Introduction
21st Century has witnessed the most unprecedented growth of wealth management industry. In account for rapid economic development concentrated in first world nation since second industrial revolution, this essay discusses the view that economic development in highly industrialized and developed nation is the primary driving force behind the development of global private banking and prosperity of wealth management industry. In this brief essay, various aspects of economic development linked to creation of wealth and its distribution are identified, evaluated and analyzed to infer the development of wealth industry. The discussion focuses on the wealthiest people in different nations across the world, as the key target clients of ultimate evolution of exclusively customized services by wealth management institutions.
Economic Development and Wealth
Economic development entails all transformations leading to improved standard of living of a country’s populace with a corresponding economic growth from simple economy characterized by low production to high income economy. The transformation includes positive changes in policies and process by which a nation is governed. The major important dimension of economic development is the use of the nation’s capital resources to generate more wealth and multiply its means of production. According to Weldon (1998), ownership of the nation’s resources therefore becomes an important aspect of the government, local and foreign business persons. Though it is generally accepted that economic development leads to creation of more wealth that is shared amongst a regions population, Maude (2006) observed that the distribution of the wealth created with the potential to create more presents a myriad of disparities and shortcomings. In many parts of the world, large proportion of wealth is concentrated in the hands of a few rich people who living in opulence because they posses a wide range of long term assets besides their personal luxurious homes. The reverse reality of salient features of wealthy people in different parts of the world is the observation that the vast majority of the populace live in poor and deplorable conditions. By their large numbers, this latter group provides both labor and skills to the state-run enterprises and private businesses owned by the rich.
Wealth Management Industry
Wealth management a division of investment advisory studies that deals with fiscal planning policies and investment management besides other financial services. Wealth management services are provided by independent financial advisors, diverse, skilled and licensed investment managers or by large corporate organizations such as established banks. Due to the amount of assets owned by certain rich people, Smith and Bank (2004) found out that wealth management industry tailored services specifically for high net worth investors. Through global private banking, wealth management industry designed extremely exclusive services customized to the needs of wealthy persons, termed as High net worth Individuals (HNWI) and Ultra High Net worth Individuals (UHNWI). Wealth management identified and segmented a category of high net worth individuals whose services include provision of insurance, advice on investments, stocks, business acquisition among other functions. There are certain modes of operations that are unique to wealth management institutions such as the holistic and comprehensive product and service provision with individualized (“highly customized”) package which are designed to meet specific (intimate) needs of the client. This criteria defines the extent of association between a wealth manager who may be an institution or a group of trained persons in property management.
Another distinguishing feature is on the nature of the products themselves, on the products, wealth managers emphasize fiscal asset planning and advisory services with professional appeal. The third dimension of specific orientation to wealth management institutions is the focus on the objectives of affluent clients such as investment performance, preservation of wealth and transfer of capital. Since Wealth management allows financial planners to manage both asset and liabilities on their ledgers, the United States Security and Exchange Commission set up regulations demanding that all investment adviser registered SEC must file Form ADV quarterly. The primary objective of Form ADV is determine the number of clients in the segment of “high net worth individuals” according to Form ADV, any person with at least $750,000 worth of asset managed by the adviser or $1.5 million net worth in the observation of the adviser or is a “qualified purchaser according to section 2(a)/51 (A) of the investment company act (1940) of the united state is considered as a High net worth individual. SEC’s definition for the HNWI and UHNWI acknowledges the individual’s observable non-financial assets say residence and library.
High net Worth Individuals/investors
Recent reports by Merrill Lynch and Capgemini annual World’s Wealth Report indicates that HNWI is a person who owns at least US$1 million in investible assets. This excludes basic residences and house hold items. The total wealth owned by HNWI was estimated at US 32.8 trillion in 2009. There are approximately 90, 000 HNWI in the world. Most of these millionaires are concentrated in cities of highly industrialized economies of the world. These include Europe and Asia. An average family in HNWI category own three homes and six cars. Most of the millionaires in this group also own personal yatch according to Capgemini and Merrill Lynch Wealth Management (2009). The way clients in this segment of banks service provision own wealth make them comparable to institutional entities.
