Report Summary
The financial crisis has led to a trust crisis between ultra high net worth individuals and investment experts. In the medium term, there will be more due diligence and hands-on involvement from the very wealthy. The very wealthy were more likely to have been exposed to asset classes that performed terribly in the downturn, such as commercial property, and complex, illiquid investments. As a result, their erosion of trust is likely to have been much greater than other investors. The very wealthy have found that trust and transparency are more important than high returns, and in the future they will be asking more questions and in some cases taking more of an active role in managing the investments themselves.
When it comes to where the very wealthy are investing their money, the pendulum has swung from extreme complexity such as hedge funds and derivatives to extreme simplicity such as cash. A desire for better returns will gradually encourage them to return to more complex investments, but these will need to be fully transparent to counter entrenched conservatism. The very wealthy expect that returns will fall in a downturn, but in the recent crisis investments were unpredictable, and in some cases behaved exactly the opposite to the way they were intended. Wealth experts believe it is inevitable that the very wealthy will return to more complex products, but for the near future the loss of trust means it will be more difficult to tempt them, even if the stated returns are higher. From their advisers the very wealthy are asking for more streamlined reporting, clearer research and a more holistic view of their needs.
The recession has caused an overall downward trend in philanthropic giving, but most very wealthy individuals intend to maintain or increase their level of donations. There is evidence that the downturn has led to a reduction in philanthropy across most income levels in society. At the top of the pyramid, however, those who remain very wealthy following the recession say they intend to maintain or increase giving levels. In some cases this is because they have set up foundations, whose output is not dependent on economic cycles. Most of all, the very wealthy interviewed for this report say that giving is a "state of mind" rather than a result of whether a percentage of their vast overall net worth has been gained or lost.
Despite maintaining their giving levels, the very wealthy have continued to adopt a more business-like approach to philanthropy that is focused on verifying positive societal outcomes and improving accountability in the charitable sector. This trend was present before the crisis, but our research suggests it has been accelerated by the recession. The very wealthy want to make sure that their money is going to the people who need it most, having seen examples in the last two decades in which good intentions did not always match the actual outcome. The recession has also made them more conscious about social returns. As a group, the very wealthy often have more time to ensure accountability and give attention to chosen projects.
Philanthropy in emerging markets such as India and China is maturing as wealth increases and as governments see the value of harnessing the expertise of wealthy entrepreneurs. Philanthropy among the very wealthy is in its infancy in emerging markets such as India and China. In India, the "insecurity" associated with the newly wealthy leads them to keep it within the religion, caste or immediate community. As that insecurity gradually dissipates, observers expect that giving will increase. In China, the government is encouraging philanthropy at the same time as it reduces its own role in paying to solve social problems.
The so-called new austerity does not apply to the very wealthy. They will continue to spend much the same amount as they did before the downturn, but they will be less flagrant. Losing half of a US$100m fortune does not mean there is necessarily less to spend on luxury, and true to that principle it seems that most of the very wealthy have not cut back. They have changed their spending habits in more subtle ways, however, partly because the recession has caused them to reassess what they really value (such as the quality of an experience versus "bling") and partly because they are conscious not to appear insensitive to wider economic conditions.
The very wealthy want luxury goods companies to sell them a quality service and "something that feels special", over and above the exclusive price tag. This trend began before the crisis but those we interviewed believe the recession has hastened this "flight to quality" in buying habits. Buying behaviour among the very wealthy is continuing to shift following the global downturn. They want better, longer-lasting and more environmentally sensitive products. They will pay for experiences and service rather than strictly for products. Opinion is divided as to how long these trends will last. Many expect the desire for visible luxury items to return with the next upturn in the business cycle.
