Ultra high net worth investors, specifically those with US$50m or more in investable assets, represent an important market for both investment banks and wealth managers with service and coverage as the main features for success, according to panellists on the How do you cater to the High Net Worth Individuals and Institutions discussion at the 14th SRP Annual European Structured Products & Derivatives Conference on February 1 in London.
The rise in global wealth slowed to 4.5% in 2015, down from 6% in 2014, according to Vito Schiro (pictured), managing director at UBS Wealth Management, moderator of the panel. However, wealth is expected to incerase at an annualised rate of 6% until 2020, which is still an “impressive” 1.8 times the global real GDP growth. The Asia-Pacific region is expected to see wealth increase annually at about 10%, followed by emerging markets, with 5%, with Europe lagging behind, according to Schiro. Wealth in China is expected to rise by 14% a year.
“In this context, ultra high net worth is expected to grow more strongly than average at 7.5% globally through to 2020,” said Schiro, citing a UBS research note. “Ultra high net worth will prove key to banking success and will remain a focus for wealth managers.”
One of the main considerations when catering for wealth management is being able to provide efficient and effective cross-asset solutions, which is why structured products and other derivative instruments remain a favourite asset class for ultra high net worth investors, according to Jean-Philippe Beaumont, managing director and founding partner at Beauclerc Advisory Services. “Structured products and derivatives account on average for over half our ultra high net worth trades in every mandate,” said Beaumont. “Making sure clients have access to the very best products, solutions and services is vital.”
Jeremie Vuillard, director and group head of advisory at Kleinwort Hambros, a subsidiary of Societe Generale, noted that these investors expect advice to be high-quality, not only in terms of solution, but also in the global asset allocation context, where the strategic, tactical and selection processes are transparent. “In this respect, structured products are only an implementation tool rather than asset class,” said Vuillard. “Structured products hold a significant advantage, in that they are able to offer exposure to pinpoint locations on risk-return spectrum.”
Tristan Blood, managing director, private wealth management at Goldman Sachs, agreed that traditional asset classes offer only limited risk-return profiles, while structured products increased the scope for exposure.
These investors now expect a holistic solution with their banking service, according to the panellists. Beaumont noted that one of the reasons he decided to quit private banking to set up an independent advisory service is because the level of ultra high net worth service at larger institutions “was being reduced to the same level as that in the $1m-$10m”.
In that sense, “independence is key” with ultra high net worth investors, according to Beaumont. While integrated banks give access to broad research and data capabilities, investors tend to look for the “best of breed among everything”, and a standalone independent service working with an open architecture approach is best suited to offer this, according to Beaumont.
In contrast, Vuillard argued that independence is costly and difficult to implement, and that integrated banks still employ open architecture, in addition to having access to large research and data resources.
Access to databases, risk tools and experts who have studied for decades is “extremely valuable to our clients,” but “we encourage clients to work with at least a couple of banks and advisors”, said Blood.
According to Patrick Kondarjian, head of Institutional and wealth management solutions, Emea sales at HSBC, "integrated" and "international" are advantageous, and do not necessarily contradict open architecture. Boutique advisers can offer value to clients and they certainly have a place in the market, but the wider trend is towards consolidation and more integration, according to Kondarjian. “An ultra high net worth holistic solution would include, among other services and products, liquidity management, stock loans, margin loans, risk premia, fixed income, hedging tools, OTC products – a far wider spectrum of solutions than that available to the retail or affluent, with different time horizons, requirements and coverage,” said Kondarjian. “Ultra high net worth investors are time-poor and they require convenience,” but while this might require bespoke solutions, it does not equate to complexity.
“Sophisticated investors, which ultra high net worth tend to be, don’t necessarily need innovation,” said Kondarjian. “They are well aware that the more complex a product is, the wider spreads, and friction costs for banks, so they tend to avoid unnecessarily complex structures."
Ultimately, these investors are professional wealth creators and, while they tend to be sophisticated , they buy an idea, and the solution may end up in a very simple delta one product, like a managed stock portfolio, for example, according to Vuillard. Risk management tools like swaps and, notably, financing is one of the primary reasons as to why this type of investor walks through the door in the first place, according to Vuillard.
“Our clients are predominantly entrepreneurs, and from that perspective they are still very much in wealth creation mode, where our solutions are somewhat complimentary to their businesses,” said Blood. “Ultra high net worth investors often find it’s cheap to raise financing on personal accounts that then helps them invest in their companies and unlock further growth potential.” The management of liabilities are part of a holistic service and an opportunity that has been less exploited by wealth managers that focus on the asset side of ultra high net worth, according to Blood.
Leverage and other characteristics of structured products and derivatives are extremely important in this regard, according to Beaumont.
Blood said, “this is because investment banks and private banks simply have different objectives, where private banks are not as concerned with tangible profit as with a long-term and positive relationship with wealthy clients."
The panel concluded that ultra high net wroth investors appear to be driven by convenience as well as by quality, and not so much by pricing. “In either case, with wealth growth outpacing economic growth, the UHNW segment has become too important not to get it right,” said Schiro said.
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