High net worth individuals, defined as those with $3 million or more in investable assets, are golden geese for an investment advisor. Cultivating a stable of high net worth clients can help an advisor grow their firm without having to rely on expensive overhead costs that come with a rapidly expanding client base of lower net worth clients.
And while currently most high net worth individuals are older, a pending generational wealth transfer is poised to create a slew of newly wealthy millennials who have dramatically different investing preferences from their parents.
Based on reports from Prequin, Bank of America, Deloitte, and more, we have put together some insights on trends in investor interest and expectations that may help advisors better serve high net worth investors now and in the coming years.
Many alternative assets are restricted to accredited investors—those with $1 million in net worth or $200 thousand in annual income or higher. So, it comes as no surprise that high net worth investors allocate to alternatives more than their lower net worth counterparts. But their interest in alternatives is about more than just access.
According to Prequin’s H1 2019 Investor Outlook report, which surveyed 400 investors about their views on various asset classes, investors look to alternatives for many reasons. The most common reason is diversification. Investors want assets that are not correlated with the stock market in case of a market downturn. However, investors are also looking for attractive risk-adjusted and absolute returns, reliable income streams, decreased portfolio volatility, and a hedge against inflation. While there is no guarantee that alternative investments will provide any of these, various classes of alternatives have gained a reputation with high net worth investors for providing some of these benefits.
The report states that 74% of institutional level investors have allocated to at least one alternative asset class, with private equity and real estate being the most popular.
And interest in alternatives is growing. US Trust, Bank of America’s Private Wealth Management arm, surveyed almost 900 high net worth investors and analyzed their portfolio allocation, breaking them down by generation in their 2018 Wealth and Worth report.
Gen X and Millennials have the largest allocations to alternatives, with 10% and 13% respectively, as of Q1 2018. Meanwhile, older generations have only allocated 3-4%. As wealth is passed down from Boomers to their Millennial children, this change could have a huge impact on how advisors manage their clients’ assets.
Across every generation surveyed—Millennials, Gen X, Baby Boomers, and the Silent Generation—all increased their allocations to alternatives between Q1 2017 and Q1 2018, signaling an increase in interest that goes beyond age differences.
Customer Experience and Technology
One of the biggest problems with alternatives is that investing in them is a lengthy, manual, and error-prone process. Compare this to the experience of investing in a mutual fund, and you’ll understand why advisors may be reluctant to increase their alternative allocations. And advisors who do offer alternatives are giving some of their best clients one of the worst investing experiences, thanks to the lengthy, manual, and error-prone processes involved.
Deloitte’s 2019 Investment Management Outlook report suggests that when it comes to expectations of their advisors, Millennials and Gen X are looking for sleek technology solutions. Boomers and the Silent Generation are simply seeking a better customer experience. An argument could be made that those desires are different ways of expressing the same concern: that traditional, manual operating processes are cumbersome and outdated.
The report states that the two highest priorities for firms in 2019 should be creating operational efficiencies and delivering an elevated customer experience.
If your firm isn’t up to date on technology, you’re not alone. Many of these new innovations have come about due to recent changes in regulations that allow things like electronic signatures.
Deloitte surveyed 73 advisory firms on technology adoptions, and only 16 stated they believed their firm was “digitally mature,” with the rest of the firms identifying as being in the “early” or “developing” stages.
“Regulatory change is driving many firms to commit resources to evaluate and change their operating models to meet their plans for growth and efficiency,” says Patrick Henry, Vice Chairman, US Investment Management leader at Deloitte.
However, firms should not be content to rest upon their laurels while other firms move ahead. Deloitte predicts that 2019 will be the year that tech-savvy firms will put pressure on traditional firms, and those who don’t jump on the technology train will be left behind.
While advisors should consider technology solutions to streamline many parts of their operations, technology that automates alternative investments has made particularly large strides over the past few years, thanks to straight through processing technology for alternatives in the form of products like WealthForge's own Altigo.
In an article for Advisor Perspectives, Barbara Clancy and Jason Mandinach, executives at PIMCO, write about automation technology for alternatives, “these platforms have greatly streamlined the subscription process, mainly through less onerous, paperless documentation and electronic signatures, and helped drive down minimum initial investment requirements to levels that cater to a wider array of individual investors.”
Other features, such as smart business rules and information verification, significantly reduce not-in-good-order (NIGO) errors, saving advisors from time-consuming re-work. An Intellicap report estimates that subscription automation and e-signature customers from a range of industries experience an 81.6% reduction in NIGO errors on average, with one financial services case study resulting in an 85% reduction. Alternatives can be transformed from one of the biggest back-office pains and more unpleasant investor experiences to one that is simple, fast, and delightful.
With shifting client demographics, higher interest in alternatives, and an evolving technology landscape, advisors are faced with making big changes in the coming years. Firms that wish to attract high net worth investors need to focus on those aspects that most interest and please their clients.
How straight through processing technology can bring accuracy, security, and speed to alternative investments.