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 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 fascinated with 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 may very well 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. Lately, knowledge exhibits that the market section 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 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 places of work, and dealer/sellers. With the quantity of investable property 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% |
| 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 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 provided by wirehouses and different channels. In response to Pershing/BNY Mellon, “Shopper preferences are shifting whereas impartial advisory companies are increasing their capabilities to seize a better share of HNW enterprise.”
What does this imply for you and your agency’s progress technique? HNW purchasers supply a considerable income supply, however usually include complicated wants that require specialised providers—together with customized portfolio building and planning recommendation. In case your plans embrace prospecting for HNW purchasers, your agency needs to be aware of the distinctive funding and planning instruments rich purchasers will count on. Beneath are some helpful instruments to contemplate when working with HNW buyers.
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Funding Instruments
Change funds. It’s widespread for HNW buyers to have accrued 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. Change funds current a tax-aware resolution 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 buyers 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 flexibility to defer realizing capital good points. After a seven-year holding interval, the investor might redeem a diversified basket of securities with out incurring capital good points taxes. Earlier than then, buyers might 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 could 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 foreign money. Some structured merchandise, corresponding 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 traces of credit score (SBLOCs). Many rich buyers recognize SBLOCs (or non-purpose loans), which use a brokerage account as collateral and supply funding for distinct wants. Widespread makes use of embrace 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 various to promoting brokerage holdings and realizing capital good points, relying on rates of interest.
SMAs/UMAs. With mutual funds, buyers are topic to embedded capital good points and affected by different buyers’ liquidations. SMAs and UMAs could be viable choices for HNW buyers.
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Individually Managed Accounts (SMAs): Buyers 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 may meet account minimums, SMAs are a preferred choice.
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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 widespread for HNW purchasers to carry precious inventory choice grants or appreciated employer inventory. Complicated evaluation of the consumer’s total monetary place could also be wanted to evaluate tax impacts of distributions, and evaluating when to train inventory choice grants could 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. Usually, purchasers 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 purchasers handle their taxes, create a legacy, switch property to heirs in a tax-efficient manner, and impact an property freeze. A charitable the rest belief presents tax benefits for the sale of an appreciated asset whereas fulfilling philanthropic objectives and presents quite a few advantages, significantly for property tax planning. A tax legal professional ought to overview and supply steerage on belief planning in 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 defend and protect their property. As with all purchasers, your steerage will create the largest impression while 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/academic functions solely and shouldn’t be construed as funding recommendation, a solicitation, or a advice to purchase or promote any safety or funding product. Buyers ought to contact their monetary skilled for extra data particular to their state of affairs.