Ultra High net worth individuals
Merrill Lynch and Capgemini World’s Wealth annual Report defines UHNWI as a person who holds at least US$30 Million in investible financial assets. Most Global Banks distinguishes very high net worth individuals from Ultra high net worth individuals by the margin of $5 million to $50 million worth of assets at the lower margin of each corresponding category. (Nicholas 2004 143) learnt that the consumption patterns of this class of persons is fed by retail brands in business sectors producing top end user products such as sports cars made by Roll-Royce and Bentley. Majority of these billionaires are found in cities of most advanced economies of the world in United States and Japan. An average family belonging to this class of people own three private homes, at least eight cars. More than a half of the billionaires in this category own private chartered planes and a most of them have private yatch.
Onshore wealth Management
High net worth investors make a lot of their input in their local economy by investing in the country. They usually put up a number of businesses depending on their potential and assumptions of the risks involved in the business environment. On shore wealth management is the term used to define the roles of wealth management institutions with respect to customer’s demand in HNWI segment concerning their assets found in home country such as America, Britain (UK) or Japan. It comprise of provision of personalized advice on fiscal planning, investment risks, consultation in hedge funds, mutual investments and trust funds.
Off-shore wealth Management
Off shore wealth management refers the unit of wealth management companies, mainly private, that is aimed at product packaging and service provision to UHNWI for their investments in foreign nations. A rich person or family in this category of millionaires may own a sizeable investment in another country or even continent. Therefore, surmounting challenges involved in operations of this entities, wealth management industry developed the international concept of managing verifiable assets of HNWI overseas. High net worth investors are motivated by a number of factors. Some of the factors that influence their chose are related to economic development like the need to maintain a low profile despite their significant economic achievement. According to Cassis and Cottrel (1988), the need for financial confidentiality is probably one of the reasons that make a HNW-individual to seek pride rather than fame by anonymously investing a foreign nation. When they invest in a foreign economy they contribute to economic development of an economy by their voluminous input to the economic system. Either this investment is promoted by popularity and fame of the affluent person in his home country caused by advanced economic development in a place where they are identified with most of the properties in the cities and palatial private residences in the country side.
They may also own Five Star hotels, villas and recreational gardens in their backyard. These together with private jets make some of them live more of a celebrity lifestyle than like that of an ordinary human. Their desire to adopt a low profile and limit conspicuousness in their home business environment is complemented by investment in rapidly growing economy overseas. Many examples are now found in many parts of the world. The example of Warren Buffet’s General Electric investment in Asia among other Billionaires’ foreign investments such as Bill Gates Microsoft in India in partnership with Google including a range of companies in Textile and garment manufacturing in Export processing zones of fronts of rapidly growing economies is a typical example of how factors like flexible legal tax system and tax consideration in a fast developing economy acts as a key driver to wealth management services off shore. In this context, Asia-pacific emerges as one specific location with unique combination of cheap input to economic development that precedes wealth management global private banking. In the end such development leads to economic development again but it interesting to learn that minimal trust to domestic financial markets as result of great recession and the expediency for regional diversification and demand for safety are some of the underlying regional difference factors that act in concert with economic development to produce suitable positions for establishing business enterprises. Mobile capital of HNWI does not delay to grasp the operations of these markets in globalization age characterized by strong wealth management net works eager to coalesce international capital control through global banks (PricewaterhouseCoopers 2009 p.14).
Global Private Banking
Most international banks such as JPMorgan Chase Bank, Deutsche Bank, UBS and Credit Suisse have distinguished group of professional staff consisting of client’s advisors and service consultants packaging products specifically for UHNWI. The nature of their net worth and the manner in which their wealth is created, these clients (based on their assets) are treated by Banks as institutional investors. Global Private Banking is a unique type of banking identified with high net worth investment segment of client geared toward facilitating the management of their assets across the world. The concept emerged as a result of rapid economic development in countries where HNWI hold significant business in the economy. Some of the services that global private banks offer to the world’s richest people are discussed below.
