What does it mean to be a high-net-worth (HNW) individual? If you have investable financial assets between $1 and $30 million, excluding the value of your primary residence, then congratulations, you’ve made it into the HNW club. According to data firm Wealth-X, in their 2019 Global HNW Analysis, the highest population of HNW individuals resides in the United States, with the highest number of these individuals living in New York. At the same time, Asia is projected to have the greatest growth in the number of HNW individuals, with its high-net-worth population expected to increase over the next five years at a compound annual growth rate of 7.6 percent.
When considering a successful wealth management plan, it could be beneficial for HNW individuals to start thinking like an institutional investor. Institutional investors include foundations and endowments, non-profits, plan-sponsors, insurance companies, Taft-Hartley Plans, and public and corporate investors.
At first glance, HNW individuals may not seem to have many similarities with institutional investors. However, a closer look reveals that they actually have many qualities in common. These similarities highlight precisely why HNW individuals should also share the same investment strategies as financial institutions.
What HNW Individuals And Institutional Investors Have In Common
Long-Term Financial Stability
High-net-worth individuals and institutional investors share an exclusive space where they have similar financial goals. One of those goals is to ensure long-term financial stability. In the case of a HNW person, he or she must consider multigenerational needs. Preparing the next generation and setting their children up for success later in life is a major concern, but what happens beyond the second generation? According to a recent report by the Williams Group wealth consultancy, an estimated 70 percent of families will lose their wealth by the 2nd generation, while 90 percent will lose it by the 3rd.
There are several reasons why this happens, such as the effects of taxes, inflation, bad investments and the dilution of assets, but perhaps one of the keys to understanding why there is such a loss in wealth over several generations is the fact that the 3rd generation is often unprepared to manage what is handed to them. Their grandparents put in the work to build and nurture the family’s assets, while their parents grew up with the struggles of not having a lot of money. Having experienced none of the work and hardships of their grandparents and parents, the third generation grows up with very little preparation for what it takes to manage their wealth.
Similarly, the backbone of any successful institutional investor is financial longevity. For larger institutions that have been established for a long period of time, there is a specific aim to implement financial strategies that ensure revenue growth. Just as families must consider the best plan to ensure wealth for future generations, so must older, more established institutions think ahead to how they can maintain the financial health of their organizations.
Risk Mitigation
HNW investors also have a broad perspective when it comes to risk. Unlike ordinary investors, HNW individuals have a greater ability to accept financial losses, particularly in the short term. What may seem like a staggering sum to most could be a mere fraction of liquidity for someone with a comfortable nest egg. For example, the short-term market volatility in December 2018 to early January 2019 had little or no effect on HNW investors and institutional investors alike, due to their long glide paths.