"Trust crisis" has changed the way the world’s wealthiest individuals invest

The global financial crisis has caused a trust crisis among the world’s wealthiest individuals, and they have responded by taking more control over their investments, seeking more accountability when they give to charity and holding out for higher quality when it comes to luxury goods, according to a new report by the Economist Intelligence Unit.

The new world of wealth: Seven key trends for investing, giving and spending among the very rich, sponsored by Societe Generale Private Banking, examines how the behaviour and attitudes of ultra high net worth individuals (those with more than US$30m in investable assets) have changed since the onset of the worst financial crisis since the Great Depression. By one estimate, the global population of ultra high net worth individuals fell by nearly a quarter from 2008 to 2009 and their wealth shrank by 24%.

“Most of the very wealthy are feeling completely at sea right now,” says an American ultra high net worth individual interviewed for the report. “I think more than anything we’re looking for someone we can trust, and the higher you go up the wealth scale the more that is the case.”

The Economist Intelligence Unit conducted 24 interviews for the report, including 11 in-depth interviews with ultra high net worth individuals from around the world. These included James Caan, the British entrepreneur, investor and star of BBC Two’s Dragon’s Den; Rohini Nilekani, a prominent philanthropist in Asia; and Aditya Jha, a Canadian entrepreneur.

“The very wealthy want to understand more than ever where their money is going,” says Jason Sumner, senior editor at the Economist Intelligence Unit. “They may have different goals for investments, philanthropy and spending, but in each arena the downturn has driven them to be more sceptical, ask more questions and in some cases take a more direct, hands-on role.”

The seven key trends identified in the report are:

1. The financial crisis has led to a crisis of trust between ultra high net worth individuals and investment experts. 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 trust is likely to have eroded to a much greater extent than that of other investors. The very wealthy appear to have found that trust and transparency are more important than high returns. In the future they will be asking more questions and in some cases will be taking more of an active role in managing the investments themselves.

2. 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. 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.

3. Charitable giving is down overall, but most very wealthy individuals intend to maintain or increase their level of donations. The downturn appears to have caused a reduction in philanthropy across most income levels in society. At the top of the pyramid, however, those who remain very wealthy say they intend to maintain or increase giving levels. In some cases this is because they have set up foundations, the output of which 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.

4. While maintaining giving levels, the very wealthy are increasingly focused on verifying positive societal outcomes and improving accountability in the charitable sector. This trend was present before the crisis, but it appears to have 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.

5. Philanthropy in 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.

6. The "new austerity" does not apply to the very wealthy: they will spend as much 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.

7. The very wealthy want luxury goods companies to sell them a quality service and “something that feels special”, beyond a product with an exclusive price tag. The recession appears to have hastened this “flight to quality” in buying habits. The very wealthy say they want better, longer-lasting and more environmentally sensitive products. They will pay for experiences and service rather than just for goods. Opinion is divided, however, 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.