In 2020, information compiled by the Federal Reserve exhibits the online price of U.S. households rose to $130.2 trillion. And, in line with a 2020 report by Cerulli Associates, 43 % of whole investable property owned by U.S. households is held by high-net-worth (HNW) traders. Clearly, the wealth market is increasing. The years forward ought to current substantial prospects to advisors fascinated about working with HNW traders (those that have a internet price of $5 million or extra). Beneath, my colleague Steve Johnian and I have a look at current information concerning HNW investor market share, in addition to sure funding and planning instruments that may very well be helpful for rich shoppers.
A Vital Market Alternative
For unbiased 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 traders 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 % in 2016 to 52.5 % 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 property 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% |
| Personal 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 Shopper Preferences
This modification comes at a time when the status of wirehouse corporations seems to be fading, particularly with youthful age teams. As traders change into extra educated and complex, they’re extra conscious of the inherent conflicts in proprietary merchandise supplied by wirehouses and different channels. Based on Pershing/BNY Mellon, “Shopper preferences are shifting whereas unbiased advisory corporations are increasing their capabilities to seize a better share of HNW enterprise.”
What does this imply for you and your agency’s development technique? HNW shoppers supply a considerable income supply, however usually include complicated wants that require specialised companies—together with customized portfolio development and planning recommendation. In case your plans embrace prospecting for HNW shoppers, your agency ought to be acquainted with the distinctive funding and planning instruments rich shoppers will count on. Beneath are some helpful instruments to contemplate when working with HNW traders.
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Funding Instruments
Change funds. It’s widespread for HNW traders to have gathered 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. Change funds current a tax-aware resolution to the dangers inherent in relying on a single inventory for continued outperformance. An alternate fund (or swap fund) permits certified purchasers to alternate a number of shares for an curiosity in a diversified non-public placement fund that carefully tracks a benchmark index. Usually, alternate funds are unique to HNW traders as a result of qualification necessities.
An alternate fund not solely replaces concentrated inventory publicity with diversified fairness publicity, it additionally affords pretax return compounding and the flexibility to defer realizing capital features. After a seven-year holding interval, the investor might redeem a diversified basket of securities with out incurring capital features taxes. Earlier than then, traders might redeem pursuits within the alternate fund on a month-to-month or day by 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 may 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, resembling market-linked CDs, supply capital safety of principal. Many supply restricted or no principal safety, nevertheless, they usually’re sometimes extremely illiquid.
Securities-based traces of credit score (SBLOCs). Many rich traders admire SBLOCs (or non-purpose loans), which use a brokerage account as collateral and supply funding for distinct wants. Widespread makes use of embrace masking a big tax obligation, funding a life insurance coverage premium, or performing as a bridge mortgage for actual property acquisition. Collateralizing a brokerage account is a aggressive different to promoting brokerage holdings and realizing capital features, relying on rates of interest.
SMAs/UMAs. With mutual funds, traders are topic to embedded capital features and affected by different traders’ liquidations. SMAs and UMAs may be viable choices for HNW traders.
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Individually Managed Accounts (SMAs): Buyers maintain particular person securities, and a key profit is tax management by means of achieve deferral and tax-loss harvesting. As a result of HNW traders are sometimes involved with tax legal responsibility and may meet account minimums, SMAs are a preferred choice.
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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 beneficial inventory choice grants or appreciated employer inventory. Complicated 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 may be tough.
It’s vital to develop a holistic technique for tax-efficient liquidity. As with appreciated employer inventory, an IRA provision known as internet unrealized appreciation (NUA) is likely to be helpful. Usually, shoppers who qualify for NUA maintain employer inventory in a 401(ok) or conventional IRA.
Property and charitable planning by means of trusts. A correctly designed belief helps HNW shoppers handle their taxes, create a legacy, switch property to heirs in a tax-efficient manner, and impact an property freeze. A charitable the rest belief affords tax benefits for the sale of an appreciated asset whereas fulfilling philanthropic targets and affords quite a few advantages, notably for property tax planning. A tax legal professional ought to assessment and supply steering on belief planning in your HNW shoppers, as these autos require cautious drafting.
Serving to HNW Shoppers Obtain Their Imaginative and prescient
When working with HNW traders, distinctive options are sometimes wanted to assist defend and protect their property. As with all shoppers, your steering will create the largest influence if you help in reaching their imaginative and prescient for right this moment and in making a legacy for tomorrow.
This materials is meant for informational/academic 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.