Insurance
Economic development always brings with it a myriad of shortcomings. in the face of wealth management and the creation of global private banking, wealth managers are confronted with new forms of unsystematic risks, namely, recession and certain deliberate risks such as fraud that follow collapse of money laundering organizations. By and large, risk managers has become so central to the activities of wealth managers that while designing a chase of product and services exclusive to the various segments of the rich (affluent, wealthy, High net worth, very high net worth and the ultra high net worth individuals) in the worlds developed society, insured products that guarantees the client indemnity in case of loses may end up to be the most attractive package that the top end client may opt for. In the observation of Keiste (2005), the trend is presently inclining toward value added services for clients and clients, particularly those in the top end user segment (HNWI) are precisely looking for exclusive services whose risks are accurately determined and precautions taken in advance. Therefore, risk management in the various properties chosen by wealth manager has a significant impact on the economy as it has on both the client and their assets as suggested by (Wyman 2008 p.26).
The most common approach to risk management to day is based on cost sharing. In locations such as Latin America and East Europe where private banking is the most common aspect of wealth management, economic development is supported by certain HNWI who have developed skepticism about the duties of wealth managers because they want Banks and financial advisors who are able to address even the risk possibilities of their products ands services. A good sense of risk management entails making informed choices based on a wide range of possible risks that the client and institution are likely to face. The progressive growth of wealth management industry now emphases risk management and performance management as the benchmarks for wealth management advisory due to increased sophistication of clients’ products and their compelling demands against a rapidly globalizing and urbanizing world. In essence the rate of economic development requires that insurance be incorporated in the advisory services of wealth managers. Then it can cater for life assurance and grievously sick clients besides covering their wealt as indicated by (Capgemini and Merrill Lynch Wealth Management 2009 p. 2).
Banking
Through international banks, wealth management companies are mandated to be the custodian of the client’s assets. On behalf of the Client, the banks are authorized to collect revenue accruing to the client’s businesses. Economic development means expansion of trade through establishments of new premises. The premises need to be constructed and completed with finishing including installation of all necessary facilities appropriately. In the view of reality as the disparity between the super rich and the ordinary citizen, such developments may only seem to attract affluent investors because they have the financial means to put up the necessary structures. Depending on the level of economic development of the nation, reality has it that the investment advisers of HNWI carry out in depth feasibility studies in any economic prospects of regional impact, because of their high propensity to invest on shore, they are predisposed to promote further economic development through private banks. It is no coincidence that in the event of economic development, the nation requires expansion of existing structures by all appropriate means and the wealthy are willing to chip in. the concept here is clear in that financial intuition’s advisers to the client do operate with motive of making profits as estimated by (Euromoney Institutional Investor PLC 2007 p.42).
In their views, the HNWIs regard revenue as key to their prosperity and preservation as the rich. It therefore necessarily follow that global private banking follows economic development. The prevailing reality about disparities of wealth distribution; there are very many poor people than there are well to do people in any given location. Projection of this trends yields shocking margins between the world’s most affluent people and the poor across different nations around the world. Consequently, global private banking system play a significant role in fund disbursement for settling of payments and meeting liabilities in various countries where the world’s affluent have their businesses and investments. According to (Horan 2009 p.143), it only makes economic sense to save on large ledger charges and minimize bureaucracies created by the usual processes of funds transfer from one account to various accounts especially if they are in many countries. The reality of HNWI and UHNWI prominence in the developed world also reveals how these affluent investors are involved in the indirect employment of the vast majority of people in their own nations and several other people in the rest of the world.
On this account of economic path of development, HNWIs provide opportunities for global banks through the millionaires’ accounts to create a new pool of investment called global private banking. Through the arising modalities, we see a systematic scene of events where High net worth Investment powered economic development yields a continuous pattern of activities that suits the intervention of wealth management advisors and institutions purposefully manage offshore investments of the HNWI. In this particular situation, the interaction of HNWIs FDI and partnership program is drawn by the regions attempts to create conditions for further economic development and vice versa. Crane (1954) observed that HNWIs show a lot of interest in fast growing economies like Europe, Britain, Japan, China, the US and France among other nations. The millionaires have most of their investments in the cities of these nations because business is turns economic development very rapidly that as a key driver to wealth management industry, the people’s purchasing power parity presents a readily convincing evidence for global private banking by the HNWI to authorize further reinvestment. Ultimately economic development is seen to act in both in part and in whole towards the growth of wealth managers and at the same time precipitating the advancement of global private banking. Wealth management advisors are required by their companies to compile reports of investment performance for the client. Due to the nature of diverse professionalism in global banks, International wealth managers designed the unit of private international banking to prepare statement for specific transactions of the HNWI segment of their clients in all their branches where they have accounts.
