In 2020, information compiled by the Federal Reserve exhibits the web value of U.S. households rose to $130.2 trillion. And, in keeping with a 2020 report by Cerulli Associates, 43 % of complete 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 excited by working with HNW traders (those that have a web value of $5 million or extra). Under, 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 may very well be useful for rich shoppers.
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. Lately, information exhibits that the market phase 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 % 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 Consumer Preferences
This variation comes at a time when the repute of wirehouse corporations seems to be fading, particularly with youthful age teams. As traders grow to be extra educated and complex, they’re extra conscious of the inherent conflicts in proprietary merchandise supplied by wirehouses and different channels. In keeping with Pershing/BNY Mellon, “Consumer preferences are shifting whereas impartial 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 complicated wants that require specialised companies—together with customized portfolio development and planning recommendation. In case your plans embrace prospecting for HNW shoppers, your agency must be conversant in the distinctive funding and planning instruments rich shoppers will count on. Under are some helpful instruments to contemplate when working with HNW traders.
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Funding Instruments
Alternate 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. 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 intently tracks a benchmark index. Sometimes, trade funds are unique to HNW traders 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 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 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 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, 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 traders respect SBLOCs (or non-purpose loans), which use a brokerage account as collateral and supply funding for distinct wants. Frequent makes use of embrace 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 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 via achieve deferral and tax-loss harvesting. As a result of HNW traders 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 shoppers to carry worthwhile inventory choice grants or appreciated employer inventory. Advanced 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 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) is likely to be useful. Sometimes, shoppers who qualify for NUA maintain employer inventory in a 401(okay) or conventional IRA.
Property and charitable planning via 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, notably for property tax planning. A tax legal professional ought to overview and supply steering on belief planning to your HNW shoppers, as these autos 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 steering will create the most important impression if you help in reaching their imaginative and prescient for as we speak 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. Traders ought to contact their monetary skilled for extra info particular to their state of affairs.
