Ultra care for ultra high-net-worth clients

By Jayson Forrest - Managing Editor  - IMAP Perspectives

John Woodley (Fitzpatricks Private Wealth), John Barton (MGD Wealth) and moderator, Greg Miller (Wealth Market) explain the challenges and demands of working with ultra high-net-worth clients.

What exactly defines an ultra high-net-worth (UHNW) client? In Australia, common consensus describes UHNW as those people with investments of $10 million or more, whereas HNW is reserved for those investors with investments outside the family home valued at or above $1 million to $10 million. 

However, the way in which advisers serve UHNW clients, compared to HNW clients, is quite different, with these ultra wealthy investors generally having greater complexity with their investment goals and objectives. 

Speaking at an IMAP webinar on ‘Building a wholesale, HNW and not-for-profit client base’, the co-founder and Group Managing Director of Fitzpatricks Private Wealth, John Woodley, says the further up the scale of UHNW clients an advice business services, the greater the breadth and complexity of issues it needs to deal with.

“These issues often compound,” says Woodley. “You have multi-generational issues, family issues, as well as multi-asset and balance sheet-style issues. The complexity of issues does multiply. So, the depth in which you need to go to in order to properly service these clients expands greatly.”

Woodley adds that for many UHNW families moving into a family office structure, they tend to lack understanding around governance issues, including the separation of business from family, intergenerational wealth transfer, and how to protect assets from other family members.

Their investment timeframe can also be much longer than retail investors, often extending out to between 50 and 80 years. “So, the types of assets and strategies you’re working with are very different to mainstream retail investors,” Woodley says.

It’s a similar view held by the CEO of MGD Wealth, John Barton, who agrees the issues surrounding UHNW clients are more complex because “you are dealing with multiple generations and multiple entities”.

“You’re often dealing with clients who are transitioning out of an active business into a passive investment corpus, and they experience some real issues in doing this. Advisers are required to help their clients though this transition process, which includes understanding the different risk profiles, and helping them with their goals and objectives, which tend to be more complex,” he says.

“I also think UHNW clients find it harder to build trusting relationships, because many of them have been targeted over the years, and not just by people and businesses with only good intentions. In fact, even within their close personal relationships, they struggle to find people who they can trust.”

Barton adds that one of the great leanings he has had dealing with UHNW clients is that despite the wealth they have accumulated, they still struggle with the transfer of intergenerational family wealth.

Categorising and treating UHNW clients as either retail or wholesale is not something that sits well with Woodley. Instead, he believes the way an adviser approaches this client segment depends largely on the needs of the family.

“It’s not a retail/wholesale question,” he says. “Instead, it’s about determining their specific needs and then working out the best approach to meet those needs.”

Woodley adds that when working with clients in this space, issues like governance, which is not really a licensed activity, crops up a lot. Therefore, he says when servicing these UHNW families, advisers are likely to be doing a combination of non-AFSL work, with some wholesale and retail capability, in order to appropriately service the whole family. 

Barton agrees: “A lot of the work we do with UHNW clients has nothing to do with an AFSL. If you are providing the governance framework - whether it’s an investment policy statement, a family constitution, helping a family to understand the structures around succession planning, or whether it’s having a counselling session with the family patriarch around the personality types of family stakeholders - these types of conversations and work have nothing to do with an AFSL.”

According to Barton, a key part of advising to this client segment is the level of counselling that advisers are required to do with their clients. And that’s where experience kicks in, “which can’t be gained from a technical or academic qualification”, he says

Both Woodley and Barton talk about the importance of governance when working with UHNW clients, but does this mean there needs to be a separation of duties within the advice process?

While governance for UHNW clients is very similar to what advisers do for all their clients, such as having written processes and polices in place, Barton says that once a practice gets to a reasonable level of scale and sophistication, a separation of duties is required in the advice process, which protects both the business and the client. 

“For families without a governance structure around their wealth, advisers need to help them identify what the risks are around investing, and what the benefits are of making changes to their portfolios,” he says.

Woodley agrees, adding there is great variation in how families approach wealth. But for families with emerging wealth and legacies to protect, they don’t necessarily have a huge appetite to take on risk, with many not even understanding the different risks involved with investing and growing their wealth.

In fact, MGD Wealth’s approach for this particular client segment revolves more around investment governance than investing capabilities.

“We spend a lot more time talking about investment policy statements, portfolio objectives, risk and asset allocation, rather than talking about the underlying investments. Instead, our role is to co-ordinate all the investment research, co-ordinate the third-party managers, and help select the underlying managers for the portfolio. We also put in place an investment committee to specifically oversee this process,” Barton says.

“So, as a business, we don’t hold ourselves out as investment experts. We’re much more about governance and building a portfolio for the client.”

And when it comes to investing, Woodley believes that the traditional approach to asset allocation doesn’t really work for UHNW clients, who tend to prefer property and real assets.

