The study, released jointly by Merrill Lynch and Cap Gemini Ernst & Young, found that these investors were mirroring institutions in their use of active portfolio management, diversification strategies, proactive risk management and consolidation of financial assets to maximize returns and protect wealth.
In a section of the study that should be of special interest to financial advisors, it was found that these investors–those with investable assets of at least $1 million–were also demanding more sophisticated service and expertise from their advisors. "Investors are adopting a more serious, disciplined approach to making investment decisions, and a critical ingredient in that is using a financial advisor in the process," John Nersesian, a wealth-management strategist in Nuveen Investments‚ wealth management group, told Dow Jones Newswires in reaction to the study. "In the 1980s it was a ‘do it for me‚ process. In the ‘90s, it was, ‘do it myself.‚ And now, in this new decade, it‚s the ‘do it with me‚ approach."
The study found, for instance, that high-net-worth investors are increasing their use of managed products and real estate investments. This was reflected in the fact that managed accounts hit an all-time high of $500 billion at the end of last year. These investors were also seeking out other alternatives in an attempt to diversify, including commodities such as precious metals and hedge funds. This is partly due to investors seeking an alternative to traditional fixed-income vehicles, which have been slumping. Investors are also more cognizant of the need to use noncorrelated instruments as a way to guard against losses. Hedge funds, derivatives and managed futures have filled this role, according to the survey.
High-net-worth investors are consolidating their accounts for two main reasons, according to the study. One reason is to provide themselves with a single point of contact. The other is to be able to view their holdings all at the same time. For advisors, the study states, this means it‚s important to provide clearly stated, objective advice and innovative solutions.
The increased sophistication of these individual investors is not surprising, the study notes, since high-net-worth individuals were among the first investors to move from equities to fixed income in 2002. That trend started to reverse itself last year, it notes.
"In response, financial advisors will be expected to adopt practices that establish specific financial goals at the outset of the relationship with attention to tax sensitivity, risk management and outlook on transfer of wealth," says Alvi Abuaf, vice president at Cap Gemini Ernst & Young. "With the product market highly commoditized, providers will have to differentiate themselves through quality of service and the advice they offer."
Direct Investment Market Soars
Direct investment programs are experiencing a resurgence in popularity, largely through the real estate market, according to newly released data.
Sales of publicly registered direct investment programs reached $7.6 billion in 2003, the highest level in 15 years and up 76% from $4.3 billion a year earlier.
The 78% increase last year represents a growth trend that started after 1999, when sales of direct investment programs hit a 20-year low of $840 million. The peak of popularity was 1987, when sales were $10.7 billion.
"The direct investment market is back," says Larry Goff, chairman of the Investment Program Association in Washington, D.C., the association of the direct investment industry. "New investment has soared as investors recognize the diversification and attractive asset alternatives offered by this investment vehicle."