Recent market volatility has put the spotlight on capital preservation, but a new study shows that advisors to wealthy clients were honed in on that objective well before the onset of the coronavirus pandemic.
A survey by Cerulli Associates in the third quarter of last year showed that 100% of advisors viewed wealth preservation as very (83%) or somewhat (17%) important, topping all other objectives, including tax minimization, wealth transfer strategies and risk management.
The results were based on a survey of more than 50 advisory firms that focus on providing wealth and estate planning services to high- and ultra-high-net-worth individuals, whom Cerulli defined as clients with more than $5 million and $20 million in assets, respectively.
Although the survey was taken before the onset of the pandemic, the findings should indicate to advisors how important wealth preservation strategies are to clients during the crisis, Cerulli said.
"Asset and wealth managers currently servicing or seeking to grow their marketshare in the high-net-worth market must be prepared to address investor needs with specific and targeted strategies that can protect client capital in increasingly volatile markets," Cerulli said in a press release.
"As more HNW investors re-evaluate their financial situation amidst the Covid-19 pandemic, providers must ensure that they are well aligned with their clients’ long-term objectives," the firm added.
The survey, part of "The Cerulli Report—U.S. High-Net-Worth and Ultra-Net-Worth Markets 2019," found that after wealth preservation, advisors considered their "very important" objectives to be tax minimization (64%), wealth transfer (61%), risk management (57%) and income generation (44%). Viewed with lower importance were liquidity management (36%), absolute returns (31%), inflation and/or deflation protection (31%) and concentrated stock positions (25%).
Advisors need to keep in mind that wealthy clients usually require a broad range of investment solutions, the report said.
"Where HNW practices can truly differentiate themselves and deliver on their key investment objectives is through investment in, and expertise on, alternative investment strategies," the report's authors wrote.
Among these strategies, direct investments in operating businesses are among the most popular with sophisticated investors because of their relatively low fees and the control they offer to investors compared to a private equity fund, Cerulli said.
"There are challenges associated with this style of investing, but when done effectively, direct/co-investments can deepen the relationship between HNW practices and investor," the authors wrote.
These were among the other findings in the report:
• Fifty-eight percent of HNW practices use environmental, social and governance (ESG) strategies and expect to get more involved in the sector over the next year. Twenty percent do not use the strategy and have no plans to do so.
• When advisors were asked why they don't use ESG strategies, the most common answers were that they do not fit into clients’ investment policy statements (55%), high cost (40%) and difficulty measuring impact (40%).
• Wealth managers controlled almost $10 trillion in HNW and UHNW client assets last year, which is just 0.5% more than the year before. Cerulli is projecting those assets will increase to $14 trillion by 2023.
• Nearly $70 trillion in wealth will be transferred from baby boomers to Generation X and millennial households during the next 25 years, Cerulli projected.
• Twenty-nine percent of practices have increased their fees over the past three years; only 15% of HNW practices decreased their fees.
