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Rich pickings

Research has identified some dramatic changes in the ownership of wealth in the UK and elsewhere.

These rep orts suggest there could be anything from five million to nearly eight-and-a-half million individuals with invest ible cash of £163;50,000 or more by 2005. Other estimates point to there being nearly 11 million people with over £163;25,000 inv est ible cash by 2004.

The amount of wealth owned by individuals is growing at a remarkable rate which is believed to be in excess of 19 per cent a year compound. This is a trend which is exp ected to continue at the same rate over the next few years. As a result, large numbers of individuals will be in need of financial advice.

Even more remarkable is that the types of individuals who are identified are wealthy are no longer principally those who have inherited their wealth. The emergent wealthy are people who have accumul ated their assets through their working life by means of running their own business, selling stock options and/or as beneficiaries of privatisations, demutualisations and prudent investment in Peps and Isas.

What makes this change of ownership remarkable from the IFA&#39s point of view is that while those with inherited wealth traditionally sought advice from private banks, the emergent wealthy are more likely to visit an IFA.

The private banks – including the private banking operations of more complex finan cial institutions such as UBS, Merrill Lynch, Credit Suisse and HSBC – have not been slow to develop new strategies in response to the growth in wealth in the UK.

This year, Merrill Lynch has entered into an agreement to offer online private ban king to HSBC customers. This repres ents a unique all iance bet ween two compet itive institutions and underlines the imp ortance both of the early identification of those with significant assets and developing a strat egy for distributing to this new marketplace.

Restructures have taken place at Natwest Private Bank ing over the last few months with a view to establishing a cor porate structure which suits the changing marketplace. Credit Suisse recently ann ounced an online private bank ing service for people with ass ets of £163;35,000 while other ins tit ut ions have similar strategies in the wings.

It would seem that where banks have retail expertise, they are in a strong position to identify customers who acquire large sums of cash. But retail banks traditionally do not have the position in the market to offer private banking services, while those banks which have private banking expertise tend to be lacking in retail banking expertise. It would seem likely that more marriages of the Mer rill Lynch/HSBC nature are inevitable.

Estimates from Lloyds TSB Private Banking indicate that 64 per cent of the high-net-worth market is controlled by IFAs. Yet the IFA market has been slow on the uptake in developing strategies for def en ding themselves against the new attack by private banks. If their high market share is to be maintained, let alone inc reased, IFAs will have to adapt their business planning to the changes in wealth ownership.

IFAs have a strong foot hold in the area of smallto med ium-sized businesses, particularly where the business is privat ely owned. Clearly, those IFAs who are advising on executive pensions, small self-administered schemes and business protection insurance will have already identified those individuals who will be the beneficiaries of substantial amounts of cash when their companies are eventually sold.

In the past, the threat at this stage would have been from the accountant advising the small business owner on avoiding capital gains tax. But this has changed dramatically since the last Budget with the reduction in CGT on business assets to 10 per cent.

The real threat to IFAs lies in the individual client market. In particular, IFAs should be aware of middle and senior managers in utility or IT com pan ies, banks or insurance companies where stock opt ion schemes maturing over the next few years will possibly go unnoticed by the IFA unless he has already identified the existence of these options and the dates on which the clients are likely to access them.

It would be wise for all IFAs to amend their fact-finds to include specific questions relating to stock options and share ownership schemes offered by employers.

Recent research indicates there are a number of different market segments within the emergent wealth market which could be put to effective use by IFAs in their business planning.

A strong differentiation has arisen between men and women in this market. Typi cally, the emergent affluent woman will be either young and employed on a high inc ome or a benefici ary of inheritances or stock opt ion schemes. Alter natively, she might be a widow or div orcee who has significant ass ets as the result of a disposition in a will or matrimonial settlement.

The market segmentation for men is wider and encompas ses everything from the young, aggressive IT consultant earning significantly above the earnings&#39 cap, through to the retired senior manager who is enjoying a comfortable pension and treats his investments as something of a hobby.

There are also strong distin ctions bet ween the needs of women and men, with women preferring to trust one adviser with all their assets whereas men tend to fav our spreading their assets.

IFAs may well want to deve lop long-term relationships with female investors to gain increased market share. For male investors, IFAs may have to accept that they are unlik ely to be given all the client&#39s assets to invest and this may require an acceptance of multiple advi ser solutions.

It may be wise for IFAs to begin building relationships with financial consultants at private banks, investment managers and stockbrokers.

One common thread which runs through all client segments in this area is the need for banking services which are efficient and competitively priced and there are prob ably massive opportunities for IFAs to bec ome the adv isers on banking services to their customers.

This will be particularly important given the identified need for independent advice on all financial services and not just those which are regulated by the FSA.

The stren gth of the IFA community lies in its independence and if this advice can be extended to the full est range of financial servi ces products, there is every rea son to be optimistic for the future.


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