Are hedge fund investors are increasingly risk-averse? James Gorman, President of Merrill Lynch’s Global Private Client Group, thinks they are. “During the bull market, the concept of strategic asset allocation became unfashionable as equities produced record returns,” he says. “However, when the market fell, high net worth individuals became increasingly risk-averse and began to seek wealth preservation through strategic asset allocation and diversification. During this bear market period, High Net Worth Individuals (HNWIs) sought to allocate their wealth into a greater variety of asset classes. Consequently, the average HNWI’s investment portfolio grew more complex.”
HNWIs are people with financial assets of at least US$1million, excluding primary residential real estate. And the World Wealth Wealth Report, which Merril lynch produced in conjunction with Cap Gemini Ernst & Young, found that the average HNWI asset allocation in 2002 was approximately 30 per cent fixed income; 25 per cent cash; 20 per cent equities; 15 per cent real estate; and 10 per cent alternative investments. So-called ultra-HNWIs, with investable assets of more than $30 million, often hold higher percentages of alternative investments.
“The average HNWI investment portfolio in 2002 reflected the need for well-designed asset allocation strategies with a clear set of investment objectives,” continues Gorman. “In particular, HNWIs sought greater product accessibility, specifically best-of-breed products.” Alvi Abuaf, a vice president at Cap Gemini Ernst & Young in the securities industry consulting practice, adds: “HNWIs expect this to be delivered with a `manage it with me,’ not a `manage it for me’ approach. We are calling this `collaborative counsel’ versus the self-directed investment approach seen in the early 90s.”
Petrina Dolby, a vice president at Cap Gemini Ernst & Young’s securities industry consulting practice, says HNWIs are increasingly demanding access to third party products too. “The ability of a financial advisor to access products from multiple financial institutions through a single point of contact is a major attraction for HNWIs,” she says. Open product architecture enables providers to include third-party products in their offerings, leading the way to a broader and deeper product and service base, regardless of institutional origin.
“The key to continued success in open product architecture is not just in a provider’s ability to offer all products on the market, but rather ‘smarter access,’ meaning providing the right information about the right products, through the right channels at the right time, ” she adds. “Today, successful providers of open product architecture encourage due diligence of investment managers, provide a wide array of portfolio opportunities, create comprehensive investment processes and implement sophisticated support infrastructure. While these enhancements benefit investors, more still needs to be done. With tens of thousands of different products to choose from, it is a daunting challenge to determine the best ones, let alone the best mix. To address this and other challenges, more and more providers are turning to advanced desktop and online solutions to support both advisors and clients.”
“More products do not always mean better products,” agrees Alvi Abuaf. “What is required is intelligent open product architecture and offerings that provide more benefits for investors and their financial advisors. Financial Institutions must provide HNWIs with convenient ways to create their own intelligent fund of funds, personalized asset allocation and diversification, all in one account that meets their individual financial strategy.” He said key features include rigorous due diligence, transparency of pricing and holdings, and a performance focus that emphasizes investment manager accountability and risk management.
More broadly, the World Wealth Report noted the number of high net worth individuals worldwide grew 2.1 per cent last year, by just under 200,000 individuals, to 7.3 million people. Their combined world wealth rose approximately 3.6 per cent to US$27.2 trillion (Euros 25.9 trillion ), despite drops in most of the world’s equities markets – thanks in large part to diversification of asset allocation.