Investments
In the United States, wealth management is intertwined with brokerage activities where the brokerage firm buys and sales long term assets usually on behalf of the wealth manager. Unlike in Europe where wealth management is taken to mean private banking focusing on provision of advice to clients and product differentiation, in the US wealth management generally depends on investments for the its sustenance. Consequently, real estate investment is one of the leading sectors in economic development of the US. Wealth management companies are therefore motivated a by economic development as the key driving factor. Take for instance, in the United States housing sector, HNWI and UHNWI have found a strong foundation of long-term asset investment in the housing sector of the economy through wealth managers who control their mortgages in most cities in the nation. It is primarily due to economic development focusing on housing investment that other wealth managers find it easy to control affluent people’s investments in personal business that provides finishing, equipments and installations to various other companies in housing and construction company. Similarly, wealth managers act as the existing intermediaries between their clients’ net worth and the development processes in the economy. The discretion mandate allows the advisor to buy and sell property in the nation on behalf of the client. Economic development’s leading to mass consumption are some of the viable opportunities in which the investment principle of HNWI draws main interests as observed by (Cypher& Dietz 1997 p.123). As the economy develops, it grows high consumption and the demand for household consumables also increase thereby providing investment opportunity for the affluent in the society.
Investment in Trust funds
Through execution-only mandate, the industry of wealth management bestows upon the appointed managers the responsibility to execute or liaise with preferred stock brokers who will facilitate the execution of sale and purchases of the securities on behalf of the client. As the economy grows the diverse means of investing stretches to cover even the partial ownership of company through purchase of share of the desired company. Most HNWI have their personal companies. However, it is equally significant for them to own shares of lucrative blue chip companies and other stocks whose probability have been determined to rise in the near future. Wealth managers’ representatives have their professional in NASDAQ, NYSE, Dow Jones and other stock markets ready to co-ordinate information relating to possible risks the a company or sectors stocks are likely to face in the coming days before advising the client and the company.
After this process is successful, the advisory mandate of the wealth managers provides that the advisor issues appropriate investment information to the client. In the face of economic development, investment may mean take over of a company through acquisition of more than half of its shareholding. This is the events that have characterized most merges of companies with the most dominant taking over the assets of the dwarfed. In efforts towards philanthropy, HNWI invest in Trust funds or do their own foundations. Chofaras (2006) noted that in the long run it pays, though at the cost of philanthropy. However, at the cost of noble activities such as education, social transformations through sporting activities or initiating of new programme with the objective of economic development as they make the society more informed, expand their range of freedom needs, discretionary mandate provide that the wealth manager, acting in his discretion, can buy and sell assets on behalf of the client as suggested by (Wyman 2008, p. 43).
Conclusion
It is undoubtedly clear that economic development the key driving factor behind the growing concepts wealth management which has given rise to the creation of global private banks. The economic perspectives of wealth management is further dependent on large markets in rapidly industrializing countries such as Taiwan, Singapore, Malaysia, Hong Kong City and South Korea in Asia. In America the ever stable Euro revenue stream of markets guarantees investment in France, Hungary, Germany, Italy, Switzerland, Denmark and Britain. The presence of stock markets with good rating of business trends such as NASDAQ, JSE and NYSE plays an important role in pointing the direction of predictable returns in the foreseeable future. This makes the decision of the wealth management advisors valid when the clients compare the information they receive with what the stock is showing. Economic growth followed by commensurate input by HNWI in the economy may not necessarily make a few more get the chance to live the flamboyant lifestyles of the world’s affluent soon, but it guarantees growth as the roles of wealth management require more people. The living standard of a people also increases correspondingly due to new opportunities created by HNWI involvement in developing the economy.
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