In 2020, information compiled by the Federal Reserve reveals the online value of U.S. households rose to $130.2 trillion. And, based on 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 involved in working with HNW buyers (those that have a internet value of $5 million or extra). Beneath, my colleague Steve Johnian and I take a look at latest information relating to HNW investor market share, in addition to sure funding and planning instruments that could possibly 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 reveals that the market phase of HNW buyers seems to have been more and more put into play.
Because the chart under 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 share 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 transformation comes at a time when the popularity of wirehouse companies seems to be fading, particularly with youthful age teams. As buyers grow to be extra educated and complicated, they’re extra conscious of the inherent conflicts in proprietary merchandise provided by wirehouses and different channels. In response to Pershing/BNY Mellon, “Shopper preferences are shifting whereas unbiased advisory companies 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 typically include advanced wants that require specialised providers—together with customized portfolio development and planning recommendation. In case your plans embody prospecting for HNW shoppers, your agency must 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 buyers.
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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 resolution 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. Usually, change funds are unique to HNW buyers attributable to qualification necessities.
An change fund not solely replaces concentrated inventory publicity with diversified fairness publicity, it additionally gives 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, 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 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 overseas foreign money. Some structured merchandise, equivalent to market-linked CDs, provide capital safety of principal. Many provide restricted or no principal safety, nevertheless, and so they’re sometimes extremely illiquid.
Securities-based strains of credit score (SBLOCs). Many rich buyers recognize SBLOCs (or non-purpose loans), which use a brokerage account as collateral and supply funding for distinct wants. Widespread makes use of embody overlaying 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 various to promoting brokerage holdings and realizing capital features, relying on rates of interest.
SMAs/UMAs. With mutual funds, buyers are topic to embedded capital features and affected by different buyers’ liquidations. SMAs and UMAs may be viable choices for HNW buyers.
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Individually Managed Accounts (SMAs): Traders maintain particular person securities, and a key profit is tax management via achieve deferral and tax-loss harvesting. As a result of HNW buyers 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): Traders 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 invaluable inventory choice grants or appreciated employer inventory. Advanced evaluation of the consumer’s total monetary place could also be wanted to evaluate tax impacts of distributions, and evaluating when to train inventory choice grants may be difficult.
It’s necessary to develop a holistic technique for tax-efficient liquidity. As with appreciated employer inventory, an IRA provision known as internet unrealized appreciation (NUA) may be helpful. Usually, shoppers who qualify for NUA maintain employer inventory in a 401(okay) or conventional IRA.
Property and charitable planning via trusts. A correctly designed belief helps HNW shoppers handle their taxes, create a legacy, switch belongings to heirs in a tax-efficient manner, and impact an property freeze. A charitable the rest belief gives tax benefits for the sale of an appreciated asset whereas fulfilling philanthropic objectives and gives quite a few advantages, notably for property tax planning. A tax lawyer ought to overview and supply steerage on belief planning to 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 impression while you help in attaining their imaginative and prescient for right now 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. Traders ought to contact their monetary skilled for extra data particular to their scenario.
