The value of global financial wealth shrank for the first time in 15 years in 2022, declining by 4% to $255trn (£201trn, €233trn), according to findings from Boston Consulting Group (BCG).
Drivers include spiking inflation, the resulting rise in interest rates, and poor equity market performance against the backdrop of geopolitical uncertainty sparked by the war in Ukraine.
However, the decline is expected to be short-lived, with a 5% rebound to $267trn expected in 2023.
Bright spots in 2022 include a 6.2% increase in the value of personal cash and deposits, as a more risk-averse approach to investments prevailed.
The value of real assets, ranging from real estate to art, also rose by 5.5% to reach $261trn. Overall, that brought total absolute global wealth to $516trn in 2022, a 1% increase compared with 2021.
“The first downturn in the global financial wealth market since the 2008 crisis came after a 10% rise in value in 2021, which was one of the sharpest in over a decade,” said Michael Kahlich, a BCG managing director and partner, said. “We expect that the improving macroeconomic outlook and rebound in stock markets will drive a return to growth in financial wealth as early as 2023, and our five-year compound annual growth rate forecast to 2027 remains a healthy 5.3%.
“However, the recent headwinds in the market show how important it is for industry players to future proof now for consistent long-term growth.”
Financial wealth continued to grow in Asia Pacific, the Middle East, Africa, and Latin America in 2022, but declined in North America and Europe.
In addition, as is often the case in the context of macroeconomic uncertainty, cross-border wealth rose by 4.8% in 2022 to reach $12trn globally.
Against this backdrop, the year saw a shift in booking centre dynamics. Switzerland remains a highly attractive wealth management and financial hub but is expected to be overtaken by Hong Kong as the world’s largest booking centre by the end of 2025.
Hong Kong has achieved the highest assets under management (AuM) growth rate among top booking centres over the last five years, with a compound annual growth rate (CAGR) of 13%.
However, it is facing strong competition from Singapore, which is increasingly perceived as a safe-haven gateway to the Asia Pacific region.
Finally, the UAE attracted assets from across regions, including Asia Pacific and eastern Europe, growing its AuM faster than any other booking centre. Its financial wealth is expected to continue to grow over the next five years at a healthy 10% rate.
Profits under pressure
Margins in the industry had been eroding for a while, but wealth managers were buffered by the favourable climate in the financial markets and rising client business volumes. However, the latter registered an 11% decline in 2022.
In addition, costs rose across the industry, driven by larger front-office teams, wage inflation, and technology spending, and are expected to remain high as inflation persists at levels above the previous decade.
Pre-tax profit margins for wealth managers decreased by an average of 2.3 basis points (bps) globally.
Players in the Asia Pacific and North America regions saw the steepest declines, with 5.5 bps in Asia Pacific and 3.1 bps in North America, compared with a 2.5 bps rise in Europe, and 0.3 bps increase in Latin America.
“Wealth managers need to adopt fresh initiatives on both the revenue and cost sides to remain competitive,” said Ivana Zupa, a co-author of the BCG report. “Key actions on the revenue side include building a scalable growth engine in client acquisition, designing a distinctive private market offering, revising the product shelf in line with shifting interest rates, and leading a long-overdue change in how financial advice is offered, driven by generative AI technology.
“In parallel, a bold approach is needed to reducing costs, including conducting an end-to-end process review, getting shoring decisions right, exploring third-party tech and operations solutions, and simplifying products and services via advice-like discretionary portfolio management.”