A new study by Cerulli Associates has raised doubts about the wisdom of the widely accepted ambitions of both planners and money managers to attract and retain high net worth clients.

The study concludes that this market, which Cerulli calls the “private wealth market” may not be as profitable as other market segments because of the demanding nature of the clients. However, the study shows that one of the main advantages which high net worth clients have is that they tend to be more loyal in times of poor performance. Client turnover among high net worths averages less than 5 per cent a year. In a report published last week – “Private Wealth Groups” – the Boston-based research and consultancy firm says: “High-net-worth and ultra-high-net-worth investors have different priorities from mass-market investors, and are frequently more concerned with wealth preservation than accumulation. “As such, they require expertise in areas such as tax planning, philanthropy, and estate planning, which are all time-intensive services which require keeping expensive experts on the payroll. “Worse still, ultra-high-net-worth investors have the power to negotiate very low fees, which further cuts into the private wealth manager’s profitability. Nonetheless, some firms have overcome these obstacles, and retention rates of 95 per cent or better make private wealth management an attractive business for the properly prepared provider.” Clients with $US2 million or less to invest spend most of that money on health care and their children’s education, and require little in the way of “residual services” such as estate planning, whereas clients with $US10 million or more are fundamentally more complex. The study says: “Wealthy clients are more interested in preservation, not accumulation. This will impact their product and service demands. Hedge funds, municipal bonds, exchange funds, and options strategies should be part of the private wealth manager’s arsenal. “Wealthy families have even more unique needs than wealthy individuals. They need more help with the “balance sheet” than the “income statement”. Understanding the family dynamic is critical. Single-family offices (SFOs) are expensive to maintain, though they do offer customisation and discretion. Many SFOs have converted to multi-family offices to leverage their expertise and spread out overhead. “Multi-generational planning is much more complicated due to its potentially infinite life expectancy. Small errors are easily magnified.” The main services offered by planners specialising in the market are: manager selection (72.2 per cent), in-house investment management (55.6 per cent), and estate planning (50.0 per cent). However, manager selection for high net worths follows what Cerulli terms the “professional buyer model”, where a manager’s process, philosophy and people are more important when making selections than past performance. The study says: “The marketplace’s traditional conception of scale and profitability is flawed. The complexity of services required by private wealth clients greatly reduces profitability. “Mutual funds are highly scalable, yet not the vehicle of choice for private wealth groups. Nearly 50 per cent of client assets are held in separate accounts, which provide greater customisation and sensitivity to taxes. “The complex services required by private wealth clients require the services of expensive experts; they also take longer to implement. Private wealth clients are more likely to have a larger number of accounts than retail brokerage investors, as foundations and trusts are used to protect or transfer assets. Maintaining additional accounts requires aggregation and reduces profitability. “The advisory fees charged on private wealth accounts may be half to one-third the fees charged on mass market retail accounts. Like gravity, wealth erosion is a strong natural force powered by higher levels of spending, higher inflation rates, higher taxes, partible inheritance, and lack of business continuity… “Provider costs are increasing dramatically. Compliance, compensation, and technology expenditures devour budgetary resources and reduce margins.” Advisory fees identified in the survey component of the study varied widely: from 20bps to 1.4 per cent of assets under advice. However, 58 per cent of respondents said that their fees had declined as client assets grew. More than 60 per cent of the money managers surveyed report only “occasional” success with the advisers of high net worths, but Cerulli notes than only 25 per cent of these managers have sales people dedicated to the market segment.

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