What the wealthy want

Is Australia the best place in the world to become a millionaire?

That’s one of the questions posed by the latest World Wealth Report, produced by Merrill Lynch Global Wealth Management and Capgemini, which shows Australia’s population of high net worth individuals jumped 34.4% last year, to 173,600.

What’s more impressive is Australia’s ranking in the global population of HNWIs, defined by the report as individuals with more than $US1 million in investable assets, excluding the family home and collectables. Out of 71 countries, Australia has the 10th biggest population of HNWIs in the world, in front of Brazil and just behind that millionaire’s paradise of Switzerland.

“Australia has been very lucky,” the managing director of Merrill Lynch Global Wealth Management Australia, Chris Selby says.

“It’s almost like 2008 never happened. And nothing suggests that things are going change going into 2010.”

The total wealth of Australia’s HNWI population jumped 36.8% in 2009 to $US519.4 billion, giving an average wealth of $US2.9 million.

Selby says the strong performance of equity markets, house prices and the wider Australian economy helped drive the strong recovery in the fortunes of Australia’s wealthy.

But there is a broader trend here – in terms of wealth creation, there are few sweeter spots than Australia right now.

On the one hand, Australia sits perfectly in the shadow of the booming Asia-Pacific region, where wealth climbed 30.9% in 2009 to $US9.7 trillion – above even Europe, where total wealth rose 14.2% to $US9.5 trillion.

On the other hand, Australia has a stable economy (Resources Super Profit Tax excepted) and links with the world’s biggest markets of North America, Europe and Japan.

“Things have changed in the last two or three years and Asia has really moved to the forefront of wealth,” Selby says.

“We’re in their slipstream.”

While the report confirms that Australia is a great place for an entrepreneur to become wealthy, it also highlights some fascinating trends about how the wealthy in Australia and around the world are thinking, investing and spending.

Here are 10 of the key trends:

1. The rich are embracing risk again – but very cautiously

One of the particularly interesting things to watch in the World Wealth Report is where the rich are investing. In 2008, as the GFC struck and global sharemarkets plunged, we saw a big move out of equities and into the relative safe havens of cash and real estate.

Not surprisingly, with sharemarkets bouncing back, the proportion of wealth invested in equities has risen from 25% to 29% and is tipped to increase to 35% in 2011. In addition, there is expected to be slight increase in assets allocated to alternative investments such as hedge funds and private equity (tipped to rise from 6% of portfolios to 8%) while real estate investment is expected to fall (from 18% of portfolios in 2009 to 14% in 2011).

2. The hedge fund is back

Looking more closely at what is driving the increase in allocations to alternative investments, it becomes clear that the hedge fund is back in favour. The proportion of alternative investment assets allocated to hedge funds fell from 35% to 24% in 2008, but rose to 27% last year. Selby says Australian investors are particularly keen on hedge funds again. “We’re seeing a lot of interest in US hedge funds right now.”

3. Australian investors are increasingly looking overseas

The interest in US hedge funds underlines the willingness of HWNIs to once again take on risk, and the willingness to look at investing offshore. HNWIs in Asia Pacific had 39% of their assets invested outside the Asia Pacific region, while those in Latin America had 63% of their assets invested outside their home region. Selby says the trend is particularly strong in Australia. “The willingness to move and migrate offshore is not a trend that we think is going to end anytime soon. Wealth cannot keep staying domestic. These HNWIs have to look offshore.”

4. The ultra rich have bounced back better than anyone

The report defines “ultra rich” HWNIs as having more than $US30 million in investable assets, excluding the family home and collectables. The wealth of this grouped jumped 21.5%, a bigger jump than the 18.9% rise across the entire population. There are now 93,100 of these ultra HNWI around the world, although just 0.7% (6,517) reside in the Asia-Pacific region.

5. Luxury cars, boats and jets are making a comeback

Few industries were hit harder by the GFC than the luxury boat, car and jet sectors, but there are signs of a bounce back. The proportion of “passion” investments by HNWIs going into what the report describes as “luxury collectables” increased from 27% in 2008 to 30% in 2009. It’s a trend Selby has noticed among his clients. HNWIs who have worked hard for decades to protect their wealth have seen in the last two years how quickly fortunes can fall and have decided to lash out. In some cases, they are even looking at luxury cars as investments. “People actually want to be able to touch these things,” Selby says.

6. The wealthy want to be healthy

If you want to grab a slice of the wealthy spending pie, set up a gym, health club or personal training business. The report shows 73% of HNWIs increased their spending in the areas of health and wellness in 2009, while 45% increased their spending in luxury experiential travel. The message for those selling to the rich is clear – unique experiences are more important than exclusive goods.

7. The rich are regaining trust in their advisers – slowly

As fortunes crumbled in 2008, 47% of HNWIs said they were losing trust in their financial advisor, and 48% said they were losing trust in their wealth management firm. Things are turning around in 2009, but only slowing – 59% of respondents said they were regaining trust in their advisors. Selby says clients are looking to take a more hands-on role in the management of their finances, and demanding more information from their advisors. “What they are looking for is much greater explanations. The idea of just buying something because you made a phone call doesn’t exist.”

8. The rich are being forced to think harder about what they really want from their investments

Selby admits it was easy for advisers to look good during the boom years – basically you picked an investment type and waited for prices to rise. But when the GFC shattered that lazy model, clients turned on their advisors in anger. Wealth managers appear determined not to let that happen again, and are investing in areas such as behavioural science to make better assessments of a client’s risk tolerance, investment style and goals. “The intention here is to try and add a lot more science around what is appropriate when someone says they are aggressive, or not aggressive,” says Selby.

For the adviser, this can lead to some uncomfortable conversations, particularly when they have to tell a client that an investment the client wants to pursue doesn’t actually fit their profile. However, Selby says this is a crucial stand to take at a time when wealth preservation is paramount. “It has been the right decision to have those hard conversations with clients.”

9. The rich still don’t trust regulators

If advisers shouldered a lot of the blame for the GFC wealth destruction, then regulators copped the rest. In 2008, 83% of HWNIs said they lost trust in regulatory bodies and institutions. In 2009, just 17% reported they were regaining trust in the regulators of the world.

10. The rich are wary of a global tax crackdown

Part of the distrust of regulators might have something to do with the fact that the rich are being targeted around the world by governments keen to increase their tax revenues and plug their deficits. Selby says the rich know the crackdown is coming. “I think everyone is happy to do the right thing and follow the law, but I think the wealthy are assuming that there will be greater focus on enforcing current laws.”