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PRACTICE MANAGEMENT
Keys for building an ultra high net worth practice
Michael Schweitzer
SVP, Head of High Net Worth
September 15, 2021
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RIAs may find it challenging to compete with larger wealth groups and wirehouses
for ultra high net worth (UHNW) clients due to competitors’ vast resources and
experience in the space. But RIAs have several natural advantages that they can
leverage to carve out an attractive niche among ultra wealthy clients. We
highlight five key areas that RIAs can focus on to improve their ability to
build business with UHNW investors.
KEY TAKEAWAYS
* Rather than casting a wide net, successful ultra high net worth (UHNW) teams
narrowly define their target audience — and then tirelessly pursue them.
* RIAs have potential advantages relative to wirehouses in serving UHNW
investors, including more flexibility in building a technology stack.
* Access to credit is key for UHNW investors, and RIAs can create a competitive
lending capability if they are thoughtful about the terms of their offering.
Ultra high net worth (UHNW) clients (those with assets of $25 million or more)
represent an enormous — and growing — opportunity for RIAs. The top 1.3% of U.S.
households now account for more than 40% of the country’s investable assets.1
But RIAs manage just a small piece of the UHNW pie, and just 13% of RIA
practices report that high net worth investors are their core market.2
The UHNW segment is attractive for advisors not only because of the sheer size
of the opportunity, but also because of the potential efficiencies to be gained.
RIAs are held to the same fiduciary requirements whether they are managing many
small accounts or a handful of larger ones. And it takes fewer (although
differently trained) people to service a small number of wealthy clients. The
return on investment, therefore, can be markedly higher for an UHNW-focused
practice.
Many advisors want to build more business with the ultra wealthy, but what can
they do to better target this segment? “It takes a combination of wealth
management, enterprise management and people management,” says Michael
Schweitzer, director of distribution for high net worth at Capital Group and
former global head of sales and distribution at HSBC. “RIAs should learn how the
best private wealth practices target the segment while leveraging the natural
advantages of the RIA model, including flexibility and fiduciary independence.”
We highlight five areas that RIAs should consider to strengthen their
capabilities for UHNW clients.
1. CLEARLY AND NARROWLY DEFINE YOUR TARGET CLIENT
The leading private wealth management teams have a very clear definition of
their target client, according to Schweitzer. They create a narrowly defined,
ideal client persona, and they are relentless in trying to connect with those
types of people. “When you deconstruct the methods of the best teams in the
broker-dealer channel, you will find that they concentrate around a specific
client profile,” Schweitzer says. “Conversely, teams that fail to have a clear
and deliberate commitment to a specific client cohort usually struggle to reach
the ultra wealthy.”
It isn’t enough to simply target a certain level of assets or focus on just a
geographic region — those filters are too broad. The needs and concerns of a
company founder with concentrated illiquid stock positions, for example, can be
quite different than those of a family that has been sitting on legacy
shareholdings for five generations.
Niche targeting becomes increasingly important as you move up the wealth ladder
due to the complexity of clients’ financial situations. “My number-one piece of
advice to any advisor is always to understand who your ideal client is, and then
market tirelessly to that client,” notes Schweitzer. “That is absolutely key to
driving scale and success.”
“Teams that fail to have a clear and deliberate commitment to a specific client
cohort usually struggle to reach the ultra wealthy.”
Michael Schweitzer
SVP, Head of High Net Worth
2. PROVIDE ASSET-BACKED CREDIT CAPABILITIES
Lending to high net worth clients has accelerated sharply in recent years,
partly driven by the low-interest-rate environment. Asset-backed lending can be
an attractive way to create liquidity for clients with a host of objectives.
Clients who have large blocks of stock and need to generate cash may seek to
avoid sending a sell signal to the market or they may face volume trading limits
on their concentrated position.
Lending is big business for private wealth advisors. In the second quarter of
2021, combined wealth management lending by JPMorgan Chase, Bank of America,
Citigroup and Morgan Stanley exceeded $600 billion. This was 17.5% higher than
the previous year and represented almost a quarter of these banks’ total loan
books.3
Another benefit of lending is that it can make client relationships stickier.
“RIAs can create a competitive lending relationship if they’re thoughtful about
the terms of their offering,” Schweitzer says. “When building lending
capabilities, terms of credit are often far more important than the amount of
credit. Being flexible on advance maintenance ratios and curation periods can be
the difference between winning and losing, even if you have a slightly higher
rate.”4
RIAs may assume that private banks and wirehouses have an edge in asset-backed
lending because of their balance sheets. But custodians, regional banks and
independent platforms are increasingly launching credit products for RIA
clients, including margin, mortgage and nonpurpose loans. In addition, an RIA’s
flexibility to craft diverse solutions may be more attractive to some clients
relative to being locked into the ecosystem of a big bank or broker.
3. BUILD AN INTEGRATED, FIT-FOR-PURPOSE TECHNOLOGY STACK
Most wirehouses and banks use technology systems that are designed for thousands
of users, with an overarching focus on compliance and oversight. RIAs, on the
other hand, can tailor their technology stack to the needs of their clients and
practice. Using a plug-and-play approach, RIAs can assemble a platform that fits
their core client persona best and build it relatively inexpensively. But
executing this approach requires being strategic and managing the process
carefully, Schweitzer says.
