Advising The Affluent
by P.E. KelleyMr. Kelley is managing editor of this magazine. Connect with him by email: [email protected]
Nationwide Advisory Solutions’ 2018 Advisor Authority study surveyed more than 1,700 RIAs, fee-based advisors and individual investors. It’s recent special report on “Winning the High Net Worth: Unlock Greater Growth Serving More Affluent Investors” zeroed in on the unique attributes and needs of the High Net Worth (HNW) – with investable financial assets ranging from $1 million to less than $5 million – and the Ultra HNW – with investable financial assets of $5 million or more.
Craig Hawley, head of Nationwide Advisory Solutions, spoke with Advisor Magazine about the mood of today’s wealthy clients, both from the perspective of managing their wealth in the present as well as protecting it into and through retirement. More wealth means more complexity, he says, which adds considerable value to what advisors bring to the discussion.
Here are five things you should know.
PEK: Two big issues jump out immediately in your new study: The HNW constituency is worried about protecting assets, and it is cautious about how they’re going to be taxed on those assets. What’s going on out there?
CH: Clearly, having more wealth means affluent investors have more to lose. The HNW and Ultra HNW investors have unique needs—and face unique risks—that advisors must understand in order to build trusted relationships. Protecting assets is the number-one financial concern of the HNW year-over-year, and it is consistently a top concern of the Ultra HNW as well. Likewise, these more affluent investors are far more worried about managing volatility to protect their assets and far more focused on preserving their assets in order to transfer wealth to their heirs, whereas the typical investor is far more concerned about saving for retirement and managing debt.
As a result, more than three-fourths of the HNW (79 percent) and Ultra HNW (76 percent) are far more likely to adopt a proactive strategy against market risk compared to roughly half of typical investors (57 percent). The most affluent are also more likely to rely on a broader range of solutions to manage market risk. While investors at every level rely most commonly on diversification, liquid alternatives and fixed annuities, the Ultra HNW are far more likely to supplement their approach to risk management with fixed index annuities, market-linked CDs, smart beta ETFs and put options.
Affluent clients also look to financial advisors for support minimizing their tax burden. Taxes are a critical issue and one of the biggest investing expenses for the HNW and Ultra HNW, who may owe 40 to 50 percent of their annual income and earnings on their investments when Federal and state taxes are combined. While 74 percent of the Ultra HNW believe they will benefit from tax reform, 42 percent say taxes are still their number one financial concern. Yet, only one in ten are more likely than the typical investor to seek help managing their taxes from a financial advisor.
This suggests there is an opportunity for RIAs and fee-based advisors to offer their more affluent clients the tax planning services they need to protect their assets and navigate the impact and unknowns of tax reform. In fact, six in ten RIAs and fee-based advisors see tax reform as an opportunity to expand their services and generate more business.
PEK: Aside from the obvious (they have more money), what are the unique attributes, and planning needs, of the ultra-wealthy?
CH: Greater wealth also means greater complexity. This makes financial planning and investing far more challenging for affluent investors and creates an even greater need for guided advice. As Advisor Authority has shown, while HNW and Ultra HNW investors are more likely than all other investors to focus on financial planning, they also say they lack the confidence and time to manage their own assets and finances.
When serving the HNW and Ultra HNW, we know that estate planning becomes much more impactful. For the more affluent investors, it’s a bigger part of their overall picture. This means knowing the most effective ways to manage and mitigate estate taxes. At the same time, it’s also important to understand the right solutions for wealth transfer and gifting so that clients and heirs can enjoy it together as a family, versus waiting to pass along an inheritance. It requires a completely different way of thinking—right down to the way that you structure a portfolio, manage the investments and manage the risk.
It also means advisors should look holistically across the entire family and build a multi-generational team to meet their needs. Consider having different levels of service offerings—and different fee-structures—for these different family members based on where they are in their own financial lives. Know how to educate and increase the financial literacy of children and grandchildren. There’s no question that wealth gives children a leg up—but it’s just as important to ensure that wealth doesn’t negatively impact client’s children and grandchildren.
When serving the HNW and Ultra HNW, specialization is even more important. Creating a unique customer experience becomes an even more powerful competitive advantage. C-Level Executives, business owners and entrepreneurs, or highly credentialed clients such as doctors and lawyers, even elite markets like professional athletes, have very specific needs that demand a differentiated approach.
