Our editorial board has been looking back over the past year and looking forward into 2012. Below are the key trends that we believe will impact the wealthy and those servicing them over the next twelve months.
Inflation in both developed and developing economies led the wealthy to re-assess their asset allocations over 2011. Historically low risk investments, such as cash and fixed income products, lost some of their appeal as returns were eroded; meanwhile alternative investments, which are considered to be ‘safe havens’, attracted increasing interest. Passion investments including fine art, wine and classic cars all increased in value.
Prime property has also benefitted considerably from this trend, with prices in key markets such as London doing particularly well. The most apparent surge in prices has been in commodities, with gold being a case in point. Over the course of the year, the gold price has broken all previous records. However, the difficulty now lies in the fact that the interest in ‘alternative investments’ has been so high that some of them now look overvalued and thus are no longer the ‘safe havens’ they used to be.
The impact is further uncertainty for the wealthy, who are seeking to protect and even grow their asset base. From a commercial perspective, it points to a significant opportunity for wealth managers as well as prestige brand manufacturers to provide services and products which deliver both value and security. Going into 2012, the outlook for the global economy is still uncertain, meaning that this dubious investment environment is likely to prevail.
Financial and C-Suite bonuses remain under scrutiny as jobless numbers continue to grow and governments implement further austerity measures. The financial services industry is responding by tying more compensation to salary and bringing down bonus payments. This has been borne out in 2010 and estimates for 2011 anticipate lower bonuses this year too.
Regardless of whether this has any material impact on bankers’ overall compensation levels for the year, the change in the structure of remuneration can impact behaviour. If pay is spread over the year (or deferred entirely), rather than paid out in a single lump sum, the wealthy’s spending behaviour could shift towards more lower-priced items rather than the typical bonus splurges on high-priced items such as housing, autos, watches and jewellery.
Analysis of various rich lists shows that wealthy women account for a relatively small proportion of overall wealth around the world. For example, 105 of the 1,000 wealthiest individuals in the UK are women. What is more, this is only the first time this number has exceeded 100.
However, concentrating on the size or proportion of wealth held distracts from the more important issue of the significant influence that women have on how wealth is spent. This is substantiated from research carried out by Ledbury, which found that just under half (49%) of wealthy husbands believe they make the financial decisions for the household; however a considerably smaller proportion (13%) of wives in these households agreed.
More explicitly, 90% of wealthy American women make sole or at least half of the decisions about philanthropy (Merrill Lynch). The implication is that women play a greater role than their individual wealth levels suggest. This pattern will gain traction going forward, as emerging countries like China, home to 18 of the world’s 28 female billionaires (Hurun/Bank of China), come to the fore and women play an increasing role in wealth creation both behind the scenes (see Wealth Segments Modern Matriarchs) and in business themselves.
As wealth growth in developing nations outpaces that in conventional wealth centres, prestige brands have invested significantly to establish themselves there. This is not without risk however and earlier this year HSBC Private Bank decided to exit the Russian market.
While this was attributed to a strategic overhaul with a view to concentrating on a select number of key markets, like other operators they will have faced unique cultural challenges which can pose barri ers to success for prestige brands.
As such, we would expect more considered approach to brand’s expanding global footprint. American apparel brand Coach is demonstrating this caution in its temporary online offering in China and we expect other luxury brands to follow suit (Women’s Wear Daily).
As luxury brands work to improve revenues they must decide whether they will target consumers on a global scale or alternatively remain more niche, serving only a limited market. This balance for exclusivity is a key consideration for brands as it will have an impact on their strategic direction. Over-exposure can lead to undesirable associations as witnessed this year when Abercrombie & Fitch offered to pay characters from the reality television programme Jersey Shore, not to wear their apparel on the show.
Another risk of over-exposure is counterfeiting. While this costs the luxury industry significant revenues every year, notwithstanding the moral issues associated with fakes, there is research evidence to show that the counterfeiting is not always bad news for luxury brands. Indeed, in some circumstances, counterfeits can lead to the purchase of the genuine product subsequently.
With luxury brand images becoming more accessible through mass communications and social media, the tension between the twin objectives of sales growth and exclusivity will only heighten and luxury brands will have to work out the best approach to deal with this.
The devastation caused by Japan’s earthquake in March initiated widespread support from the luxury industry, many players in which have long-established businesses there (see High Net Worth Apr 2011). Analysis of donations given by individual brands showed them to represent only a very small proportion of their respective revenues for the year, however it highlights an emerging trend which looks set to gain momentum over the medium term. This is particularly important for international expansion as consumers in China, for example, place high importance on Corporate Social Responsibility (CSR) (Tsinghua University & Ruder Finn Asia).
More recent developments include Tiffany & Co launching a website dedicated to CSR, detailing sustainability performance for the year as well as they company’s history of environmental and social responsibility (First Post).
Country of origin still ranks high in importance for consumers choosing luxury brands. Traditional centres of luxury such as France, Italy and UK continue to hold appeal for their know-how and experience in luxury design and craftsmanship. However another trend is the emergence of developing countries such as India and China in more specialised areas used in the manufacture of luxury goods.
Historically, these countries have been associated with the low-skilled mass production element of luxury, however increasingly they are being used for expertise and artisanship, building on their traditional reputations for themselves in this respect.
While the majority of global wealthy are self-made, inheritance is still an important source of wealth. In emerging markets, the newness of wealth there means that succession planning is not yet a feature. The implication is that this lack of planning could undermine the country in question’s ability to sustain its wealth levels going
forward. Russia is a case in point and has the lowest level of family involvement in business, with only 8% of children playing any role (Societe General).
Furthermore, an estimated $70bn of Russian wealth will be expatriated abroad by year-end (New York Times) due to an inherent lack of trust in the authorities there. On the other hand, recent research found that the wealthy in China are planning for their children’s prosperity by buying properties in conventional wealth centres, in anticipation of their children living there to receive a world-class education (Bank of China/ Hurun). In every case, the challenge of passing wealth onto the second generation will remain a key issue for 2012.
The above is a collection of insights taken from Ledbury Research’s flagship publication High Net Worth. For more information please visit this link.