Many IFAs will need to rethink their business and marketing strategies to deliver a service designed to meet the needs of the growing number of weal thy clients. But who are these clients and what do they want?
The Merrill Lynch/Gemini Consulting World Wealth Rep ort 2000 says high-net-worth individual asset wealth is exp-ec ted to grow by 12 per cent each year, reaching $45 trillion by 2004. Here in the UK, 9 per cent of the UK adult population are wealthy investors with financial assets of over £50,000.
This represents a considerable opportunity for IFAs.
High net worth is not easily definable. If we include those who are emerging aff luent, affluent, financially secure, well off or wealthy, as they prefer to be known then the number of clients or potential clients who fall into the high-net-worth category is much greater.
The challenge for the IFA is to identify these people and provide them with the sort of service they need.
Profiling these clients is not easy. They do not just walk into your office wearing an Armani suit and Gucci sunglasses. Many IFAs probably already have high-net-worth clients without realising it.
High-net-worth clients are distinguishable by their inc ome (high earners) or their assets (capital-rich) and may have acquired their wealth in many different ways. Although they are similar in many ways, it seems the amount of wealth and the way in which it was acquired allows insight for IFAs into their attitudes and financial needs.
Inheritors are probably the most easily identifiable of clients. They are currently capital-rich and tend to be more risk-averse in terms of attitude to investment. They are likely to be looking for investments which provide reasonable capital growth with the emphasis on retaining their wealth.
But there are indications that the source of high-net-worth wealth is moving away from inherited wealth. In the World Wealth Report 2000, research based on 400 of the wealthiest US individuals found that inherited wealth has reduced from 32 per cent in 1984 to 22 per cent in 1999. Many of the new wealthy are entrepreneurs or high-earners.
Many of the wealthiest business owners have developed technology and internet-based businesses before selling for millions of dollars.
Research suggests that entrepreneurs are interested in wealth creation as well as wealth preservation but tend to favour a higher-risk investment than the inheritor. Their focus is for capital growth to finance future projects.
High earners are more lik ely to hold the highest-risk investments. They tend to have a shorter-term investment perspective and are looking for short-term opportunities with maximum growth potential.A Premier League footballer is an example of a high earner and the sort of client who would tend to have a more favourable attitude to risk.
How do high-net-worth cli ents differ from the average investor? Research by NMG Financial Services Consulting in September 2000 found there is a huge variation in the extent to which people were actively managing their money, depending on how much wealth they have and how it was acquired. The adviser will need to adopt different strategies for different categories of high-net-worth cli ents, particularly those who are most keen to keep an active interest in their investments.
Wealthy clients tend to be more financially sophisticated than the average investor. They are looking for a wealth management advisory service -a one-stop financial planning service for all their investment needs, incorporating accountants and solicitors as well as their financial advisers. They are likely to need to link the requirements of their businesses to their personal financial planning and will require more sophisticated corporate and trust planning solutions.
They normally have a fairly clear idea of what they want from advisers – face-to-face mee-tings supported by regular contact with the same adviser. The internet may form a key supporting element for communications. It is important the advi ser is qualified, accessible and acc ountable for their decisions.
It has also been found that the wealthier the client, the hig her calibre of bespoke products they want. These tend to be bought through several pro viders and specialists. They also place a high importance on swift and efficient communication and want immediate satisfaction to their information needs.
What are they looking for in terms of investments?
Wealth management has traditionally been the reserve of private banks and boutique investment firms but, according to the NMG report, high-net-worth people are becoming increasingly dissatisfied with these channels. Their criticisms ran ged from a less personal service and increasing distrust to wider use of call centres and voice-activated systems.
The wealthier the client, the more likely they are to invest offshore.
The Merrill Lynch/Gemini Consulting UK Private Wealth Report 1998 says high-net-worth investors – those with over £500,000 to invest- tend to invest over 50 per cent of their wealth offshore. With the growing number of wealthy investors, offshore life companies are having to widen their product range to cater for their discerning needs.
But clients with between £50,000 and £500,000 to invest (the affluent and emerging affluent) invest just 5 per cent to 20 per cent of their wealth offshore. This creates an opportunity for IFAs to advise this group of clients that offshore investment is not just for the super-rich and can be the right choice for them.
Offshore insurance-linked products such as bonds provide investors with diverse tax-efficient investment opportunities. They have the advantage of being able to accept collective investments and offer a wide range of funds of differing risk profiles, including managed funds.
They offer scope for IFAs to advise clients on which funds to choose as well as allowing clients to build their own investment portfolios. Some also offer their own investment management service. They are particularly useful for corporate investments and those looking for trust planning opportunities.
It is clear that although high-net-worth clients are more financially aware than the average client, they are still looking for advice and support. Whether it is providing information or a whole wealth management service, IFAs can fulfil an important and valuable role.