What Advisors Can Learn From Ultra-Wealthy Clients

Investors with a great deal of assets and complex financial situations demand a lot from their financial advisors. The ultra-wealthy, in particular, expect to receive a full-service platform from their wealth managers. They are seeking advisors who can offer them global wealth management services because many of them hold a great deal of their wealth outside the U.S.

To meet the expectations of these affluent individuals, wealth managers and financial advisors must offer comprehensive services that cater to their unique financial situations. This includes providing a wider range of investment options across international markets, assisting with cross-border transactions, navigating complex tax and regulatory frameworks, and offering expert guidance on managing and preserving wealth across generations.

But what can advisors learn from their high net-worth clients? By understanding the strategies and perspectives of these wealthy individuals, advisors can gain invaluable insights and sophistication. Through a symbiotic relationship, advisors can, therefore, enhance their own expertise and refine their approaches to better serve both their high net-worth clients and the broader spectrum of investors, creating a mutually beneficial environment for financial success.

High and Ultra-High Net Worth Individuals

What does it take to be classified as a high-net worth individual (HNWI)? What about Ultra-High Net Worth? These classifications are typically used in the financial industry to identify and cater to clients with varying levels of affluence.

As a high-net-worth individual, you may qualify for exclusive banking, investment, and other financial services with reduced fees, discounts, and special rates, along with access to special events and other perks. HNWIs are also able to invest in sophisticated investment vehicles like hedge funds, which are generally open only to accredited investors who meet certain criteria, including a minimum net worth. Similarly, HNWIs may also be able to invest in private equity (PE) and venture capital (VC) funds, or other alternative asset classes that are not often available to the general public.

High Net Worth Individuals (HNWIs)

HNWIs are individuals who possess a significant amount of wealth or financial assets. While there is no universally agreed-upon threshold, HNWIs are generally defined as those with investable assets (such as cash, stocks, bonds, real estate, and other financial instruments) exceeding $1 million. HNWIs often have complex financial situations and require specialized financial advice and services.

 Advisors should work closely with HNWIs to assess their goals, risk tolerance, and time horizons. This includes evaluating investment strategies, retirement planning, tax optimization, estate planning, and risk management. Many HNWIs expect regular updates on their investments and personalized communication. Advisors should provide detailed performance reports, transparent fee structures, and frequent contact to address any questions or concerns.

Very-High Net Worth Individuals (VHNWIs)

The very-high-net-worth individual (VHNWI) classification will often refer to someone with a net worth of at least $5 million. In general, they are offered the same sort of financial services and opportunities as HNWIs, but may receive lower fees and extra attention due to the relatively higher account balances.

VHNWIs may have an appetite for alternative investments, such as private equity, hedge funds, venture capital, or real estate partnerships. Advisors should have the expertise to evaluate and offer these opportunities, considering their risk and return profiles.

VHNWIs may benefit from family office services, which provide individualized and comprehensive financial management, including accounting, bill payment, philanthropic planning, and intergenerational wealth transfer. Advisors can partner with specialists to offer these services or guide clients in establishing their own family offices.

Ultra-High Net Worth Individuals (UHNWIs)

UHNWIs represent a smaller subset of wealthy individuals who possess an exceptionally high level of net worth. Again, the specific threshold for UHNWIs can vary, but it generally starts at $30 million or more in investable assets. UHNWIs typically have substantial wealth spread across various asset classes and often have unique financial needs and goals. They require more comprehensive and tailored wealth management services that go beyond traditional investment advice, such as estate planning, philanthropic strategies, and family office services.

UHNWIs complex financial needs also require highly-specialized tax planning, including expertise in navigating international tax and regulatory frameworks, managing cross-border transactions, and coordinating with other professionals in different jurisdictions. UHNWIs also often place a great importance on preserving and passing on their wealth to future generations. Advisors should help develop comprehensive family legacy and succession plans, including trusts, foundations, and governance structures.

Investing Strategies of the Affluent

Investing strategies can vary for different wealth segments, including High Net Worth Individuals (HNWIs), Very High Net Worth Individuals (VHNWIs), and Ultra-High Net Worth Individuals (UHNWIs). Here's an overview of how investing strategies may differ for each group:

High Net Worth Individuals

• Diversification and Risk Management: HNWIs typically focus on diversifying their investment portfolios across various asset classes, such as stocks, bonds, mutual funds, and real estate. They may also allocate a portion of their portfolio to alternative investments, like private equity or hedge funds, to enhance returns and reduce risk.
• Long-Term Growth and Income: HNWIs often prioritize long-term wealth accumulation and income generation. They may have a balanced approach between growth-oriented investments and income-generating assets, aiming for both capital appreciation and regular cash flow.
• Professional Guidance: HNWIs may seek professional advice from financial advisors to help them navigate the complexities of investing, especially in areas such as tax optimization and estate planning.

