In 2020, knowledge compiled by the Federal Reserve exhibits the online price of U.S. households rose to $130.2 trillion. And, based on a 2020 report by Cerulli Associates, 43 % of whole investable property 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 web price of $5 million or extra). Beneath, my colleague Steve Johnian and I take a look at current knowledge relating to HNW investor market share, in addition to sure funding and planning instruments that could possibly be useful for rich purchasers.
A Vital 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 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 workplaces, and dealer/sellers. With the quantity of investable property at stake, even small share 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 Consumer Preferences
This variation comes at a time when the fame of wirehouse companies seems to be fading, particularly with youthful age teams. As buyers turn into extra educated and complicated, they’re extra conscious of the inherent conflicts in proprietary merchandise supplied by wirehouses and different channels. Based on Pershing/BNY Mellon, “Consumer preferences are shifting whereas impartial advisory companies are increasing their capabilities to seize a higher share of HNW enterprise.”
What does this imply for you and your agency’s development technique? HNW purchasers 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 purchasers, your agency must be acquainted with the distinctive funding and planning instruments rich purchasers will anticipate. Beneath are some helpful instruments to contemplate when working with HNW buyers.
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Funding Instruments
Change funds. It’s frequent for HNW buyers to have amassed 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. Change funds current a tax-aware answer to the dangers inherent in relying on a single inventory for continued outperformance. An alternate fund (or swap fund) permits certified purchasers to alternate a number of shares for an curiosity in a diversified personal placement fund that carefully tracks a benchmark index. Usually, alternate funds are unique to HNW buyers as a consequence of qualification necessities.
An alternate fund not solely replaces concentrated inventory publicity with diversified fairness publicity, it additionally gives pretax return compounding and the flexibility to defer realizing capital positive factors. After a seven-year holding interval, the investor could redeem a diversified basket of securities with out incurring capital positive factors taxes. Earlier than then, buyers could redeem pursuits within the alternate 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 will 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, akin 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 admire SBLOCs (or non-purpose loans), which use a brokerage account as collateral and supply funding for distinct wants. Widespread makes use of embody masking 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 different to promoting brokerage holdings and realizing capital positive factors, relying on rates of interest.
SMAs/UMAs. With mutual funds, buyers are topic to embedded capital positive factors and affected by different buyers’ liquidations. SMAs and UMAs will 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 well-liked 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 frequent for HNW purchasers to carry helpful inventory choice grants or appreciated employer inventory. Advanced evaluation of the shopper’s general monetary place could also be wanted to evaluate tax impacts of distributions, and evaluating when to train inventory choice grants will be difficult.
It’s vital to develop a holistic technique for tax-efficient liquidity. As with appreciated employer inventory, an IRA provision referred to as web unrealized appreciation (NUA) may be useful. Usually, purchasers 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 purchasers handle their taxes, create a legacy, switch property to heirs in a tax-efficient approach, and impact an property freeze. A charitable the rest belief gives tax benefits for the sale of an appreciated asset whereas fulfilling philanthropic targets and gives quite a few advantages, significantly for property tax planning. A tax lawyer ought to evaluation and supply steering 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 property. As with all purchasers, your steering will create the most important impression if you help in attaining their imaginative and prescient for immediately 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 info particular to their state of affairs.
