In 2020, knowledge compiled by the Federal Reserve exhibits the online value of U.S. households rose to $130.2 trillion. And, in response to a 2020 report by Cerulli Associates, 43 p.c of whole investable belongings 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 desirous about working with HNW traders (those that have a web value of $5 million or extra). Beneath, my colleague Steve Johnian and I have a look at latest knowledge concerning HNW investor market share, in addition to sure funding and planning instruments that could possibly be useful for rich shoppers.
A Important Market Alternative
For impartial 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, knowledge exhibits that the market section 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 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 workplaces, and dealer/sellers. With the quantity of investable belongings at stake, even small proportion modifications imply large 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 workplaces | 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 status of wirehouse corporations seems to be fading, particularly with youthful age teams. As traders turn into extra educated and complicated, they’re extra conscious of the inherent conflicts in proprietary merchandise provided by wirehouses and different channels. In accordance with Pershing/BNY Mellon, “Shopper preferences are shifting whereas impartial advisory corporations 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 supply a considerable income supply, however typically include complicated wants that require specialised companies—together with customized portfolio building and planning recommendation. In case your plans embrace prospecting for HNW shoppers, your agency needs to be aware of 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
Trade funds. It’s frequent for HNW traders to have collected a considerable amount of wealth in a concentrated inventory place. They could be hesitant to diversify for a lot of causes, together with the potential tax burden. Trade funds current a tax-aware answer 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 non-public placement fund that intently tracks a benchmark index. Usually, change funds are unique to HNW traders because of qualification necessities.
An change fund not solely replaces concentrated inventory publicity with diversified fairness publicity, it additionally presents pretax return compounding and the power to defer realizing capital good points. After a seven-year holding interval, the investor could redeem a diversified basket of securities with out incurring capital good points taxes. Earlier than then, traders could redeem pursuits within the change 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 might 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 forex. Some structured merchandise, equivalent to market-linked CDs, supply capital safety of principal. Many supply restricted or no principal safety, nonetheless, they usually’re sometimes extremely illiquid.
Securities-based strains of credit score (SBLOCs). Many rich traders recognize SBLOCs (or non-purpose loans), which use a brokerage account as collateral and supply funding for distinct wants. Frequent makes use of embrace masking a big tax obligation, funding a life insurance coverage premium, or appearing as a bridge mortgage for actual property acquisition. Collateralizing a brokerage account is a aggressive different to promoting brokerage holdings and realizing capital good points, relying on rates of interest.
SMAs/UMAs. With mutual funds, traders are topic to embedded capital good points and affected by different traders’ liquidations. SMAs and UMAs might be viable choices for HNW traders.
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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 traders are sometimes involved with tax legal responsibility and might meet account minimums, SMAs are a well-liked possibility.
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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 frequent for HNW shoppers to carry priceless inventory possibility 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 possibility grants might 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. Usually, shoppers who qualify for NUA maintain employer inventory in a 401(ok) or conventional IRA.
Property and charitable planning by trusts. A correctly designed belief helps HNW shoppers handle their taxes, create a legacy, switch belongings to heirs in a tax-efficient method, and impact an property freeze. A charitable the rest belief presents tax benefits for the sale of an appreciated asset whereas fulfilling philanthropic targets and presents quite a few advantages, significantly for property tax planning. A tax legal professional ought to evaluation and supply steerage on belief planning in your HNW shoppers, as these automobiles 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 belongings. As with all shoppers, your steerage will create the largest affect whenever you help in attaining their imaginative and prescient for at the moment and in making a legacy for tomorrow.
This materials is meant for informational/instructional 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 state of affairs.
