A changing wealth landscape

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In his 2008 book Outliers, Author Malcolm Gladwell explains how, of the 75 richest people in human history, an astonishing 14 were either born or grew up in the U.S. between 1831 and 1840. As these individuals, who include John D. Rockefeller and Andrew Carnegie, reached adulthood, they found themselves living in a world of profound change and opportunity

New wealth new behaviour 3 of 7 Introduction 1 of 7

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Roads and railways were being constructed, industrial manufacturing was becoming established, and Wall Street was finding its feet. For wealth creation on a massive scale, there were few better places to be than the U.S. in the 1850s and 1860s, when society and the economy were being completely transformed.

Today, the extent of change taking place may not quite be on the scale seen in the mid-19th century, but there is no question that recent decades have seen a profound transformation in the global economy. Globalisation has linked countries together through trade, the movement of capital and labour, and the sharing of ideas. The collapse of Communism and the deregulation of state-owned sectors and infrastructure across both developed and emerging markets have created massive opportunities for new wealth to be created. Meanwhile, financial liberalisation and innovation have facilitated the flow of capital around the world, enabling investment and business ventures to find each other with unprecedented efficiency.

Technology has accelerated many of these developments - and has been a significant driver of wealth creation in its own right. Communications technology, including the Internet, mobile and social media, has enabled a dramatic surge in economic growth and allowed ideas, business models and information to flow freely around the world.
This has enabled significant changes in efficiency and productivity, and opened up opportunities for entrepreneurs and business owners to generate new ventures and scale them globally at an unprecedented pace.
The outcome of these twin forces of globalisation and technology has been an explosion of entrepreneurship around the world and a decline in inheritance as a determinant of future wealth. Economist Emmanuel Saez points out that the world’s wealthiest individuals today tend to be what he calls “the working rich.” “The evidence suggests that top income earners today are not ‘rentiers’ deriving their incomes from past wealth but rather are ‘working rich,’ highly paid employees or new entrepreneurs1.”

Increased opportunities for wealth creation around the world means that, proportionally, the percentage of individuals who acquire wealth through inheritance is falling. A research paper by New York University
Economist Edward Wolff and Maury Gittleman of the Bureau of Labor Statistics found that, for those at the top 1% of wealth levels in the U.S., the percentage of households receiving wealth transfers fell from 57.3% in 1989 to 45.5% in 2007. The size of those inheritances also fell — for those with wealth of USD$1 million or more, the mean value of wealth transfers received fell from USD$2.1 million in 1989 to USD$1.8 million in 20072. “If you compare the numbers of truly wealthy who inherited their wealth versus those who have made it in their own lifetime, then certainly the latter is increasing dramatically,” says Margaret Wolhuter, Strategy Director at The Partners. Our sample of 2,000 high-net worth individuals surveyed for this report is illustrative of this trend, with most having earned their wealth through their own efforts. Just 26% said their primary source of wealth was inheritance and 18% said it came from a spouse of partner (see chart 1).

Chart 1 - Source of wealth
Chart 2 - Source of wealth by region

The values displayed sum to more than 100% because respondents could choose multiple choices.
Source: Ledbury Research

Outside of the core developed markets, wealth is especially likely to come from the sale of a business. For example, 57% of respondents from Asia-Pacific (for the purposes of sampling, this group excludes Japan in our survey) and 48% from the Middle East said that the sale of a business was a key source of wealth for them (see chart 2). By contrast, these figures are 21% for the U.S. One important reason for this is that these markets have a much shorter history of widespread wealth creation, and many of the high net worth individuals in these markets are first generation wealthy, and therefore at a different point in the legacy life-cycle.

We also see evidence that entrepreneurs and business owners have managed to increase their wealth during the downturn. In developed markets, 45% of entrepreneurs said their wealth has increased over this period, compared with only 33% of non-entrepreneurs. In emerging markets, the corresponding figures are 41% for entrepreneurs and 30% for non-entrepreneurs (see chart 3).

Chart 3 - Wealth changes during the downturn

Technology and wealth accumulation

Over the past few decades, technology has become increasingly important as a source of wealth creation. On the 2012 Forbes’ World Billionaires List, technology is now the second-most common way U.S. billionaires generated their wealth, with 51 out of 425 becoming rich through this industry3. It is also a sector where wealth can be generated quickly. Our research found that the average period of wealth accumulation is lower for respondents with business interests in technology than in other sectors across all regions of the world, with the exception of the Middle East (see chart 4).

There are various reasons why technology should enable rapid wealth accumulation. First, it is frequently characterised by rapid growth. One report found that, since 2004, employment growth in the high-tech sector had grown three times more quickly than the private sector as a whole4. Another found that, of the top ten fastest growing industries in the U.S., nine had some link to technology5. The fastest growing sectors of all were social network game development, e-book publishing and social networking sites.

Technology entrepreneurs also benefit from low barriers to entry - unlike sectors such as retail, manufacturing or mining, there are few fixed assets required which means that ventures can be started at relatively low cost. In general, technology firms also have high potential for scalability: many are unconstrained by geography, and good ideas can now spread quickly around the world via the Internet, social media and other channels. Finally, technology is a sector in which change is constant and extremely rapid, presenting entrepreneurs with opportunities to develop and introduce revolutionary innovations that take advantage of evolving technologies and customer demand.

Chart 4 - Rate of wealth accumulation in technology versus other sectors

1 Striking it rich: the evolution of top incomes in the United States, Emmanuel Saez (2008)
2 Inheritances and the Distribution of Wealth Or Whatever Happened to the Great Inheritance Boom? (NBER, 2011)
3 How America’s Wealthiest Get Rich, Forbes.com
4 http://www.guardian.co.uk/business/2012/dec/06/technology-sector-growing-faster-economy
5 IBIS World Top Ten Fastest Growing Industries (April 2013)