ABOUT 2.8 MILLION people in north America have net investable assets of more than $1 million. Together they hold $8.5 trillion. By 2008, Capgemini and Merrill Lynch estimate, this will have increased to $14 trillion, with the US overtaking Europe as home to the biggest share of the world's wealth assets.
Financial services firms have already begun to beef up their offerings to profit from this growing wealth. However, the expectations of US high-net-worth investors are shifting in surprising ways that will put pressure on those in the financial services industry hoping to make money from them. Clients are demanding clarity about potential conflicts between their own interests and those of financial services providers and they want investments that suit their circumstances precisely, rather than self-serving advice on which mass-market financial product to buy.
Evidence from consultants Spectrem Group, and Capgemini Ernst & Young and Merrill Lynch's 2004 World Wealth report, suggests US high-net-worth investors are putting increasing emphasis on advice untainted by the provider's self-interest.
"High-net-worth investors want independent objective advice," says George Walper, president of Spectrem. "And it is the events in the US over the last three or four years with corporate scandals and a down market that have led them to this conclusion." The result, according to Spectrem's research, has been a shift towards receiving advice from independent sources.
The number of US investors with more than $5 million in investable assets using advisers affiliated with a major institution such as a bank, mutual fund company, brokerage firm or insurance company fell from 66% in 2001 to 60% in 2003.
Spectrem's research further shows that the wealthier an individual, the greater the preference for an independent adviser. Some 51% of individuals with more than $25 million in assets, for example, now use an adviser who is independent, says the report.
The increased demand for objective advice has resulted in a defection of some high-net-worth individuals from full-service brokers, the traditional preference of wealthy US investors, as their primary advisers. Spectrem's 2003 survey shows 41% of US high-net-worth individuals using full-service brokers as their primary source of advice in 2001 but 30% in 2003, with financial planners, investment managers and investment advisers picking up the defectors.
The full-service brokers, however, reject claims that they are losing out to independent advisers, contending that these allegations are anecdotal. "There is absolutely no evidence at Smith Barney to support the conclusions [of the report]. On the contrary, we continue to experience growth in the $5 million-plus segment," says Susan Thomson, director of corporate affairs at Smith Barney. She points to first-half net inflows of $11 billion for her firm's private-client business . Merrill Lynch's global private-client business received $9 billion in new assets in the same period.
A boom in advice
"The problem," says an executive at a full-service broker, "is that there is no clear data to prove that full-service brokers are losing out." The Spectrem report was derived from a survey of just 515 high-net-worth individuals – too small a sample of the 163,000 US individuals who command more than $5 million to be anything but anecdotal, the executive claims.
But it appears that advisory services are a key area of growth for some of the full-service brokers as they attempt to capture a share of the increased wealthy population. Merrill Lynch's global private client group, for example, has added 520 financial advisers worldwide this year, and is adding five more offices to its private wealth management division, which advises clients with assets of more than $10 million. It has also been expanding its retirement services.
And other industry consultants back the Spectrem's conclusions that objective advice is becoming increasingly sought. "Yes, the need for objective advice is pushing some high-net-worth individuals towards the independent adviser," says Petrina Dolby, vice president of Capgemini Ernst and Young's financial service practice. But she adds, "full service brokers who offer both proprietary and non-proprietary products can be considered in this category."
Surya Kolluri, a consultant at Bain & Company believes that if high-net-worth individuals are moving to independent advisers it is because of investors' perception of full-service brokers, rather than what brokers are actually offering. "We advise our clients [the financial institutions] to build on their relationship business and balance proprietary and non-proprietary business. Because when you look at the growth in the independent financial advisory market, it is only as a result of the perceived objectivity that IFAs bring."
The rise of the IFA
Although there are no figures to confirm the growth of the IFA market, those in the industry maintain it is happening. Stephen Martiros of family office forum CCC Alliance says: "I wouldn't go as far as saying that independent financial advisers are springing up daily, but there are certainly a tremendous amount appearing. [The wealthy families] we deal with want no conflicts of interest when it comes to advice, and the best services and products. Rarely are they bundled. You can get your advice from someone independent and highly specialized, and then put your money with a product provider. The explosion of wealth has enabled independent advisers such as multi-family offices, wealth managers, and consultants to cater to just one of the needs of high-net-worth individuals, and they can obtain critical mass in their business line. They're able to gain a lot of momentum in a short period of time."
If wealthy clients are unbundling the advice and product provision they use, by opting for independent advisers but products from brokers and investment managers, then this would contradict another trend pointed to by consultants – that the wealthy are looking for a holistic approach to their wealth, with just one institution meeting all their needs. "Holistic is a value proposition, but are you getting it from someone who is objective? That's why IFAs are springing up," says Martiros.
Kolluri agrees that the unbundling that appears to be taking place is a result of a gap between what wealthy investors want and what is available to them in the market. "What Bain has found is that no single institution has cracked the code in meeting the complex and diverse needs of the wealthy investor in a holistic manner," he says. "They're coming at it from their own angle and no-one has managed to wrap themselves completely around the client."