Very High Net Worth Individuals

• Alternative Investments: VHNWIs have a higher capacity for risk and may allocate a larger portion of their portfolios to alternative investments, such as venture capital, private equity, or real estate partnerships. These investments offer potentially higher returns but often come with a higher level of complexity and illiquidity.
• Preservation of Wealth: VHNWIs tend to be more focused on wealth preservation and capital protection. They may invest in assets with lower volatility and reduced correlation to traditional financial markets, such as real estate, art, or precious metals, to safeguard their wealth over the long term.
• Family Office Services: VHNWIs may establish or utilize family offices, which provide comprehensive investment management, tax planning, and wealth preservation services tailored to their specific needs. These services help ensure the efficient management and coordination of their financial affairs.

Ultra-High Net Worth Individuals

• Global Investment Opportunities: UHNWIs often have a significant portion of their wealth invested internationally. They seek opportunities in different regions and countries to diversify their holdings, capitalize on global trends, and potentially benefit from favorable tax or regulatory environments.
• Direct Investments and Philanthropy: UHNWIs may engage in direct investments, such as acquiring private companies or funding startups, to exert greater control and potentially generate higher returns. Additionally, they may have a stronger focus on philanthropic endeavors, establishing foundations or making impact investments that align with their social and environmental goals.
• Family Legacy and Succession Planning: UHNWIs often prioritize preserving and transferring their wealth and investments across generations. They employ sophisticated estate planning techniques, family trusts, and governance structures to ensure a smooth transition and continuation of their wealth management strategies.

It's important to note that these are generalizations, and individual investment strategies can still vary significantly based on personal preferences, risk tolerance, and specific financial goals. Consulting with a qualified financial advisor is crucial to tailor investment strategies to each investor's unique circumstances and aspirations.

Retirement Planning for the Affluent

Retirement planning for the various levels of affluence will have similarities but can also differ based on the financial resources and goals of each group. Here's an overview of how retirement planning may vary for each category:

High Net Worth Individuals

• Goal-Oriented Planning: HNWIs typically have defined retirement goals, such as accumulating enough wealth to buy a retirement home or travel the world. Their retirement planning focuses on accumulating sufficient assets and optimizing investment strategies to achieve these goals.
• Diversified Investment Portfolios: HNWIs often create diversified portfolios to balance growth and income. They may invest in a mix of stocks, bonds, mutual funds, and real estate to build a retirement nest egg while mitigating systemic risk.
• Tax-Efficient Strategies: HNWIs may incorporate tax-efficient investment vehicles, such as Roth IRAs and 401(k) plans, to maximize tax advantages and reduce their tax burden during retirement. They may also consider tax-loss harvesting, tax-efficient withdrawal strategies to manage their taxable income.

Very High Net Worth Individuals

• Lifestyle Maintenance: VHNWIs typically aim to sustain their high-end lifestyle during retirement. Their planning may involve ensuring a steady income stream from investments, minimizing the impact of inflation, and preserving capital to support their desired standard of living.
• Alternative Investments: VHNWIs may allocate a portion of their portfolio to alternative investments, such as private equity or real estate, to potentially enhance returns and diversify their retirement assets. These investments may offer opportunities for higher yields but may also carry additional risks and complexities.
• Legacy Planning: VHNWIs may begin to prioritize wealth transfer and legacy planning during retirement. They may utilize trusts, life insurance policies, or charitable giving strategies to efficiently transfer assets to future generations or support philanthropic endeavors.

Ultra-High Net Worth Individuals

• Multi-Generational Wealth Preservation: UHNWIs focus on preserving their wealth not only for their retirement but also for future generations. Their retirement planning includes strategies to minimize estate taxes and ensure the smooth transfer of wealth across generations.
• Customized Investment Approaches: UHNWIs may have more flexibility and resources to explore custom investment strategies tailored to their retirement needs. This can involve direct investments in businesses, real estate, or other ventures to potentially generate higher returns and create income streams during retirement.
• Lifestyle Flexibility: UHNWIs are already very wealthy, and may prefer greater flexibility in retirement, including where they live, travel, or the types of hobbies they pursue. Their retirement planning may encompass lifestyle considerations and the financial resources required to support these aspirations.

While there may be differences in the specific strategies employed, retirement planning for all groups involves careful consideration of financial goals, asset allocation, tax efficiency, and wealth preservation.

Estate Planning for the Affluent

Estate planning for High Net Worth Individuals (HNWIs) and Ultra-High Net Worth Individuals (UHNWIs) requires careful consideration due to the complexity and substantial value of their estates. Here's a breakdown of how estate planning may differ for each group:

High & Very-High Net Worth Individuals

• Estate Planning: HNWIs & VHNWIs typically focus on creating a comprehensive estate plan that includes essential components such as a will, power of attorney (POA), and healthcare directives. They may establish trusts, such as revocable living trusts or testamentary trusts, to ensure efficient distribution of assets and minimize probate costs.
• Bequests: These groups often prioritize wealth preservation for their beneficiaries. They may utilize strategies like gifting, including annual exclusion gifts and lifetime gifting, to transfer assets during their lifetime and potentially reduce estate taxes. Life insurance policies are often used as a means to provide liquidity and protect the value of the estate.
• Succession Planning: They also may plan for the smooth transfer of their family businesses or other significant assets to the next generation. They may consider mechanisms like buy-sell agreements, family limited partnerships, or family LLCs to manage the transfer and control of these assets.

