The COVID-19 pandemic has accelerated many trends already apparent in the U.S. economy, including the concentration of wealth, which poses a significant opportunity for advisory firms that serve wealthy households, according to a new report from Cerulli Associates.
Even before the pandemic struck, the number of households with more than $5 million in investable assets reached a record 1.6 million in 2019 in the U.S. and their assets grew to nearly $20 trillion, or more than 43% of total investable assets in the country. Cerulli expects those assets will continue to grow, widening the wealth gap further, and providing “a growing investor base for both advisory firms and asset managers.”
It estimates that nearly $70 trillion in wealth will be transferred from aging households to their heirs and to charities over the next 25 years. Developing relationships with clients’ children will be key for the long-term growth of advisory practices serving high-net-worth households, according to Cerulli.
Firms must “understand family dynamics among their clients and the needs of both current wealth holders, as well as those of future wealth recipients, if they are to remain successful moving forward.” They will need to deliver a differentiated product set and service model based on unique needs of investors, who will be not only younger but also more often female, as competition for assets increase.
Adopting planning practices such as regular family meetings and educating family members on the purpose and value of their wealth will be important.
Technology will also become “a significant factor determining which firms are going to be successful in gaining and maintaining client relationships,” says Cerulli. But “regardless of technology, firms that provide advisors with greater independence when serving clients consistently draw in more advisors and client assets over time.”
As of 2019, private banks and wirehouses controlled in almost equal parts 55% of the assets of high-net-worth clients, which Cerulli defines as households having investable assets of more than $5 million. RIAs controlled 20% of those assets while multi-family offices (MFOs) had 7%, direct-to-consumer providers 10%, and broker-dealers and others 6%.
Cerulli projects that by 2025, the mix will change slightly in favor of RIAs, MFOs and direct providers, accounting for 23%, 8% and 12% of market share at the expense of private banks and bank trusts. Private banks and wirehouse teams, however, will be slow to give up their significant share of the HNW wealth management market, and they are beginning to more quickly respond to changing industry trends.
Wealth preservation, tax minimization and risk management are the most important objectives for HNW practices and nearly two-thirds of those practices surveyed by Cerulli said they use ESG products currently and expect to increase their usage over the next 12 months.