The HNW wealth management market is highly competitive and providers need to “hit on all cylinders to keep clients satisfied,” according to recent research by Cerulli Associates.

High net worth investors and families are discerning consumers of financial services and as such remain alluring in the eyes of asset managers and providers. However, the market is competitive and providers need to “hit on all cylinders to keep clients satisfied,” according to recent research by Cerulli Associates.

In its report, High Net Worth and Ultra High Net Worth Markets 2012, Cerulli highlights that, on average, HNW investors have more provider relationships and are therefore more likely to switch providers than other investors. While legacy providers still control the largest share of assets, the report finds that investors are increasingly shifting to smaller providers that offer greater autonomy.

The firm found that the average number of relationships maintained by HNW investors rose from 3.3 in 2008 to 3.7 last year - a trend highlighting how investors are diversifying their sources in order to compare the advice and investment performance they receive from various providers.  

“Cerulli believes that these investors will consolidate their providers with time as the memories of 2008 and 2009 fade,” the firm said. As a result, HNW providers must think about how they position themselves to be the provider of choice when this occurs, it added.

Meanwhile, there are also a number of open-architecture opportunities for asset managers, as a growing number of banks gravitate towards external managers and away from proprietary products.

For asset managers, the sophistication of both the intermediaries and the end investor in this market is a draw, Cerulli said.

However, this shift towards open architecture "is not universal and remains in various stages of adoption at different banks,” Cerulli said. “Likewise, registered investment advisors and multi-family offices have been the post-crisis marketshare winners, as these boutique business models have increasingly won the assets of HNW investors.”

As these firms typically operate as independent businesses - and thus have no manufacturing capabilities - they are the most dependent on external managers to construct client portfolios.

The report finds that investment consultants are also approaching the HNW market via two main routes: the outsourced chief investment officer model - where an investor or intermediary turns over portfolio discretion to a third party - and by selling research databases to external parties, which can include advisor platforms or large multi-family offices, it said.

Challenges

While there are numerous open-architecture opportunities for HNW asset managers, the report highlights that the largest provider firms in this space are still “massive financial services conglomerates,” where the influence of proprietary products “remains high.”

Secondly, a growing number of HNW investors are opting for structures where they can exercise more control. The first is retail direct providers and the second is the formation of private trust companies - particularly by ultra high net worth creators, the firm says. 

“While traditional advice providers have downplayed these firms as a threat, ownership of direct accounts is almost universal among HNW investors, where they hold an average balance of nearly $1 million,” it said.

Meanwhile, although legacy providers have lost share of HNW assets as a result of investors opting for other providers, Cerulli believes this loss is also attributable to the “natural erosion of wealth that occurs as it is passed to and split among multiple heirs.”

Cerulli concludes that asset managers must regard HNW providers as a “unique market.” While their complex needs and high balances are appealing “at a first glance,” this segment is the most likely to express dissatisfaction and change their provider. “Providers serving HNW clients need to hit on all cylinders to keep clients satisfied,” it said.