High net worth investors are generally defined as those who have at least $1 million in assets and the US can currently boast being home to over a third of the world’s millionaires—about 5.3 million individuals, according to a report from Henley & Partners.1
With wealth comes additional challenges and these types of investors are rarely suited with a one-size-fits-all approach. Advisors positioning themselves to serve the needs of affluent investors must be mindful of the fact that HNW investors often have unique needs and goals that may be outside the realm that advisors are used to dealing in.
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Types of High-Net-Worth Investors
Before diving into the complexities of affluent investors, it’s important to understand the different methods by which someone becomes considered “high-net-worth.” Knowing how a client amassed their wealth is key for their advisor to provide the most valuable guidance.
1. The self-made wealthy
They planned effectively to become wealthy. These individuals likely started saving and investing early and have worked over a period of years to amass their wealth. They might have worked throughout their life to minimize debt, only spend within their means, and invest diligently. They might be focused on preserving what they’ve amassed and ensuring that it lasts for their lifetime – and possibly that of their heirs.
2. The overnight HNW
They suddenly became wealthy. These individuals either sold a business (or business interest) or were the recipient of a large inheritance that put them into the HNW category. These investors might not be used to having the type of wealth they now have and may not be as committed to investing as someone who planned and invested for wealth. They may be focused on managing taxes and taking steps to ensure the longevity of their assets.
3. The already wealthy
They were born wealthy. These individuals are part of a wealthy family, a private family office, a family business or other family enterprise, and may have access to generational wealth. They may be more focused on estate planning strategies and ensuring effective generational transfer of wealth.
What Do They Worry About?
While the ways they became wealthy might vary, high-net-worth individuals share some common concerns and complexities. Advisors serving these clients should be armed with a deep understanding of these issues and their potential impacts on a client’s wealth.
Getting Organized
With increased wealth often comes more complex financial circumstances and factors that impact overall wealth. There may be different sources of income, lawyers, accountants, estate plans, insurance, investments, trusts, properties, business ownership, and more. Getting their financial house in order might be at the top of the list, particularly for those overnight HNW who either inherited or received wealth as the result of an event, who may need the guidance of a trusted financial advisor.
Maintaining Their Lifestyle
One of the biggest concerns of high-net-worth investors is also a prominent concern of those not in the high-net-worth category and that is retaining the ability to enjoy their lifestyle. For high-net-worth clients, that lifestyle may be more complex and require more wealth than a typical investor.
A UK-based survey of HNW individuals found that uncertainty around the wealth needed to maintain lifestyles in retirement and later life was one of the top concerns, especially among those of pre-retirement age (38%) and women (33% compared to 21% of men), who have longer life expectancies than men.2
Preserving Wealth
To maintain and optimize their wealth, HNW investors worry about preserving the wealth they’ve accumulated in order to fulfill their other objectives, such as maintaining their lifestyle for the rest of their lives, or transferring wealth to heirs. According to a 2021 Forbes article, preserving wealth requires a completely different investment approach than acquiring wealth – one that includes diversification, lower risk, passive investing and a disciplined process.3
Wealth Transition
According to EY, the market environment of the past few years, including the pandemic, has elevated succession planning and wealth transition as top focuses for high-net-worth investors.4 Couple that focus with the fact that by the year 2045, as much as $84 trillion in assets is expected to change hands as older generations pass wealth to their heirs.5
The idea that every client has their own unique circumstances is especially true when it comes to wealth transfer. Without the appropriate parameters in place, wealth can be significantly impacted by income and estate taxes, healthcare and long-term care costs, probate, and other estate implications. If wealth is being transferred during living years, timing becomes crucial to ensure investors retain enough for their life.
Taxes
Taxes are often cited as the biggest concern among investors and for those in the high-net-worth category, taxes can have an even bigger impact. UK-based research surveyed high-net-worth individuals across age groups and found that 72% of respondents cited managing taxes and implementing efficient planning as top concerns.2
Strategies to mitigate the impact of taxes are generally most effective when planned ahead and implemented through the year. They might include tax loss harvesting, contributing to tax-advantaged vehicles such as health savings accounts, 529 plans and other retirement accounts, charitable gifting strategies, and other tax optimization strategies.
How Advisors Can Help
Every HNW investor has a unique set of circumstances and factors to consider, making a one-size-fits-all solution approach highly impractical. Rather, advisors must embrace a personalized approach to effectively serve these investors. This can be challenging and time-consuming for advisors serving multiple clients in this way.
Partnering with a high-net-worth strategist enables advisors to deliver customized portfolios and wealth solutions for affluent clients that’s scalable. Because wealth preservation and transfer are key concerns for HNW investors, advisors should be well-educated in these areas and consider investment providers with specialized resources in these areas.
Wealth strategist providers can help design a package of wealth solutions and services that might include a tailored portfolio, banking and lending solutions, trust services, charitable giving capabilities, custom indexing and other tax-advantaged strategies. To meet the specific needs of HNW clients, a wealth strategist connects advisors to investments focused on ESG or other values-based criteria that may be a priority for some HNW investors.
Tax planning may be one of the most important aspects of a comprehensive and effective HNW solution. The complexity around tax laws, particularly for high-net-worth investors, and the impact that effective tax management can have on their assets, can be daunting. Given the high value of a HNW client relationship, many advisors choose to outsource tax management – by partnering with either a tax specialist or an investment provider that specializes in customized wealth solutions for affluent investors. Advisors should consider the depth of tax management services offered and be sure that there’s a robust range of capabilities, including:
- Tax loss harvesting
- Tax transition
- Tax advantaged portfolio design
- Tax lot accounting
- Proactive, ongoing tax oversight
As with any client relationship, communication is key. HNW investors are savvy and look for education and communications from their advisor about potential strategies, issues that impact their wealth, and the markets. Maintaining regular and open lines of communication can help clients stay educated but also benefits advisors to uncover life events, adjustments to goals and strategies, and opportunities for better alignment.
Understanding the mindset of affluent investors can help advisors embrace the challenges and solutions to turn HNW prospects into HNW clients. This market is not for plug-and-play solutions—but rather for customized strategies and services that are designed exclusively for the more complex needs of these individuals.
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2033-OPS-7/27/2023
1 Source: Henley & Partners, USA Wealth Report 2023, February 2023
2 Source: RBC Wealth Management, “New research reveals top concerns of high-net-worth individual in 2023”, Feb 2023
3 Source: Forbes, Preserving Wealth Is A Very Different Discipline Than Creating It, June 2021
4 Source: EY, “Top four wealth planning considerations for high net worth individuals”, July 2022
5 Source: Cerulli Associates, “Cerulli Anticipates $84 Trillion in Wealth Transfers Through 2045”, January 2022
Orion Portfolio Solutions, LLC, an Orion Company, is a registered investment advisor.
Wealth Management services are offered by Orion Portfolio Solutions, LLC d/b/a Brinker Capital Investments a registered investment advisor.
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The views expressed herein are exclusively those of Orion Portfolio Solutions, LLC, a registered Investment Advisor, and are not meant as investment advice and are subject to change. Information contained herein is derived from sources we believe to be reliable, however, we do not represent that this information is complete or accurate and it should not be relied upon as such. This information is prepared for general information only. It does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person.
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