“You need to design the tech stack properly from the ground up. This isn’t an
area to go it alone,” Schweitzer says. “There are a multitude of potential
solutions and combinations out there. Depending on the size of your practice,
you should have a senior tech person on staff or use a consultant. If you don’t
approach the tech stack carefully, you can create a dysfunctional system with
multiple components that don’t talk to each other, including layers of expensive
overlap.”
“You need to design the tech stack properly from the ground up. This isn’t an
area to go it alone.”
Michael Schweitzer
SVP, Head of High Net Worth
4. MANAGE HUMAN CAPITAL LIKE AN ENTERPRISE
Having the right people and the proper processes in place to guide their actions
is absolutely critical when it comes to serving UHNW investors. Building an
effective team starts with being very specific about team members’ roles and
responsibilities. “Be precise and targeted when it comes to creating job
descriptions,” Schweitzer notes. “When you thoughtfully design roles with just a
handful of key responsibilities — and then compensate folks based on fulfilling
those responsibilities — team members will have a clear sense of what is
expected of them. This allows you to define what good looks like so you can
measure outcomes against those objectives.”
The top teams are continuous-improvement engines, according to Schweitzer. They
are obsessive about setting standards and measuring performance. If something
goes wrong — for example, failing to respond to a client within a standard
24-hour window — the team goes into action. The team will have a process for
investigating the error, running drills, testing and retesting the system, and
reducing the probability of it happening again.
The most successful UHNW teams train exhaustively. In teaching team members how
to work with UHNW investors, case studies and scenario training can be
particularly valuable given the varied and complex nature of each client’s
situation.
Leaders of RIAs should commit to coaching their teams; this includes investing
in training programs and sending team members to industry events to keep them
ahead of the latest developments.
5. DEVELOP A FIDUCIARY-FORWARD APPROACH TO ALTERNATIVE INVESTING
Access to alternative investments — including private equity, hedge funds and
real estate — has been a calling card for the wirehouse approach to serving UHNW
clients. Wirehouses have built traction by developing platforms to pool
individual client tranches together to meet multi-million-dollar investment
floors at top-tier institutional funds.
New platforms are emerging to provide similar access to alternative investments
for RIAs. But before rushing to allocate capital to alternatives, investors
should be aware of the risks and nuances of alternative asset classes. As
fiduciaries, RIAs are well-positioned to educate and guide clients on the
realities of alternative investing so they can make well-informed decisions.
“An alternative investment strategy needs to be carefully curated,” Schweitzer
said. “For one thing, only a small portion of alternative funds available in the
market today have consistently delivered excess returns versus the S&P 500
Index. It’s difficult to gain access to the best-performing funds, and the fees
involved may neutralize any potential excess returns.”
As with any asset class, diversification is key. Schweitzer notes that investors
need to take a portfolio approach and aim to hold a cross-section of funds or
multiple vintages of the same manager. A well-diversified portfolio could mean
20–30 investments, or around $10 million in total capital if each commitment
involves a $250,000–$500,000 tranche. Assuming a 30% allocation to alternatives,
an investor would need to have a net worth of approximately $30 million to build
a diversified alternatives portfolio. If their net worth is smaller, they may be
better served by staying out of alternative asset classes altogether, as they
may not be in a position to build diversified exposure.
As fiduciaries, RIAs are well-positioned to differentiate themselves by
discussing these issues in a transparent way and ensuring that clients fully
understand the nuances and risks involved in building exposure to alternative
investment strategies.
START REFINING YOUR APPROACH TO SERVING UHNW CLIENTS TODAY
Alternative investments are just one piece of the puzzle when it comes to
serving ultra high net worth investors. Before you rush to build out these
capabilities, Capital Group can provide valuable perspective on the higher
level, holistic issues that are so important to this client segment. Capital
Group’s wealth strategists have extensive experience addressing complex tax,
trust and estate planning issues and can share ideas about how you can
strengthen your approach to working with ultra wealthy clients. Schedule your
one-on-one consultation with our wealth strategy team today.
1 Cerulli Associates, “The Cerulli Report — U.S. High-Net-Worth and
Ultra-High-Net-Worth Markets 2020: Implications of Wealth Concentration.”
2 Cerulli Associates, “The Cerulli Report — U.S. RIA Marketplace 2020: Exploring
Drivers of Change.”
3 Financial Times, “Wall Street doubles down on lending ‘cheap money’ to the
rich,” July 24, 2021.
4 Advance ratio = percent of collateral value that can be borrowed. Maintenance
ratio = permissible fall in collateral value before additional collateral is
needed.
--------------------------------------------------------------------------------
Michael Schweitzer is a director of distribution for High Net Worth at Capital
Group, home of American Funds. He has 32 years of industry experience and has
been with Capital Group for four years. Prior to joining Capital, Michael worked
as global head of sales and distribution at HSBC. Before that, he held a variety
of senior roles as a managing director at UBS and Merrill Lynch. He holds a
bachelor's degree in business administration from San Diego State University.
Michael is based in Los Angeles.
--------------------------------------------------------------------------------
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