NU Online News Service, July 13, 11:00 a.m. – Financial institutions must face critical changes in the economics of the wealth management industry if they are to win their share of the pie, says a new study by the Boston Consulting Group. Many financial service firms have lost sight of the cost-effectiveness of serving particular classes of clients, the study suggests.

BCG believes that one-third to one-half of client accounts at most wealth management firms hold balances below the stated minimum size. Despite the financial and economic downturn, the number of individuals joining the ranks of the wealthy continues to grow. The new study predicts that the wealth market will increase globally by more than 10% a year to reach $66 trillion in 2005 and potentially generate $700 billion in annual revenues for the wealth management industry, up significantly from the current estimate of $500 billion.

“The focus on dot-coms has diverted attention away from the fact that business-to-consumer markets in Asia are actually booming,” says David C. Michael, a vice president in BCG’s Hong Kong office and one of the report’s three co-authors. “Our research found 81% of online business-to-consumer revenues in Asia are generated by large, established companies.

The BCG study, Richer Prospects in Wealth Management: Global Wealth 2001, A Senior Management Perspective, identifies 34 million households with net investment assets in excess of $250,000, controlling $40 trillion in wealth overall. The key to profitability for wealth managers may lie in deciding which customer segment?a specific wealth level or geographic region?they can most effectively serve. Among the study’s major findings:

  • Today, 46% of the assets of the wealthy are in North America and only 25% are in Europe. But this is set to change, with higher European economic growth and a stronger euro. This should cause assets in Europe to grow nearly twice as fast as those in the U.S. over the five years to 2005, leaving North America holding 42% and Europe 30% of wealthy investors’ assets.
  • Although European competitors will continue to find it difficult to break into the U.S. market, with its lower prices for wealth management services, the European market should become very attractive to U.S. players. Regulatory complexities across the different markets, however, mean Europe presents its own challenge.
  • Although individuals with less than $5 million to invest are often neglected by institutions in favor of the ultra-rich, this emerging affluent class accounts for 79% of wealth revenues. Although this group is predicted to grow faster up to 2005 (11.6% per year, compared to 9.6% for all groups), the affluent provide a much steadier source of growth from their accumulating savings. BCG believes it is possible to focus profitably on this customer segment by offering a more self-directed, Internet-enabled approach at a lower cost to serve.