In 2020, information compiled by the Federal Reserve exhibits the online price of U.S. households rose to $130.2 trillion. And, in accordance with a 2020 report by Cerulli Associates, 43 p.c of complete investable belongings owned by U.S. households is held by high-net-worth (HNW) buyers. Clearly, the wealth market is increasing. The years forward ought to current substantial prospects to advisors fascinated about working with HNW buyers (those that have a web price of $5 million or extra). Under, my colleague Steve Johnian and I have a look at latest information relating to HNW investor market share, in addition to sure funding and planning instruments that could possibly be useful for rich shoppers.
A Vital Market Alternative
For impartial monetary advisors, there’s extra to this market alternative than the hovering accumulation of wealth throughout America. Traditionally, wirehouse and personal financial institution channels have maintained management over the advisory enterprise of the very rich, however that dominance appears to be diminishing. In recent times, information exhibits that the market phase of HNW buyers seems to have been more and more put into play.
Because the chart beneath demonstrates, the HNW investor market share held by wirehouse and personal financial institution channels is estimated to have dropped from 56.8 p.c in 2016 to 52.5 p.c in 2021. Throughout the identical stretch, the channels steadily gaining market share included RIAs, direct suppliers, multifamily places of work, and dealer/sellers. With the quantity of investable belongings at stake, even small proportion adjustments imply huge asset transitions are occurring.
| HNW Investor Market Share by Channel | ||||||
| Channel | 2016 | 2017 | 2018 | 2019 | 2020 | 2021 |
| Wirehouses | 30.80% | 31.20% | 30.40% | 30.10% | 29.80% | 29.50% |
| Non-public banks | 26.00% | 25.30% | 25.30% | 24.50% | 23.70% | 23.00% |
| All RIAs | 11.70% | 11.50% | 11.70% | 12.10% | 12.50% | 12.90% |
| Direct suppliers | 10.50% | 10.50% | 10.90% | 11.40% | 11.90% | 12.50% |
| Multifamily places of work | 7.80% | 7.80% | 8.00% | 8.20% | 8.40% | 8.50% |
| Dealer/sellers | 6.80% | 7.30% | 7.40% | 7.50% | 7.60% | 7.60% |
| Financial institution trusts | 6.70% | 6.50% | 6.30% | 6.20% | 6.10% | 6.00% |
| Supply: RIA Intel, Cerulli Associates; 2019–2021 figures are estimates. | ||||||
Shifting Consumer Preferences
This transformation comes at a time when the fame of wirehouse corporations seems to be fading, particularly with youthful age teams. As buyers grow to be extra educated and complex, they’re extra conscious of the inherent conflicts in proprietary merchandise provided by wirehouses and different channels. In line with Pershing/BNY Mellon“Consumer preferences are shifting whereas impartial advisory corporations are increasing their capabilities to seize a larger share of HNW enterprise.”
What does this imply for you and your agency’s progress technique? HNW shoppers provide a considerable income supply, however usually include advanced wants that require specialised companies—together with customized portfolio building and planning recommendation. In case your plans embrace prospecting for HNW shoppers, your agency needs to be acquainted with the distinctive funding and planning instruments rich shoppers will count on. Under are some helpful instruments to think about when working with HNW buyers.
FREE DOWNLOAD
Superior Monetary Planning Methods
for Excessive-Internet-Price Shoppers
Discover inventive, complete monetary planning options—from asset safety to
charitable giving—on your high-net-worth shoppers’ distinctive wants.
Funding Instruments
Alternate funds. It’s widespread for HNW buyers to have collected a considerable amount of wealth in a concentrated inventory place. They might be hesitant to diversify for a lot of causes, together with the potential tax burden. Alternate funds current a tax-aware answer to the dangers inherent in relying on a single inventory for continued outperformance. An change fund (or swap fund) permits certified purchasers to change a number of shares for an curiosity in a diversified personal placement fund that intently tracks a benchmark index. Sometimes, change funds are unique to HNW buyers as a result of qualification necessities.
An change fund not solely replaces concentrated inventory publicity with diversified fairness publicity, it additionally provides pretax return compounding and the power to defer realizing capital beneficial properties. After a seven-year holding interval, the investor might redeem a diversified basket of securities with out incurring capital beneficial properties taxes. Earlier than then, buyers might redeem pursuits within the change fund on a month-to-month or each day foundation (topic to restrictions). A possible draw back is giving up potential for an upswing within the concentrated holding.
Structured merchandise. These merchandise are deployed to hedge a portfolio, present diversification, or cater to different HNW wants. As a result of they’re extremely customizable, structured merchandise might be linked to underlying worth actions of a single safety, a basket of securities, an index, a commodity, a debt issuance, and/or a international forex. Some structured merchandise, equivalent to market-linked CDs, provide capital safety of principal. Many provide restricted or no principal safety, nonetheless, they usually’re usually extremely illiquid.
Securities-based strains of credit score (SBLOCs). Many rich buyers respect SBLOCs (or non-purpose loans), which use a brokerage account as collateral and supply funding for distinct wants. Widespread makes use of embrace protecting a big tax obligation, funding a life insurance coverage premium, or appearing as a bridge mortgage for actual property acquisition. Collateralizing a brokerage account is a aggressive different to promoting brokerage holdings and realizing capital beneficial properties, relying on rates of interest.
Smas/some. With mutual funds, buyers are topic to embedded capital beneficial properties and affected by different buyers’ liquidations. SMAs and UMAs might be viable choices for HNW buyers.
-
Individually Managed Accounts (SMAs): Buyers maintain particular person securities, and a key profit is tax management by achieve deferral and tax-loss harvesting. As a result of HNW buyers are usually involved with tax legal responsibility and may meet account minimums, SMAs are a well-liked choice.
-
Unified Managed Accounts (UMAs): Buyers open one brokerage account that unifies a number of SMAs, enabling operational and rebalancing efficiencies.
Wealth Planning Instruments
Distribution methods for compensation wealth. It’s widespread for HNW shoppers to carry helpful inventory choice grants or appreciated employer inventory. Advanced evaluation of the shopper’s total monetary place could also be wanted to evaluate tax impacts of distributions, and evaluating when to train inventory choice grants might be difficult.
It’s essential to develop a holistic technique for tax-efficient liquidity. As with appreciated employer inventory, an IRA provision referred to as web unrealized appreciation (NUA) is likely to be useful. Sometimes, shoppers who qualify for NUA maintain employer inventory in a 401(ok) or conventional IRA.
Property and charitable planning by trusts. A correctly designed belief helps HNW shoppers handle their taxes, create a legacy, switch belongings to heirs in a tax-efficient means, and impact an property freeze. A charitable the rest belief provides tax benefits for the sale of an appreciated asset whereas fulfilling philanthropic objectives and provides quite a few advantages, notably for property tax planning. A tax lawyer ought to evaluate and supply steerage on belief planning on your HNW shoppers, as these automobiles require cautious drafting.
Serving to HNW Shoppers Obtain Their Imaginative and prescient
When working with HNW buyers, distinctive options are sometimes wanted to assist defend and protect their belongings. As with all shoppers, your steerage will create the largest affect while you help in attaining their imaginative and prescient for at the moment and in making a legacy for tomorrow.
This materials is meant for informational/instructional functions solely and shouldn’t be construed as funding recommendation, a solicitation, or a advice to purchase or promote any safety or funding product. Buyers ought to contact their monetary skilled for extra info particular to their scenario.