 10%, wealth managers that outperform on personalization are the exception rather than the rule.
Personalization is a complex undertaking that requires introducing new data and analytics, connecting processes across the firm's front, middle, and back offices, and changing ways of working. In the report, BCG identifies three actions that wealth managers vying to deliver individualized service at scale can take to improve personalization: prioritize capabilities that recur across journeys; design for value and scale; and back good ideas with the right enablers.
The Digital Wealth Management Premium Is Real
The valuation multiples of digital wealth management firms are six or seven times as high as those of traditional wealth managers. Furthermore, private funding in wealth tech has increased, with digital wealth management firms attracting $14.5 billion in funding in 2021 (11% of total global investments).
Digital wealth management institutions are delivering faster customer growth, cheaper cost structures, and superior rates of innovation. To protect their future profitability, traditional wealth managers must evolve with the times.
"Traditional wealth managers have known for years that they need to accelerate the pace of their own digitization," said BCG's Zakrzewski. "Now they have an additional incentive to emulate the practices of these digital leaders as they look for ways to secure future growth and increase their value to clients."
