William Byrnes' Tax, Wealth, and Risk Intelligence

William Byrnes (Texas A&M) tax & compliance articles

Trends of New-Breed HNWIs

Posted by William Byrnes on July 18, 2009

From 2006, Cap Gemini’s polling has identified several long term trends that continue to appear to drive a general re-allocation and opportunities for wealth managers to acquire clients.[1] By example of asset re-allocation, in 2006 HNWI clients reached 20% alternative investment diversification for their portfolios, up from just 3% in 2000.[2] HNWIs, and in particular the new breed HNWIs, are increasingly globally informed about investment opportunities and risks.  Thus, HNWIs are undertaking their own research of information and expecting a collaborative process with their advisors.  HNWI’s are demanding firm’s investment teams develop and use global strategies and products to hedge local risks[3], by example allocating to the continuing emerging markets of BRIC (though 2009 has seen this become BIC).

As to be expected based upon the short term drivers of the recession, recalibration of asset values, failure or quick-sale of numerous global financial institutions, and tremendous investment fraud scandals by prominently respected institutional individuals, 2009 has seen tactical, if not forced, re-allocation.  Ellen Kelleher in April reported in the Financial Times that HNWI are commonly dissatisfied with private banks pitching structured products “with high charges and confusing terms”.[4] Citi Private Bank’s survey covering its wealth managers for 2,000 HNWI and UHNWI found that this year almost 90% of their clientele have reduced or substantially reduced their exposure to equities and nearly all have shied from hedge funds, citing transparency and stability as the value drivers of their allocation decision.[5] While in 2008 HNWIs sought income fixed returns, the World Economic Forum proposes that future alternative investment classes offering beta return to HNWI portfolios may include (1) infrastructure finance, (2) intangible assets (such as intellectual property), (3) research and development exposure, (4) mega-trends, (5) frontier markets, (6) distressed assets, and (7) insurable risk.[6]

Since 2006, new breed HNWIs in particular have been trending toward a lack of fidelity to their institutions and migrating sizable allocations of their portfolios to boutique (investment) firms and to multi family office operations.[7] 27% of HNWI surveyed in 2008 by Cap Gemini noted changing wealth mangers or withdrawing assets.[8] In the previous year, Cap Gemini already noted that HNWIs were migrating toward a holistic service approach to their advisement.  Nearly 70% of advisors that retained their HNWI leveraged team-based models.  American Academy of Financial Management (www.aafm.us) reports that wealth managers not employing an intergrated-service, collaborative approach to their clients’ issues during the recession have experienced tumbling fees as clients transferred to advisors able to address such issues.  By example, AAFM reported that few financial advisors pro-actively collaborated to draw into their team recessionary skill sets such as debt renegotiation, cash flow and workout strategies.  Scorpio Partnership’s Transforming the Worth of Wealth report found from its surveying that the general feeling amongst financial advisors is that investors are increasingly looking to transfer to service-based smaller boutiques as the economy weakens. In fact, HNWIs are returning to smaller regional and local financial institutions (Cap Gemini reports a 31% increase in their client base).

Exemplifying the impact of this trend, Scorpio Partnership reported that the 25 brand name firms surveyed “posted less than 15 per cent growth in clients every three years, on average”.  On the other hand, as of the third quarter of 2008, 83 US based multi family office firms managed $334 billion, which at that time represented 19% of total assets under management of the global hedge fund industry.[9] Based on the 2009 disengagement from ‘opaque’ hedge funds by HNWIs, ‘transparent’ multi family offices will likely have made substantial strides toward closing the assets under management gap.[10] When choosing from among wealth managers, HNWI apparently value branding and reputation, but size has lost its importance.[11]

In my next blogticle, I will address the new required skills sets of wealth managers required by new breed HNWIs, at least as we teach them in our wealth managers’ training programs.   Prof. William Byrnes (http://www.llmprogram.org)

[1] All the reports cited herein addressing trends amongst HNWIs confirm the original trend recognition by the 2006 Cap Gemini Report.

[2] Cap Gemini World Wealth Report 2006.

[3] The Wealth Management Report 2009 Meeting the Expectation of UK High Net Worth Clients JP Morgan at 38.

[4] The Big Money Prefers Smaller Firms, Ellen Kelleher, Financial Times (April 10, 2009).

[5] The KnightFrank (Citi Private Bank) Wealth Report 2009 at 12.

[6] The Future of the Global Financial System, World Economic Forum’s World Scenario Series (2009) at 33.

[7] Show them the Money, Economist Special Report April 2, 2009.

[8] Cap Gemini World Wealth Report 2009.

[9] The Future of the Global Financial System, World Economic Forum’s World Scenario Series (2009) at 36.

[10] The KnightFrank (Citi Private Bank) Wealth Report 2009 at 12.

[11] The Future of Private Banking: A Wealth of Opportunity?, Oliver Wyman (2008) and The Wealth Management Report 2009 Meeting the Expectation of UK High Net Worth Clients JP Morgan.

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