The Emerging Investment Avenues
According to a study undertaken jointly by Merrill Lynch and Cap Gemini Ernst and Young, High Net worth Individuals [HNIs] or wealthy investors are proactive in portfolio management, risk management, consolidation financial assets and use of diversification strategies as actively as large institutions. HNIs are proactive in identifying new investment options and take inputs from professional advisors in volatile market conditions.
HNIs are dynamic in modifying their asset allocation and were among the first investors to move from equities to fixed income during 2001-2002 period of downturn in equity markets. They shifted back to equities when they identified favorable market trends.
Needs of wealthy investors
Wealthy investors being aware of the emerging investment opportunities use sophisticated investment strategies such as:-
- Leveraging on the professional advisors’ capability to analyse market trends and make appropriate investments
- Searching for innovative products to enhance value
- Diversifying across various types of assets
- Investing across emerging geographies
- Consolidating financial information and assets
Investment products and avenues
- Managed products: Managed product service is the most popular investment strategy adopted by wealthy investors globally
- Real Estate: Wealthy investors have found this asset class very attractive and have invested directly in real estate and indirectly through real estate investment trusts.
- Art and passion: Wealthy investors also have their investment in art, wine, antiques, and collectibles
- Precious Metals: Gold and other precious metals are attractive investment options to balance the asset allocation
- Commodities: Wealthy investors have turned to commodities to offset the lower returns from fixed income securities.
- Alternative investments: Hedge funds and Private equity investments such as venture funds are becoming increasingly popular with wealthy investors to reduce the investment risks related to stock market fluctuations. This is because these instruments have low correlation with equity asset class performance. Investment in non correlated assets, such as commodities helps to improve diversification of the portfolio amidst volatile market conditions.
Characteristics of wealthy investor
The wealthy investor of today is:-
- Young, educated and knowledgeable
- Well informed about global trends
- Willing to take risks
- Demanding and quality conscious
- Performance oriented in taking decisions and less loyal
- Techno savvy and seeks information from various sources
- Smart in looking for the best deal
- Not attracted by traditional status symbols that do not add value
- Hands on in checking investments, making deals and getting personally involved
Special needs of wealthy investors
The strategies and characteristics of wealthy investors has led to financial institutions innovating and expanding their product range to meet the growing demands of such investors.
A financial advisor should keep in mind the following special needs and expectations of the wealthy clients:-
- Demand broader range of services and skills: Wealthy clients not only are on the look out for multiple investment avenues, unlike other clients, but are also ready to face the risks associated with newer products.
- Net worth and goals need to be matched and assets need to be planned tax effectively: Since wealthy investors have surplus funds that can be passed on to the next generations and also come into the high tax paying category, investors need to advice them on the best methods to transfer their assets after death as well as on the best tax saving investments.
- Estate planning and tax planning: In-depth knowledge about tools of estate planning such as wills, trusts, and power of attorney is necessary. It is also important to know the succession rules and tax rules to do effective tax planning resulting in minimal/no tax on transfer of assets.
- Educate the client: Educating the client on various and different types of investment avenues that will suit him the best will prove very beneficial for the financial advisor. Wealthy clients, especially those who are self made, may assume that if they can make wealth in one industry they can manage their own portfolio as well. In such cases it is best to educate the client about the best investment options rather than trying to push a product; because if one is trying to push a product, the client is unlikely to get interested since he/she will be having enough people chasing him/her for investments.
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