When I got into this business more than 20 years ago, there wasn't really a high net worth market per se. Yes, there were wealthy people. And of course, there were financial professionals who served them. But they did so quietly, largely operating behind the closed doors of private banks and boutique investment management firms.
Unsurprisingly, this confidentiality resulted in a kind of “knowledge gap.” Wealthy people didn't always know what their peers were doing to protect their wealth. Firms didn't always know what wealthy people wanted from them. Professionals had to rely on intuition and guesswork to determine exactly how to serve the affluent.
In the years since, there has been a great deal of attention paid to high net worth (HNW) individuals, and a great deal of research done on the way wealthy people think and invest. Of that research, some of the best has been done by my former colleagues at Merrill Lynch, who, along with co-publishers CapGemini Group, are responsible for the annual World Wealth Report (WWR). You can download a free copy for yourself at capgemini.com.
Now in its 14th year, the WWR surveys high net worth individuals (which it defines as those with over $1-million (U.S.) in investable assets) and financial services firms from around the globe. Those findings are supplemented with third-party research (our group has contributed research on the Canadian HNW population for several years now), resulting in a kind of snapshot on the state of the world's wealthy in any given year.
There are several insights that resonated with me as I reviewed this year's report. But the one that really stood out was the observation that the psyche of the world's wealthy has changed.
The financial crisis and subsequent recession has changed the way HNW individuals think about wealth and investing. Since the onset of the crisis back in 2007, wealthy investors have become a lot more cautious with their money, seeking out investments that offer cash flow and capital protection rather than all-out growth. This is the financial equivalent of hitting for doubles and singles rather than for home runs.
I'm not surprised by this. Over the past several years, we've seen an incredible creation and destruction of wealth; investors of all levels of wealth have seen the value of their portfolios rise, then fall, then rise and fall again. After riding a roller coaster like that, it's no wonder why some people want to get off.
At the same time, there's more to this change than simply a shift towards a more conservative investment approach. As the WWR notes, the events of the past several years have led to several notable changes in the way wealthy people manage their financial affairs.
For one, the wealthy are now taking a more “hands-on” role with their finances, and are actively re-evaluating their relationships with their current wealth advisers. They are placing a greater emphasis on risk management, and are asking professionals for detailed “what if” analysis on proposed investments and asset allocation models. They are demanding independent investment advice, and are cross-checking the advice they receive from their own advisers against other sources. Finally, they are insisting on greater transparency from their wealth advisers, so they fully understand the performance, risks, and fees of a particular investment before they buy.
The above are steps that all investors should take to protect their wealth, no matter what their net worth. Furthermore, any professional worthy of the name should welcome the opportunity to validate the strategies and products they recommend to clients – that's how we demonstrate our value.
