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Wealth Management: How the Billionaires Do It

Investopedia logoInvestopedia 14-07-2015 Wendy Connett
A new report on the world's billionaires gives insight into how they work, save and plan on distributing their wealth. © shutterstock A new report on the world's billionaires gives insight into how they work, save and plan on distributing their wealth.

A recent report from UBS Group Inc. (UBS) and PricewaterhouseCoopers (PwC) — Billionaires: Master architects of great wealth and lasting legacies — gives a rare look into how the world's billionaires made their fortunes, how they plan to keep them and how they plan to pass them on. 

For financial advisors catering to high-net-worth individuals, insights from the report can be applied to a broad spectrum of wealthy clients who need to make what are often difficult decisions about maintaining and managing their wealth and planning their legacies. (For more, see: Asset Protection for High-Net-Worth Individuals.)

The report surveyed 1,300 billionaires and analyzed data from 1995-2014 across the 14 largest billionaire markets in the world, accounting for 75% of billionaire wealth globally. UBS and PwC also conducted face-to-face interviews with more than 30 billionaires.

The New Gilded Age

The research found that 917 self-made billionaires have generated more than $3.6 trillion of wealth globally. Twenty-three percent launched their first business venture before the age of 30 and 68% did so before turning 40.

“We currently live in an age of opportunity and accelerated wealth creation, similar to the Gilded Age of the late 19th and early 20th Centuries, when entrepreneurship in the U.S. and Europe drove the first wave of innovation in modern history,” said Josef Stadler, head of Global Ultra-High-Net-Worth at UBS, in a statement. “But wealth generation is cyclical, and over the last few decades we have benefited from being on a strong arc of the cycle.” (For more, see: How Did Richard Branson Make His Fortune?)

Wealth Creation

Billionaires exhibit similar character traits, including an appetite for smart risk-taking, an obsessive focus on business and a strong work ethic.  But they have built their fortunes in different ways.

In the U.S., for example, financial services was the top producer of self-made billionaires (30%) with wealth per billionaire in this sector averaging $4.5 billion. Self-made billionaires in Europe (49.5%) and Asia (20%) were in large part created by the consumer industry in the last 20 years. With an average wealth of $5.7 billion, European billionaires are wealthier than those in Asia ($3.2 billion) by a large margin.

The research points out, however, that the self-made billionaire population in Asia is unique because wealth creation in the region is more recent than in other parts of the world. Asian billionaires tend to be younger than other billionaires, with an average age of 57. This is 10 years younger than their U.S. and European counterparts. Because a significant proportion of Asia’s billionaires grew up in poverty — 25% compared to 8% in the U.S. and 6% in Europe — UBS and PwC anticipate Asia to be the center of new billionaire wealth creation going forward. (For more, see: What Advice Has Jeff Weiner Given to Would-Be Entrepreneurs?)

Wealth Preservation

More than two-thirds of the world’s billionaires are over 60 years old and have more than one child. This means wealth preservation, wealth transfer and legacy are at the top of their minds. The research maintains that wealth thins over time, especially as families grow. As billionaires age they face the difficult decision of what to do with the businesses that made them wealthy: keep or sell all or pieces of the business.

The report found that most U.S. and European billionaires choose to keep their businesses (60%), one-third (30%) sell pieces via an initial public offering (IPO) or trade sale and 10% cash out. The majority that cash out become financial investors, investing on their own, seeking specific risk-return goals, and/or delegating investments to a family office or personal financial advisor.

Fifty-seven percent of European and 56% of Asian billionaire families take over the family business when the patriarch/founder retires compared to just 36% in the U.S. (For more, see: A Study on the Wealth Effect and the Economy.)

Philanthropy

The philanthropic endeavors of today’s billionaires support education, health and humanitarian causes and tend to focus on efforts that provide tangible, measurable results, the research found. They like to know how many lives have been impacted by their donations, see improved health or living conditions or finance various causes through micro lending.

In the U.S. “visible philanthropy” donated through institutions is popular. More than 100 billionaires have joined Bill Gates’ Giving Pledge since its inception, for example.

The Bottom Line

Billionaires from different regions and cultures around the world typically share common characteristics. Advisors can use insights from the report — like how these rich entrepreneurs choose to divvy their wealth, for example — and apply them to clients with significant wealth of varying degrees. (For more, see: High-Net-Worth Client Tips for Financial Advisors.)

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