(Forbes) A Forbes Insights survey of more than 200 high-net-worth (HNW) investors reveals profound contradiction. While significant majorities are satisfied with the current quality and performance of their wealth strategies and investments, nearly identical numbers recognize the need for significant improvement across a spectrum of investment choices, offerings and tax treatments. It seems that despite relative satisfaction, investors’ requisite to-do lists remain both extensive and demanding.
In his role as Chairman of the Board for Whittier Trust, Michael J. Casey regularly interacts with HNW investors, and his overall observation is that “while apparent confidence is high, perhaps this is a case of ‘you don’t know what you don’t know.’” The Forbes Insights survey agrees:
80% of HNW investors believe their wealth is being managed in a way that meets investment objectives.
79% believe their investments are delivering optimal performance.
78% say their portfolios are sufficiently diversified.
79% say their investment strategies are in no way siloed but are rather integrated within a carefully balanced portfolio.
76% believe their wealth is being managed in the most tax-efficient manner possible.
Regarding this latter point, this includes all issues associated with intergenerational wealth transfers, endowments or charitable giving. Without question, says Casey, “while the majority are satisfied that absolute investment performance is meeting objectives, perhaps a more astute barometer would be ‘wealth performance,’ specifically what is in my pocket after taxes and fees.”
Deeper dives into the realities of the industry and accompanying survey findings invoke a “[palpably disconcerting] set of contradictions,” says Whittier Trust Chief Portfolio Manager Caleb Silsby. As for the industry itself, he says, “consolidation is leading to lower levels of service and more of a cookie-cutter approach to strategies and investments.” A further consequence of consolidation—a new reality for the industry—he continues, “is that fee structures are becoming increasingly complex; it’s becoming very difficult to understand the true costs of any relationship.”
Despite HNW investors’ stated satisfaction with current relationships and performance, responses to questions regarding needed actions—now and through 2025—show that subconsciously, or perhaps innately, they recognize all is not right with their portfolios.
Here are five steps investors are taking, or plan to take by 2025, to manage their wealth.
Ensuring tax efficiency. Though 76% of HNW investors say they are confident their wealth is being managed in a tax-efficient manner, the most frequently cited needed action is ensuring greater efficiency in investing and cash flow management. Over half say this is an action needed today (52%), with 30% more planning to take action in this area by 2025 (bringing the total to 82%). Additionally by 2025, 78% will be taking steps to ensure greater tax efficiency within intergenerational and related wealth transfers. “This is to some degree driven by tax reform in the U.S. and now [worldwide],” says Silsby, “but it [betrays] any notion that investors should be confident their investments today are optimized from a tax perspective.”
Defining investment goals. Forty-nine percent of HNW investors recognize the need to more carefully define investment goals, reaching 80% by 2025. Closely related, 43% see a need today to create closer alignment between such stated goals and their chosen investment strategies, rising to 75% by 2025. What this means, says Whittier Trust President and CEO David Dahl, “is that investors really aren’t, at the core, satisfied that there’s been sufficient, conscious and critical evaluation, [articulation] and follow-through regarding goals, needs and objectives.” Of course, there are, by no means, “any simple answers in this area,” says Dahl. Rather, he suggests, “you can optimize the approach only by engaging HNW investors and their family members and other heirs to this wealth [in critical dialogue].” Most HNW investors “have some idea of where they’re going and what they need to do,” says Dahl, “but nearly all have an underlying sense that they need to do better, which takes an analytical and holistic approach.”
Expanding invested assets. Today,42% of HNW investors recognize the need to expand the range of investible assets, rising to 76% by 2025. According to Silsby, while investors may be generally pleased with current performance, “there’s always a need to be looking out to the horizon. It’s one of the reasons we’re never satisfied; we’re always looking for the next opportunity to create growth for our clients.” Investors, says Silsby, “feel this same sense.”
Stress-testing their portfolio. Thirty-six percent, or just over a third of HNW investors, feel the need to stress-test, or similarly recession-proof, their investment portfolios. By 2025, this figure will climb to 73%. Again, says Silsby, despite overall confidence, “investors recognize that there’s a lot that can be wrong as well as right, and that they need to do a better job of understanding how their portfolios can be optimized in terms of opportunities and risks, as well as be more attuned to their needs and risk tolerances.”
Removing silos. Forty-two percent of HNW investors currently see the need to remove silos and improve the integration of their overall investment portfolio; this figure rises to 69% by 2025. According to Dahl, “over time, it’s very easy to add this or that piece without taking into account the overall risk/reward characteristics.” So “tearing down the silos and making sure all of the pieces are working together is an essential exercise. Unfortunately, it’s something that’s often overlooked.”
With cash flows continuing to roll in and investment balances continuing to grow, it’s easy to develop a sense that all is well and optimized. However, the reality can be altogether something different. With great wealth comes great scale, which means every right move or misstep is enormously amplified.
“HNW investors have every right to feel confident and satisfied—they’ve done so many things right to achieve all that they have,” says Casey. But with these achievements, “there is also responsibility to immediate and extended family, to the next generations and [perhaps] to charitable causes.” The stewardship of great wealth should not be left to chance or inertia. Great wealth requires a strong guardian willing to do the hard work to optimize performance against objectives. Do not, says Casey, “become complacent.