In 2020, knowledge compiled by the Federal Reserve exhibits the web price of U.S. households rose to $130.2 trillion. And, in response to a 2020 report by Cerulli Associates, 43 p.c of complete investable property 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 fascinated by working with HNW traders (those that have a web price of $5 million or extra). Under, my colleague Steve Johnian and I take a look at latest knowledge relating to 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, knowledge exhibits that the market section of HNW traders 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 workplaces, and dealer/sellers. With the quantity of investable property at stake, even small proportion 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 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 alteration comes at a time when the fame of wirehouse corporations seems to be fading, particularly with youthful age teams. As traders turn out to be extra educated and complex, they’re extra conscious of the inherent conflicts in proprietary merchandise supplied by wirehouses and different channels. In response to Pershing/BNY Mellon, “Consumer preferences are shifting whereas unbiased advisory corporations 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 shoppers provide a considerable income supply, however typically include advanced wants that require specialised companies—together with customized portfolio development and planning recommendation. In case your plans embody prospecting for HNW shoppers, your agency needs to be conversant in the distinctive funding and planning instruments rich shoppers will anticipate. Under 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 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 carefully tracks a benchmark index. Sometimes, 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 gives pretax return compounding and the power to defer realizing capital positive aspects. After a seven-year holding interval, the investor could redeem a diversified basket of securities with out incurring capital positive aspects taxes. Earlier than then, traders could redeem pursuits within the change 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 might 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, equivalent to market-linked CDs, provide capital safety of principal. Many provide restricted or no principal safety, nonetheless, and so they’re sometimes extremely illiquid.
Securities-based traces of credit score (SBLOCs). Many rich traders admire 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 positive aspects, relying on rates of interest.
SMAs/UMAs. With mutual funds, traders are topic to embedded capital positive aspects and affected by different traders’ liquidations. SMAs and UMAs might be viable choices for HNW traders.
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Individually Managed Accounts (SMAs): Buyers maintain particular person securities, and a key profit is tax management by way of 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 preferred possibility.
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Unified Managed Accounts (UMAs): Buyers 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 helpful 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 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) may be helpful. Sometimes, shoppers who qualify for NUA maintain employer inventory in a 401(okay) 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 property to heirs in a tax-efficient means, 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 legal professional ought to evaluation and supply steering on belief planning in your HNW shoppers, as these automobiles require cautious drafting.
Serving to HNW Purchasers Obtain Their Imaginative and prescient
When working with HNW traders, distinctive options are sometimes wanted to assist defend and protect their property. As with all shoppers, your steering will create the most important affect once you help in reaching their imaginative and prescient for in the present day 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 suggestion to purchase or promote any safety or funding product. Buyers ought to contact their monetary skilled for extra info particular to their scenario.