Ultra-High Net Worth Individuals

• Sophisticated Trust Structures: UHNWIs often employ more intricate trust structures, such as dynasty trusts or charitable remainder trusts, to achieve long-term wealth preservation and minimize tax liabilities. These trusts can provide continued asset protection, control, and flexibility for multiple generations.
• International Considerations: UHNWIs with global assets may face complex tax and legal issues across continents and jurisdictions. Their estate planning may involve international trust structures, offshore accounts, and coordination with legal and tax advisors from multiple countries to optimize tax efficiency and compliance.
• Philanthropic Planning: UHNWIs frequently have philanthropic goals and establish foundations, endowments, or charitable trusts as part of their estate planning. They may also create donor-advised funds or private foundations to support causes they care about while potentially benefiting from tax advantages.
• Family Governance: Both HNWIs and UHNWIs often focus on establishing family governance structures to maintain family unity, preserve wealth, and provide guidelines for future generations. This may involve creating trusts, family councils, mission statements, and protocols for decision-making, wealth education, and intergenerational wealth transfer.
  

Given the complexities involved, estate planning for both HNWIs and UHNWIs requires the expertise of estate planning attorneys, tax advisors, and financial professionals who specialize in wealth management. Each individual's unique circumstances, goals, and family dynamics must be carefully considered to develop a tailored estate plan that addresses their specific needs and aspirations.

Understanding the Unique Needs of UHNWIs

While the average millionaire might consult a specialist to manage their portfolio of stocks, bonds, or REITs, UHNWIs are likely to have more complex investments. Many have at least one family business that is not liquid. In addition, their portfolio may also include commercial real estate, hedge funds, and private equity.

UHNWIs are also likely to have sizable tangible assets, such as boats, planes, homes, and artwork, and it is important for financial advisors to include these on the balance sheet. A 2021 survey by Chubb and the Wharton School found that 87% of the ultra-wealthy considered tangible assets to be an important part of their wealth, while only 53% of advisors see them the same way.

They are also more risk-averse than typical clients. After all, it's easier to lose UHNW status than it is to attain it. This means that the ultra-wealthy are also extremely cautious about their choice of financial advisors: 95% of those with over $50 million in assets prioritize coverage and service quality over price. For those with over $30 million, that figure is 80%.

This means that it's not enough for an advisor to have a good track record; they also have to provide in-depth explanations of how they are investing the client's money. Research by FactSet found that "quality investment information" is the most reassuring signal of credibility for UHNW clients. Moreover, the vast majority of UHNW clients would not work with an advisor who could not communicate effectively. In order to preserve their wealth, UNHWI clients may require bespoke tax services to minimize tax liabilities.

How Advisors Can Attract UHNW Clients

This means that there is a sizeable niche for advisors who specialize in serving the ultra-wealthy, provided that they are equipped to serve the needs of these clients. This may require a sophisticated team of investment specialists who are more familiar with the unique financial and tax needs of UHNWIs.

Many large investment houses offer elite services to their wealthiest clients. For example, Deutsche Bank’s wealth management group, Deutsche Asset & Wealth Management, offers structured financing solutions, allowing the wealthiest clients to borrow against their private aircraft. Morgan Stanley has a dedicated Art Resources Team to help their wealthiest clients manage their portfolio of art assets.

But you don't need a full-sized investment bank in order to serve wealthy clients efficiently and effectively. In fact, some suggest that many ultra-wealthy clients place a high value on receiving personalized investment services.

Sara Grillo, writing in Advisor Perspectives, recommends a "70 Deep" practice that focuses on quality rather than quantity. Instead of trying to serve as many clients as possible, she says, advisors can make more money in the long run by providing high-quality, boutique service to a select few.

This allows the advisor to devote more attention to each client, while also leaving more time to run other aspects of the practice. "Raise your fees so that they are ridiculously overpriced," Grillo writes, "and then ridiculously over-deliver!"

Of course, it won't be easy to impress an ultra-wealthy client. It is also important for the advisory firm to look the part–with clean, comfortable waiting areas, professional interior design, and sophisticated reading materials. One investment management firm recommends that financial advisors model themselves on family offices–everything the client sees should be polished and professional.

The Bottom Line

High net worth individuals (HNWIs) with $1 million or more can begin to access more sophisticated financial planning and receive more tailored advice. Ultra-high net worth individuals (UHNWIs), with over $30 million to invest, require more specialized and comprehensive wealth management services that go beyond traditional financial planning. Their complex financial situations demand expertise in areas such as tax optimization, estate planning, philanthropic strategies, global wealth management, and family office services. Additionally, UHNWIs often seek investment opportunities in alternative assets, international markets, and direct investments, requiring advisors with in-depth knowledge and access to these exclusive opportunities.

In order to attract and retain ultra-wealthy clients, financial advisors need to go beyond traditional services. They should offer advanced and tailored solutions, strengthen their relationships with clients, and provide global services. This means providing sophisticated strategies that align with clients' unique needs and goals, fostering trust and communication, and catering to their international wealth holdings. By doing so, advisors can better meet the expectations of the ultra-wealthy and establish long-term partnerships that support their clients' financial success.