In 2020, information compiled by the Federal Reserve reveals the web value of U.S. households rose to $130.2 trillion. And, in response to 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 serious about working with HNW buyers (those that have a web value of $5 million or extra). Beneath, my colleague Steve Johnian and I have a look at current information concerning HNW investor market share, in addition to sure funding and planning instruments that might 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. Lately, information reveals that the market section 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 % 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 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% |
| 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 Shopper Preferences
This variation comes at a time when the fame of wirehouse corporations 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 line with Pershing/BNY Mellon, “Shopper preferences are shifting whereas unbiased advisory corporations are increasing their capabilities to seize a better share of HNW enterprise.”
What does this imply for you and your agency’s development technique? HNW shoppers supply a considerable income supply, however usually include advanced wants that require specialised providers—together with customized portfolio building and planning recommendation. In case your plans embody prospecting for HNW shoppers, your agency needs to be aware of the distinctive funding and planning instruments rich shoppers will anticipate. Beneath are some helpful instruments to contemplate when working with HNW buyers.
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Funding Instruments
Trade funds. It’s frequent for HNW buyers to have amassed 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 personal placement fund that intently tracks a benchmark index. Sometimes, change funds are unique to HNW buyers on account 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 positive factors. After a seven-year holding interval, the investor might redeem a diversified basket of securities with out incurring capital positive factors 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 will be linked to underlying value actions of a single safety, a basket of securities, an index, a commodity, a debt issuance, and/or a overseas forex. Some structured merchandise, similar to market-linked CDs, supply capital safety of principal. Many supply restricted or no principal safety, nonetheless, and so they’re usually extremely illiquid.
Securities-based strains 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 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 way of acquire 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 frequent for HNW shoppers to carry invaluable inventory choice grants or appreciated employer inventory. Complicated 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 tough.
It’s vital to develop a holistic technique for tax-efficient liquidity. As with appreciated employer inventory, an IRA provision known as web unrealized appreciation (NUA) could be helpful. Sometimes, shoppers who qualify for NUA maintain employer inventory in a 401(ok) or conventional IRA.
Property and charitable planning by way of 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 lawyer ought to evaluation and supply steering on belief planning in your HNW shoppers, 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 defend and protect their belongings. As with all shoppers, your steering will create the largest affect whenever you help in reaching their imaginative and prescient for right this 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 scenario.