“Because of their long investment timeframes, these clients can afford a lot of illiquidity, so they can take on the advantages of illiquidity, which means you have private assets coming in, private equity and all of these other investment areas that don’t neatly fit in a retail investor’s portfolio,” he says. “Many of these UHNW clients take an endowment philosophy to their money, which brings in these other longer-term asset classes.”

Barton agrees: “UHNW clients have the luxury of thinking about multiple portfolios that have quite different objectives. It enables them to think about their family’s wealth in a series of buckets, and each one of those buckets can have quite a different set of objectives and very different investments.”

The traditional approach to financial advice is to scale the advice process, which means finding more clients and using economies of scale to service them at a lower cost for the business. However, Woodley believes that particular advice model doesn’t work for UHNW clients. Instead, he says the trend is the opposite for UHNW clients, which revolves around advice businesses seeking less clients, but doing more for them. This means advisers can charge these clients more for delivering real value to them.

“Therefore, as part of any business strategy, you really need to understand your market, which means reducing the number and type of clients you are speaking to. That’s because in the UHNW market, there are so many variations of clients, like family offices, multi-families, not-for-profits and others, and they all have very different needs,” Woodley says. “As advisers, we simply can’t satisfy all those clients. This means businesses need to be very clear on what type of UHNW client they can serve best.”

But the million dollar question is, where do you find all these UHNW clients?

At MGD Wealth, Barton admits that it’s a long engagement process to actually secure an ultra wealthy client, which is often based on referrals.

“These clients always come from referrals, either from an existing client or another professional who already has a relationship with the client, but who knows and trusts us as financial advisers.”

However, Barton also concedes that taking a referral to actually signing them on as a client usually takes “at least a year or two”. “So, the initial engagement process can be quite lengthy,” he says.       

Woodley agrees that clients come through trusted relationships.

“It’s a transfer of trust and trust always happens through a relationship,” he says. “As a business, you need to ensure that you are referable and can actually do the work that the client requires. Building relationships with referral partners is incredibly important.”

There’s no denying that servicing UHNW clients can be a lucrative part of an advice business. However, as this specific client segment tends to have very complex needs and objectives, charging them for the advice provided is not as straightforward as it is for retail investors.

At MGD Wealth, clients are charged separately on the work the practice does for them, meaning there is a separate charge for governance work and a separate charge for investment advice.

It’s a similar story at Fitzpatricks Private Wealth, where different components of the advice or client engagement process are charged separately.

“Advisers should charge where the client perceives the highest value of their engagement with you,” says Woodley. “Traditionally, advisers review a portfolio and give away real value talking about client goals. However, if the highest value of what you do is really helping clients to be clear on their goals, then as a business, you need to separately charge for that. Clients will then value that, so your conversations around goals becomes richer and more valued by the client.”

When it comes to identifying the key attributes that separate good advisers from the pack for the UHNW market, Barton says the ability to be good with client relationships is an essential quality for any successful adviser.

“UHNW clients tend to have a higher trust hurdle, so the value of building and maintaining relationships is important,” he says. “You need advisers who are great with people and who are great at asking questions.

“Clients need to feel that you have the experience and technical skills to identify risks that they are not aware of. You need to be able to ask them questions they haven’t thought of. You need to anticipate issues they haven’t seen coming. It’s all these areas where, as an adviser, you add value.”

Woodley also acknowledges that human skills, like listening to clients, are the types of skills that advisers are particularly good at bringing to the table.

“A good adviser also needs to spend time with other professionals working in the UHNW advice space. This professional community and the sharing of ideas and knowledge, can’t be underestimated. There is real value working with other professionals.”

Like any client, there are real concerns and issues when dealing with UHNW clients, and top of the list at MGD Wealth is privacy and data security.

“Cybersecurity is a real and omnipresent issue in our world today. Just like any advice business, UHNW clients are being constantly targeted by cyber criminals. As an industry, I don’t think we collectively spend enough time thinking about those particular risks,” says Barton.

And what about privacy generally?

“These UHNW clients demand and expect privacy. I think it can be tempting for junior staff or advisers to occasionally ‘name drop’, which is something advice businesses need to proactively prevent their staff from doing,” Barton says.

Woodley agrees: “These clients do suffer trust issues, so it’s absolutely essential that their trust is not broken. As a business, you need to be discreet and protect the privacy of your UHNW clients at all times. Failure to do so, and word gets out quickly, which is likely to be the end of your engagement with this client segment.”

John Woodley is Co-founder and Group Managing Director of Fitzpatricks Private Wealth; John Barton is CEO of MGD Wealth; and Greg Miller is a Director at Wealth Market.

They spoke as part of an IMAP webinar on ‘Building a wholesale, high-net-worth and not-for-profit client base’.