QPEK: The report identifies the number one reason for HNW investors to seek out advice from an advisor is to ‘feel more confident about their financial future’. What are the issues that affect their confidence in managing and maintaining their wealth?
CH: It’s true that greater wealth does not always mean greater optimism. When it comes to their financial outlook, the HNW are only somewhat more optimistic (65 percent) compared to all investors (62 percent), while the Ultra HNW are somewhat less optimistic (58 percent).
As the world becomes increasingly complex, and the headlines are dominated by the unexpected and unprecedented, it is clearly creating greater concerns for all investors, even the HNW and Ultra HNW. As Advisor Authority has shown, when asked which macro factors would most adversely impact their portfolios in 2018, the HNW were far more likely to consider gridlock in Washington and global instability their top two concerns, while the Ultra HNW were concerned about both of these, but listed rising interest rates number-one.
While many experts agree that the economy is fundamentally strong, with no imminent threat of a recession, and the bull market still has some room to run, before it turns into a bear, we all know that emotions often drive the market and impact financial decisions. Suffering financial losses is a very real fear—even for the most affluent. RIAs and fee-based advisors say that one of their most important jobs is to help clients keep a cool head when markets become volatile, helping them stay focused on the long-term to effectively navigate short-term pressures—and even identify hidden opportunities in a volatile market.
PEK The study identifies a deep appreciation among HNW investors for a uniform Federal Fiduciary Standard across the entire financial industry. How would this improve their financial positions?
CH: Year-over-year, Advisor Authority has shown that investors consistently rate a fiduciary standard among the top three most important factors for choosing an advisor. Nearly half of all investors (48 percent) would go so far as to stop working with an advisor who is not required by law to serve in their best interest. And more affluent investors are no exception. The HNW (74 percent) and Ultra HNW (80 percent) are more likely than all investors (68 percent) to believe there should be one federal fiduciary standard across the financial industry.
Clearly, more affluent investors place a premium on trust and transparent financial advice that is in their best interest. They understand that when an advisor’s interest is aligned with their own—when the advisor sits on the same side of the table as the client—both of them can win.
PEK Throughout the study, investor confidence stands out, by a large margin, as the number one concern… and the number one reason they seek professional financial guidance. What’s affecting their overall confidence in keeping and growing wealth, and how does this industry respond to those concerns?
CH: Based on our research, the underlying reasons that more affluent investors seek guided advice goes back to two things—with greater wealth comes greater complexity and having more wealth means having more to lose. As gridlock in Washington, global uncertainty, rising interest rates and tax reform continue to put greater pressure on affluent investors’ portfolios—and their peace of mind—they seek guided, unbiased advice to help them grow their wealth and protect their assets, so they can reach their financial goals and leave a meaningful legacy.
HNW and Ultra HNW investors demand more sophisticated solutions to these challenges. Tech innovation will play an increasingly important role. As Advisor Authority has shown, the most successful advisors say that tools for risk management, risk monitoring and portfolio stress testing are the number-one type of technology they will integrate into their practice in the next 12 months, followed by interactive websites or client portals, and tax optimization tools. They will also prioritize the use of Artificial Intelligence to gain greater understanding of clients’ needs and expectations, provide more personalized holistic planning, protect assets against market risk and engineer investing strategies for better returns.
But remember that when serving the HNW and Ultra HNW, building deep one-on-one relationships will continue to be of great importance. Yes, the more affluent are more likely to be familiar with Artificial Intelligence and be confident in its ability to improve financial planning, and they are more likely to cite increased use of social media, mobile technology and robo advisors as reasons for choosing an advisor. But they continue to place a premium on the human connection and say that when working with their advisor, nothing can replace face-to-face. Likewise, year-over-year, HNW and Ultra HNW investors consistently say the top three factors for choosing an advisor are advisor experience, personalized advice for a holistic financial picture, and a fiduciary standard that puts their best interest first.
Ultimately more affluent investors today need an advisor who can step up and play quarterback to manage the complexity of their financial lives. Start with holistic planning. Take a multi-generational approach. Develop a deep specialization and create a unique customer experience. Harness the benefits of Artificial Intelligence and leverage the best of technology for risk management and tax-advantaged investing. Provide unbiased advice that puts clients’ best interests first. Remember these five things for your affluent clients’ long-term success—as well as your own.