There has been a movement to a new type of investor; one that’s more ‘off-piste’ from traditional demographics and requirements we’ve seen until now. These younger, entrepreneurial, high-net worth investors have a distinct passion to be more hands-on with their investments, often because they have been entrepreneurs themselves and it fits better with their personality and investment appetite. Within the industry, financial institutions need to acknowledge this change and start innovating and adapting to be pertinent to these individuals. We’re already seeing a gradual drop in the average age of a high-net worth individual to 57 yet the average age of a wealth management client has modestly increased to 62. And the gap will continue to grow. If wealth management firms wish to stay relevant to the next generation of high-net worth investors, they must evolve their proposition.
The entrepreneur is the single most important client group in most wealth management markets today. These clients are more likely to want to invest in sectors they know and they want to share their experiences. This changing demographic has a desire to engage with the company; they want to be involved and make a difference. The 2017 BNP Paribas Global Entrepreneur report, produced by Scorpio Partnership, shows that the top priority for so-called ‘Millipeneurs’ (millennial entrepreneurs) is to change the world and give something back to society.
And the evidence is growing. High-net worth clients are increasingly investing in private assets as they become more active and hands-on with their wealth; the Global Entrepreneur report also found that clients were allocating 33% of investable assets to private equity and real estate. Entrepreneurial wealth clients, the key demographic for many institutions, have almost half of their wealth in private assets. The ability to back a team, to influence them, to take a long-term view and help be part of that journey are all aspects they relate to given their backgrounds.
The ambition of these entrepreneurs to do more to help society has led to impact investing entering the mainstream. Impact investing provides a way of tackling the world’s most pressing issues while still yielding an acceptable return. This appeals to this ‘millennial mindset’ among high-net worth clients and their desire to get involved and make a difference. JP Morgan forecasts a drastic increase in these investments as money changes hands on a generational scale. It goes so far as to estimate that impact investing may expand to £1 trillion by 2020.
Despite this, financial institutions are not offering the types of opportunities that are wanted by today’s high-net worth clients. Those that have engaged in the direct private investment space have had offerings that are typically fragmented, unstructured and not scalable or only offer solutions focused on connecting investing bank deal flow with the family office space or the top end of their ultra-high-net worth clients. When this changing demographic is combined with the upcoming greatest generational wealth transfer ever known, the need to evolve a proposition to meet these clients’ needs has never been clearer. Without change, wealth management risks alienating themselves from a very important and growing client base.
The right approach to using a private asset proposition varies across institutions and depends very much on their client base and it is crucial that an institution assesses the positives and negatives of different approaches. One way in which firms can bridge the gap between new investors and new opportunities is through collaboration with fintech organisations. For example, using streamlined processes, incumbents can enhance access to the investment opportunities that are so highly in demand.
Through collaboration and technology, existing players can improve distribution channels and break down both time and geographic boundaries. As well as this, it can help overcome regulatory challenges, managing reputational impact and the increased role of private capital in the economy. In the face of competitive pressures, increased transparency and low returns, financial institutions are looking for a way to differentiate themselves and working with innovative technologies to broaden their private asset offering is a potential avenue for achieving this.
It is also noteworthy that this generation of high-net worth investors have an expectation of digital maturity which can also be met through working with private market entrants. They are a generation who are accustomed to digital services such as online banking and want the same ease of access in their investment management. According to the World Wealth Report 2016, 73% of high-net worths say digital maturity is very or somewhat significant in their decision to increase assets with their wealth management firm over the next 24 months. Leveraging the convenience of digital technologies can also help firms in staying relevant to today’s high-net worth investors.
The changing demographic, mindset and investment needs of the next generation of wealth management clients will mean there is great value in offering a private market proposition. To the entrepreneur, to the DIY investor, to the millennial and many more client personas, direct investing creates passion and this can play a crucial role in strengthening relationships with clients. Firms that can broaden their proposition by offering the opportunities these clients want will be the industry winners.