Wealth-X Presents: Key Trends in Wealth for 2016
Wealth-X thought leaders predict the key trends that will shape the wealth landscape in the new year, across multiple sectors and regions. Learn about the motivations of the ultra wealthy, and how financial services institutions, luxury brands and non-profits can adjust their strategies to engage this population in the coming 12 months.
The issues around wealth inequality and income inequality will take center stage in 2016. We’re in a US election year, and we have candidates on both sides of the aisle who are not holding back any punches; there will be many topics under debate, but wealth inequality will be foremost. This applies outside the US, as well. We will see the same issue in China and around the world. The most impactful and concerning trend for ultra wealthy individuals is what Main Street feels — and more importantly, does — this year in reaction to perceived and actual growing wealth and income inequality.
There is a very real chance this year that luxury brands will face hurdles in reaching the ultra wealthy. Certainly, the map of where people are spending has shifted, and it may well shift again. It’s not just about mainland Chinese individuals buying in London or in New York. Spending among the ultra wealthy will be challenged in 2016; it was already on a downward trend in 2015, as a result of the global economic and geopolitical environment. At the same time, people are evolving their tastes to include experiences and perhaps even favor experiences over products. However, luxury brands have not been quick to develop or expand those offerings. That poses a problem.
Luxury brands are chasing the wealth in Silicon Valley, but they don’t re-envision their offerings, whether those are experiences or products. For example, the Financial Times is holding its Business of Luxury summit in San Francisco this year. However, traditional luxury brands need to rethink their strategy in approaching the ultra wealthy who have made their fortunes in the technology sector. You could open a boutique with high-end jewellery, bringing the best of Switzerland to Silicon Valley, but no one may care. Will tech billionaires want the latest luxury watch? Maybe if they go out and build it themselves, or if they understand the engineering and creation process, or that it’s personalized. Luxury providers have to re-envision the experience. It’s not about, “Here’s an expensive thing; it’s nice and shiny and complicated. Buy it.”
In 2016, we predict that private wealth will continue to diversify. A lack of safe haven asset classes will cause people to rethink their portfolios, broadly speaking. Real estate was a safe haven for a while, but that status has been complicated, given the global issues around terrorism. It is true that London’s luxury real estate is back — prices of the city’s most expensive mansions surged in the second half of last year amid a shortage, something that we called a long time ago. However, even though London is back up for now, another destabilizing event could happen in Europe and put a serious pause on that activity. There is also a possibility that governments, whether in rhetoric or in actuality, could further restrict their borders, causing a real drain on luxury real estate. At the same time, there has been a trend for several years of families seeking private equity transactions in deal flow. The challenge is that some of the biggest deals seem overpriced and hard to access in a meaningful way, while small deals may not be as safe, given the macro-economic conditions and geopolitical environment.
In 2016, we predict a shift of family office investments to direct investing. Many of the family offices and wealthiest families who had relationships with the top banks got seared in their relationship in the financial crisis of 2008-2009. What they found was that they had been advised to invest and buy portfolios of things where the reality was that they had no idea what the underlying collateral was. In the wake of that, what you’ve seen over the last five years and what you will see going into 2016 is a massive kind of pendulum swinging, where family offices are not going to go through the banks. Instead, they are going to invest directly in deals themselves. These family offices are going to go back to areas and verticals that they understand and have expertise in, where there is transparency. Wealth management typically is for wealth preservation. Many of these family offices want to grow, and therefore they have to take more risks, which means more direct investment. We forecast a growth in direct and private investments from family offices, which is going to create new companies and new liquidity.
As more and more luxury brands, private banks and non-profits target the hyper growth of wealth in emerging markets such as China and Russia, that wealth graph as mapped out by Wealth-X is inextricably linked to the rise of what we call the risk graph. The risk graph is the underlying shadow of all this wealth; banks have dealt with this in the past, but the tools that banks use primarily focus on traditional forms of sanctions, anti-money laundering and anti-bribery. However, the traditional tools around compliance and risk in the financial services industry are ill equipped to address the convergence of the wealth graph and risk graph. They don’t have the capability or skill set to look at the origin and source of wealth, which in the risk world is becoming the dominant factor for how you assess risk. Risk can be associated with a donation to a non-profit or a bank opening an account or a company that has service providers; it filters across all these areas, so more increasingly, as people look at wealth they will have to examine the risk.
The future of engaging with the ultra wealthy is going to be driven by the ability of non-profits, private wealth management platforms and luxury brands to customize a bespoke experience that also reflects their brand narrative in a way that is authentic to the client. A bespoke marketing strategy means understanding who you want to target and then building a strategy based on everything you know about that person. And companies can only do that if they have deep intelligence about those prospects.
Spending on luxury goods continued in 2015 to be focused within a handful of global cities and driven by a consumer class of global citizens. Beneficiaries of this global movement included brands with a strong presence in luxury capitals such as London, New York and Paris. Brands present at travel retail, particularly at airports, also profited from the growing number of global travellers.
The effect of foreign exchange rates on luxury purchases was a strong driving force in 2015. We see the impact of foreign exchange continuing to weigh in on luxury purchases in 2016.
However, the continual strengthening of currencies such as the US Dollar and UK Sterling may deter tourist shoppers. Similarly, the threat of terrorist attacks will, we believe, weigh on the minds of some consumers and potentially curb travel rates to certain destinations.
A relative tumultuous macro-economic situation across many emerging markets in 2015 has been one of the contributing factors to a growth in spending on fine jewellery, watches and collectibles. In 2016, we believe there will be a growing preference for high-ticket items across these categories. Consumers seek assets with a tangible value that will appreciate over time and can be liquidated if needs be.*
Brands that are committing to social change through the sale of luxury goods will, in our opinion, flourish in 2016. An increasing awareness, partly due to the rapid dispersion of information through social media and the web, is empowering the growth of brands that not only deliver on quality, design and uniqueness but that also support the wider community and environment.
Sarah’s Bags is just one example of social entrepreneurship that is prospering. The company, based in Beirut, produces hand-made embroidered bags made by the female prisoners of Baabda prison. The initiative is to provide underprivileged women with a concrete skill that they can they use in the future. US based luxury fashion and leather goods brand, Maiyet, is also deeply committed to developing partnerships with artisans in local communities within developing economies as a means to promote self-sufficiency.
As awareness of brands such as these and others including Warby Parker and Edun grow, we imagine it will inspire other, more established luxury brands, to ensure that they are making a positive social impact.
*Note: This prediction was first published in Luxury Society.