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How Advisors Deal With High Net Worth Clients

The demands of high-net-worth clients are no small feat and can be challenging and daunting to deal with, to say the least. However, acquiring and retaining an HNW client is every financial advisor's dream. They are a highly lucrative clientele that requires a unique and specialized approach to dealing with their wealth. An advisor can certainly not consider their approach homogenous to their other clientele for dealing with the elite, which requires a certain kind of finesse.

How Advisors Deal With High Net Worth Clients

It takes an individualistic approach and distinctive skills to interact well with the elite, especially in the financial industry. They will expect personalized services in investment management as well as from you and justifiably so. On top of that, you will be required to adapt quickly to the unique working environment, meet high expectations, and be well informed about the constantly evolving and fluctuating financial market. By keeping in mind certain common attributes and demands of HNW clients, you can deem the task somewhat more manageable.

Related: Effective Strategies To Deal With Difficult Clients

Registered Investment Advisors versus Broker-Dealers

The bigger the wealth, the more complicated it is to manage it. Consequently, HNW clients usually have more than one wealth management advisor handling all of their financial concerns, be it handling their investment goals, personal liability insurance, estate taxes, or managing overseas assets. Over the recent years, these clients are more inclined to prefer registered investment advisors (RIA) over broker-dealers to manage their affluence, and understandably so. 

According to the Schwab Advisor Services Independent Advisor Outlook Study, investors are becoming more aware of independent RIAs, who are required to act as fiduciaries to clients, and 57% prefer it to other business models in 2021. The study further supports that one of the contributors to the growth of the RIA industry is the growing number of affluent investors. 

Registered Investment Advisors versus Broker-Dealers

The advantages of or preferring an RIA are many. Not only do they possess an advanced understanding of high-value investing and finance management, unlike broker-dealers, who facilitate more around the standard of suitability, but RIAs are also expected to act as fiduciary. In addition, the ones that manage smaller sums of investment are expected to register with state securities authorities. Furthermore, RIAs that manage $100 million are required to at least disclose the details to the SEC or other regulatory authorities. 

The preference for an RIA over a broker/dealer is justifiable: an RIA’s client can be assured their interest will be of utmost priority and will be served in accordance with certain practices and procedures that RIAs must adhere to. The RIA industry is expected to only grow further in the coming years. If you haven't considered pursuing career advancement as a registered investment advisor, now may be the time to do so. 

Encourage An Aggressive Savings Ratio

The affluent lifestyle demands exotic cars, expensive mansions, and high-end designer clothes and all this doesn’t come with a low cost. Therefore, the HNW client’s commitment to savings is highly significant and it is your job as their advisor to ensure they are saving enough to support theirs lavishes.

Most industry experts recommend a 10% to 15% savings of the gross income, which is ideal for regular or HNW clients. Keep in mind certain clients come with a prodigal attitude towards money and this habit can lead to serious financial constraints in the future. 

Aggressive Savings Ratio

Furthermore, in light of the pandemic and due to increasing uncertainties and high volatility of the market, advisors are now recommending a 25% savings ratio for affluent clients. Therefore, if your client is currently at 10 or 15, it is best to have them gradually increase to 25%. Encouraging your client to have an aggressive savings ratio can guarantee financial stability in tough and uncertain times. 

Demand Greater Risk Management

Andrew Carnegie, the world's richest man in his late 19th-century days, had some advice for anyone who wished to follow his example: “Put all your eggs in one basket,” he said, “and then watch that basket.”

And the threat is obvious: the more wealth there is, the higher risk it comes with and the more chances there are of “wealth casualties.” Such large obtained wealth requires protection from all sorts of threats. Those threats could be bad investment decisions, overspending, market volatility, inflation, longevity, or even lawsuits. 

Even protecting such large amounts of wealth comes with a high cost. Financial advisors need to keep these clients ready to pay various long-term insurance premiums to safeguard their wealth. However, should you choose to not pay heed to this, the cost of NOT having these insurances could end up being much greater when the need requires. 

Examples of some safeguards HNW clients require are:

  • Life insurance to safeguard assets from estate taxes
  • Deposit insurance for bank accounts
  • Liability coverage for home, auto, or businesses
  • Umbrella insurance for further personal liability protection
  • Professional liability coverage in case your client belongs to some vulnerable professionals such as accountants, architects, engineers, IT consultants, investment advisers, lawyers, or real estate agents
  • Business liability depends on the size and nature of your client’s business

And the list goes on for each acquired asset means an added cost to protecting that asset and as a financial advisor it is critical you make conserving and shielding their asset an utmost priority. 

Greater Risk Management

Interested In Long Term Investment

Asset protection is not the only important aspect when managing the wealth of the wealthy. In fact, the 2017 U.S. Trust Insights on Wealth and Worth," a survey of high net-worth investors, found that 50% considered growing their assets a higher priority than preserving them.

However, once you have dealt with a few high net worth clients, you will realize that not all of them have the same characteristics and they may approach you with varying goals. Needless to say, buying a car, home, or college tuition fees are not their concern. Some may have certain investment goals while others may prefer growth of wealth or simply preserving their wealth for as long as possible. However, most of those goals boil down to making long-term investments.

Statista conducted a survey in 2019 which looked into the portfolio asset distribution of the wealthy in the United States. It found that the mass affluent investors were noted to have 39% of investable assets in their portfolio, whereas millionaires stood at 58%, and ultra-high net worth clients chose to have 71% of their wealth committed to investable assets. This shows that the priority for most affluent clients all prefer their portfolios largely dedicated to investments. 

Long Term Investment

Long-term investments for such clients that possess portfolios of such considerable size could mean acquiring businesses, and real estate ventures, rather than short-term investment stocks, liquidity, or bonds. Bear in mind that the bigger they get the more complicated their investment will become and more strenuous risk management measures will be required to protect it.

The Challenges Of HNW Clients

Financial advisors dealing with HNW clients must be cognizant of the fast-evolving financial market as their clients are usually well-informed of the market status themselves. It is by staying well-informed that have they managed to acquire their wealth or hold on to what was handed down to them. Thus, they want the best of the best to manage their wealth.

Challenges Of High Net Worth Clients

Whether high net worth clients have acquired wealth through blood, sweat, and tears or won through a lottery or it has been handed down to them, servicing them can come with challenges: their demands are high, their portfolios require high maintenance, and servicing them also requires having a deep knowledge of offering personalized services.