True or false: There is a market segment with $3 trillion to $8 trillion in potential assets that money managers have hardly touched.
Managing the fortunes of wealthy individuals could translate into a market of just that size during the next two decades. It is hard to reach and labor intensive, but its assets are less prone to leave the firm and it opens doors in other business lines.
The number of individuals with more than $1 million has tripled in the last decade, according to a recent research report from Sanford C. Bernstein & Co. The individual market has boomed, thanks to capital gains on investments and increased use of stock option compensation among companies, said the report.
There are 3.3 million households in the United States with more than $500,000 in discretionary assets, Bernstein estimates. Of those, 1.2 million have $1 million or more, and 90,000 of those have $5 million or more.
Expanding in the high-net-worth marketplace is an option for firms that lack the size to compete against megamanagers and don't want to surrender their independence, said Kenneth Hoffman, president of the Optima Group, a Fairfield, Conn., investment management marketing and consulting firm. He said only a third of wealthy individuals' assets is professionally managed and half of that total is held by bank trust departments.
Various forecasts say $3 trillion to $8 trillion in wealth will be passed on from one generation to another in the next two decades, affecting both the size of the market and its characteristics.
A number of entrepreneurial enterprises built after World War II will be liquified during the coming decades, due to taxation, succession and other reasons, said Robert Elliott, executive vice president at Bessemer Trust Co., New York. Unlike "old money," these entrepreneurial fortunes are not tied in long-term relationships, making the investment management market more competitive.
The heirs to that wealth probably will put the bulk of their assets in financial markets, and will be oriented toward equity, said Mr. Elliott. That's because they'll need to offset both the impact of taxation and the fragmentation of their inheritance, he said.
The next generation is also more willing to accept packaged products, said Mark Hurley, a vice president at Goldman, Sachs & Co. and one author of the firm's recent study on investment management industry (Pensions & Investments, Oct. 16).
The way to approach the market is to mix some high-margin products with large value-added components - hedge funds, funds of funds and private equity fund - with standard, lower-margin products. Firms that can offer good service while controlling their costs will do well, he said.
Wealthy individuals are a hard group to reach, according to the Goldman Sachs report. To bring in new assets, managers have to develop relationships with entities that provide referrals, such as accountants, lawyers and insurance agents. The managers will have to create a marketing and client service structure dedicated to the market and separate from their retail and institutional groups, according to Goldman's analysis.
"If you expect to say 'I'm going to see an institutional client today and I'm going to see a private client tomorrow,' you're going to have a lot of problems, because it's not going to work," said Russ Prince, principal of Prince Associates, a Stratford, Conn., market research and consulting firm on high-net-worth individuals.
Jurika & Voyles, Oakland, Calif., opened a new private client group specializing in high-net-worth investors with more than $2 million in assets. The group, which opened this month with 125 of the firm's existing clients, offers portfolio management, personal and charitable trust management, after-tax reporting and planning, online portfolio access and educational programs.
The firm wanted to tap the potential of the individual market as well as ensure its individual clients would not be lost in the firm's growth, said Glenn Perry, vice president and manager of the private client group.
Besides Mr. Perry, the firm hired Barbara Shragge, a senior portfolio manager from RCM Capital Management, to handle individual portfolios exclusively, and transferred a portfolio assistant from the institutional area to handle private clients. A separate clerical staff and additional research analysts also were hired.
Such service is key in the high-net-worth market, industry observers say.
According to research from Prince Associates, 91% chose managers based on what they perceive as their expertise, and 89% based on the care they showed in identifying the clients' needs. The firm's size and the cost of the services were among the least important criteria; only 13% of individuals consider size very important and cost only mattered to 9%.
"They expect competitive fees, but they also realize the premise that you get what you pay for," said Mr. Elliott.
It's also a market that is less sensitive to investment results "if you do the right the hand-holding," said Mr. Prince. The average institutional client stays with a firm for about five years; the average affluent client stays about 8.5 years, he said.