Report: The rich get richer as others lose out

Malcolm Shearmur

Monday, Sept. 12, 2005 | 9:22 a.m.

Millionaires are getting richer while the assets of people with less money are declining, according to a report published today by Boston Consulting Group Inc.

The wealth of some 7 million people with at least $1 million to invest will grow at an annual pace of about 6 percent over the next five years as they make money from riskier investments such as hedge funds, the Boston-based firm said. The assets of those with less than $100,000 will dwindle by 0.3 percent a year through 2009.

"Most of the assets that the less rich are investing are in bonds, stocks and money markets, which we don't see rising that fast," Christian de Juniac, co-author of the report, said in a phone interview from his London office.

Millionaires around the world have about $24.5 trillion of investments, Boston Consulting said. Hedge funds, which cater to wealthy investors and aim to make money in falling as well rising markets, have more than doubled their assets to $1 trillion since the end of 2000, according to Hedge Fund Research Inc.

The rich will increase their wealth by 10 percent this year, according to the Boston report, which comes out annually.

The assets of those with less than $100,000 will probably drop 3 percent in 2005, the study predicted. Japan's central bank has kept interest rates at almost zero for 4 1/2 years, while in Europe rates are at their lowest since at least 1946.

The increase in wealth at the top end of the scale has led to greater competition among banks for their custom.

The resulting pressure on prices and profit will be strongest for smaller wealth managers who will need to merge or specialize in selected products or markets to survive, according to the Boston study, which was based on a survey of 100 financial companies.

"Smaller banks have to think about a strategy," Christoph Ritschard, a banking analyst at Zuercher Kantonalbank in Zurich, said in a phone interview. "They can cooperate with distribution partners, they can outsource certain functions, they can merge or acquire, but they have a certain pressure to move forward."

Banks for the wealthy, including UBS AG, the world's biggest, have been expanding in markets including Asia, Eastern Europe and Latin America where economic growth is faster than in their traditional U.S. and western European markets.

Julius Baer Holding AG, Switzerland's largest publicly traded private bank, last week agreed to buy four asset-management units form UBS to help it grow in Asia.

The assets of people in Latin America with at least $100,000 to invest surged 12 percent in local currencies last year, led by Brazil and Chile, according to figures from Boston. The pace of growth will slow to about 6 percent per year through 2009 as less new wealth is being created than in the 1990s, the study said.

In Asia, the wealthy amassed 7.3 percent more assets in local currencies last year and growth will slow to an annual 6.8 percent over the next five years. North America, where more than half of the world's millionaires are based, will have the slowest growth in assets at 4.1 percent, according to the Boston Consulting Group.

The rich in Europe will see assets grow at about 6 percent annually over the five-year period.

European "onshore" wealth managers, who oversee assets in the client's country of residence, widened their pretax profit margin to 28 percent in 2004 from 24 percent a year earlier. Margins for "offshore" managers widened to 30 percent from 26 percent, the Boston report found.

A European Union tax on the savings of non-residents introduced this year will hurt offshore markets, according to Boston Consulting. In Switzerland, the largest offshore center with $1.82 trillion held in foreign accounts, about two-thirds of the money stems from clients in Europe.

"As the screws get tightened, that has to be a long-term problem for Switzerland," de Juniac said.