In 2020, information compiled by the Federal Reserve exhibits the web value of U.S. households rose to $130.2 trillion. And, in line with a 2020 report by Cerulli Associates, 43 % of whole 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 all for working with HNW buyers (those that have a web value of $5 million or extra). Under, my colleague Steve Johnian and I take a look at current information concerning HNW investor market share, in addition to sure funding and planning instruments that may very well be useful for rich purchasers.
A Important 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 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 % 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 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% |
| 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 variation comes at a time when the popularity of wirehouse companies seems to be fading, particularly with youthful age teams. As buyers develop into extra educated and complex, they’re extra conscious of the inherent conflicts in proprietary merchandise provided by wirehouses and different channels. In response to Pershing/BNY Mellon, “Consumer preferences are shifting whereas unbiased advisory companies are increasing their capabilities to seize a better share of HNW enterprise.”
What does this imply for you and your agency’s progress technique? HNW purchasers provide a considerable income supply, however usually include complicated wants that require specialised companies—together with customized portfolio building and planning recommendation. In case your plans embody prospecting for HNW purchasers, your agency ought to be aware of the distinctive funding and planning instruments rich purchasers will anticipate. Under 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 accrued 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 trade fund (or swap fund) permits certified purchasers to trade a number of shares for an curiosity in a diversified personal placement fund that carefully tracks a benchmark index. Sometimes, trade funds are unique to HNW buyers resulting from qualification necessities.
An trade fund not solely replaces concentrated inventory publicity with diversified fairness publicity, it additionally presents 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 trade fund on a month-to-month or every 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 could 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 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 usually extremely illiquid.
Securities-based traces 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. Frequent 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 could 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 by achieve deferral and tax-loss harvesting. As a result of HNW buyers are usually involved with tax legal responsibility and might 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 purchasers to carry beneficial inventory choice grants or appreciated employer inventory. Complicated evaluation of the consumer’s general monetary place could also be wanted to evaluate tax impacts of distributions, and evaluating when to train inventory choice grants could be difficult.
It’s necessary to develop a holistic technique for tax-efficient liquidity. As with appreciated employer inventory, an IRA provision known as web unrealized appreciation (NUA) may be useful. Sometimes, purchasers who qualify for NUA maintain employer inventory in a 401(okay) or conventional IRA.
Property and charitable planning by trusts. A correctly designed belief helps HNW purchasers handle their taxes, create a legacy, switch belongings to heirs in a tax-efficient approach, and impact an property freeze. A charitable the rest belief presents tax benefits for the sale of an appreciated asset whereas fulfilling philanthropic objectives and presents quite a few advantages, significantly for property tax planning. A tax lawyer ought to assessment and supply steerage on belief planning on your HNW purchasers, as these autos require cautious drafting.
Serving to HNW Purchasers Obtain Their Imaginative and prescient
When working with HNW buyers, distinctive options are sometimes wanted to assist shield and protect their belongings. As with all purchasers, your steerage will create the most important affect whenever you help in attaining 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. Traders ought to contact their monetary skilled for extra info particular to their state of affairs.
