As numbers of mass affluent and high net worth investors swell globally, the role of the financial adviser is strengthening. To be successful going forward, the adviser needs to concentrate on understanding their clients' changing needs, says Peter Hobbs, head of sales at Generali International
When building any kind of business, it helps if your target market is expanding. In this respect, there has never been a better time to be an independent financial adviser.
A huge growth in real wealth across the globe has seen a boom in mass affluent and high net worth individuals (HNWIs), who are ideal clients for IFAs.
Although organisations use different criteria to define these consumer segments, typically mass affluent customers would have investable assets of £50,000 to £250,000 (or local currency equivalent) and HNWIs are defined as having assets of £250,000 to £5m (or more) at their disposal.
Recent Growth in the Mass Affluent and HNWi Market
A number of research studies have concluded that both of these market segments have experienced compound growth of over 5% pa since the Millennium, with the CapGemini/Merrill Lynch World Wealth Report 2004 estimating that there were 7.7 million HNWIs, each with investable assets of at least $1m, across the world in 2003. This has been a global phenomenon and the growth in HNWIs' total financial wealth is expected to continue at an average of 7% pa through to 2008.
The mass affluent market is also expanding dramatically in most developed economies. For instance, Datamonitor estimates that the mass affluent population in Europe is expected to grow from 26 million in 2002 to 34 million by 2007, representing a compound annual growth rate of over 5% pa, with an associated rise in liquid assets held by this group of 6.0% pa.
In the Middle East, the position is not quite so dynamic but the region is still forecast to experience 3% compound growth in the wealth of its HNWI segment across the next three years, more or less in line with recent years*.
The vast potential in the growth of mass affluent and HNWI consumers is also apparent in the Asia Pacific region, with both the regional financial centres of Singapore and Hong Kong seeing at least 10 new major private banks open for business in the past couple of years. Local banks have also been making a pitch for these opportunities, mostly concentrating on wealth management services for mass affluent consumers with account balances of $100,000 or less. Asia's mass affluents have a particularly large pool of wealth held in low-yield savings accounts which is an ideal target for more sophisticated investment management solutions**.
It is important not just to look at these high level figures but to consider local trends that are relevant to individual countries and cities. For instance, the recent slowdown in the growth of the UK and EU expatriate mass affluent or HNWI consumer has put pressure on new business levels for many international advisers.
However, it is also worth bearing in mind a significant opportunity created by that infamous demographic phenomenon, the 'baby boomers'. This group, born between 1946 and 1964, is important given the number of people now approaching retirement. Many baby boomers are currently mass affluent or HNWI investors who need to continue to accumulate capital while providing for a steady retirement income. This is an ideal scenario in which IFAs can provide fuller wealth management services, encompassing everything from investment advice to long-term healthcare needs.
This shift towards retirement, coupled with consumers' memories of different bear markets, has seen the underlying financial objectives of most mass affluent and HNWI investors move clearly away from 'speculation' to more conservative investment growth opportunities, often focused on retirement provision. For older and wealthier consumers there has been a parallel trend towards wealth preservation and tax-effective inter-generational wealth transfer.
Role of the adviser in the Mass Affluent and HNWi Market
All of these trends should strengthen the role of the adviser. It is evident the world over that when dealing with these important and comparatively complex financial issues, mass affluent and HNWI consumers share a common view - they need and want advice delivered face-to-face from a trusted adviser.
The wider nature of the financial advice required is highlighted by the CapGemini/Merrill Lynch survey which found that 47% of HNWIs claim to have discussed tax minimisation strategies with their professional advisers. While this is a relatively high proportion, it suggests that the other 53% could also benefit from such advice but just have not got round to it yet.
From an adviser's perspective, it is important to recognise that HNWIs, and mass affluent consumers to a lesser extent, have exposure to multiple professional advisers such as lawyers, accountants and private banks and, as a result, do not tend to rely on one individual source such as an IFA. However, IFAs do have the opportunity to take a central financial planning role with these clients, with the face-to-face advice dimension being particularly important to client acquisition and early relationship building.
The successful IFA business model of the future is expected to see the IFAs concentrate on doing what they do best: targeting clients, understanding their needs, customising the proposition and managing the customer relationship from acquisition through servicing and retention.
Direct Investment vs Products in the Mass Affluent and HNWi Market
Direct management of clients' investments has historically been seen by many advisers as a key part of their role. Movement away from this type of management is clear due to a more recent trend among mass affluent and HNWI consumers towards structured approaches to investment that embrace asset allocation, fund choice and stock picking. This is viewed as a better longer-term bet for improved returns and appears to provide better value for money.
However, there is one product in the IFA's 'briefcase' that can provide a consistent vehicle for a whole range of client-specific investment approaches, while also delivering potentially significant tax benefits - the offshore life assurance-based portfolio bond (PB).
For many mass affluent and HNWI clients, the open architecture basis of the PB can accommodate all of their investment needs, including asset diversification from bonds through to equity, property and hedge funds, professional management and dealing simplicity.
In today's environment, the emphasis on PBs is shifting steadily towards their tax planning vehicle attributes rather than being a pure investment product. For instance, the PB can allow the client and his IFA to control the timing of when a taxable event will occur.
PBs also provide IFAs with a point of differentiation over other professional advisers, as this type of structure remains the virtually exclusive preserve of the IFA. The good news for IFAs is that the all-important tax planning attributes of offshore 'life wrappers' is largely being preserved in the face of the anti-avoidance measures hitting other financial products.
* CapGemini/Merrill Lynch World Wealth Report 2004
** Acuity Consultants Market Analysis
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