The following article considers the upper echelons of wealthy individuals and how, based on their levels, business models for wealth advisors must adjust. There is strong demand for objective advice, but many firms aren't sufficiently tooled up to deliver. A prominent figure in the sector examines the territory.

The following commentary is from Jamie McLaughlin. He is chief executive of J H McLaughlin & Co, a founder of the UHNW Institute in the US, and a member of FWR's editorial board. He has commented on stories in FWR in recent years, such as in this example. See also here.

The following article has appeared in a publication (see here) by The Investments & Wealth Institute. The editors of FWR are pleased to share these insights from someone who has become an important thought leader in our industry over the years. The usual editorial disclaimers apply. To comment, email tom.burroughes@wealthbriefing.com and amanda.cheesley@clearviewpublishing.com

The wealth management industry is at a crossroads – a profound shift in demand favors objective advice, but extremely challenging business economics leave most firms undercapitalized and under-resourced to meet the demand of wealthy families. This is particularly pronounced for advisors who prize or aspire to serve the more complex ultra-high net worth (UHNW) (1) and “centimillionaire” (2) client segments where the economics can be perilous.

The demographics suggest a compelling opportunity (3), but the challenges of serving the UHNW client segment outweigh the perceived opportunity. The UHNW and centimillionaire client segments are peculiar and idiosyncratic – they are dramatically different segments. Most firms should stick to their knitting and be content serving client segments of less than $25 million where the services are more replicable and margins much higher. 

Trends

Increasing wealth and complexity
According to Cerulli Associates, (4) as of year-end 2022, there were 129,665 households in the US with over $30 million in net worth, representing $15 trillion in wealth. (5)   

As the number of UHNW families continues to increase, so does the complexity associated with managing and administering that wealth. Private investment vehicles and alternative investments, particularly, add a tremendous amount of complexity -– including monitoring, administration, and performance reporting on those assets. Advanced estate planning structures result in structures that require annual tax reporting, accounting, and administration. With increasing wealth come new assets including homes, planes, boats, and collections. With those assets come employees, maintenance, and risk management – replacing and renewing property and casualty insurance in this current “hard” market being an example. (6)    

In addition to complexity, each family is different and almost every service provided must be customized to each family’s wishes. To serve these heterogeneous needs, many service requirements and associated work processes are non-replicable. 

Alignment and transparency 
By operation of law, (7) RIAs are required to act in a fiduciary capacity and have a duty of loyalty to always put the interests of their clients first. While wirehouses and private banks provide many advisory services, they are not subject to this strict standard. But the larger issue is alignment, which is “governed” by demand. Families prefer their advisor to act as their agent and, should their advisor act as a principal with some economic self-interest, that the conflict (the so-called “agency dilemma”) be disclosed. 

Shift in demand for non-investment services
The most overarching trend is a generational shift from investment management models – historically driven by supply and centered on product manufacturing and distribution – to contemporaneous wealth management models driven by client demand and centered on delivering integrated advisory services and counseling across multiple disciplines. 

The service matrix has expanded widely – thirty years ago, no one would have imagined or expected that their investment advisor would provide counsel on such exogenous needs as, for instance, family dynamics, business consulting, philanthropy, and health and wellness.

But too many firms that aspire to serve more complex wealth segments do not fully understand the unsystematic needs of the segment and their staff models are not deep enough to deliver on such promises without cannibalizing their margins. 

In the absence of a disciplined service and related pricing model, these expanded services have systematically eroded firms’ margins. In fact, firms invite complexity – terms such as “holistic,” “comprehensive,” and “integrated” abound on firms’ websites. Many proffer “family office services” but the term is too often a hollow marketing tagline to attract UHNW and centimillionaire clients. 

Consequently, margins of 15 to 25 per cent for firms that serve these rarefied client segments are common compared with margins of 25 to 40 per cent in the mass affluent and high net worth client segments. 

Shift in business models 
The UHNW client demand favors a professional services firm (PSF) model centered on counseling across a wide spectrum of client needs as distinct from the traditional transactional product manufacturing and distribution model.  

The firm of the future will have a combination of scale and speed while maintaining client intimacy. (8)

Firms are scaling
Through a combination of organic and inorganic growth, a “category” of 40 to 50 firms with $20 billion (AuM) or more focused on these uber client segments has emerged with a handful now greater than $100 billion (AuM). Similarly, brokerage teams that serve the UHNW client segment and manage greater than $5 billion (AuM) are not uncommon. 

Footnotes

1, There is no universal definition "ultra-high net worth" (UHNW). The term emerged in the early 2000s with the rise of global wealth reports most notably the Capgemini Merril Lynch Global Wealth Report that coalesced around a threshold of $25 to $30 million of a family’s net worth (balance sheet wealth) to define a UHNW family. Wealth-X, an Altrata company, defines a UHNW family as one with greater than $30 million in net worth. Cerulli Associates defines UHNW as over $20 million in investible assets.

Another, more rarified client segment is the segment of “centimillionaire” – families with >$100 million net worth. This distinction is introduced to discriminate their peculiar needs and demands versus the merely UHNW family. Their needs tend be much more complex and the burden and imperative of discerning the purpose of their wealth and legacy more acute. 

All tubs are rising but the wealthiest are getting wealthier per Boston Consulting Group – Global Wealth Market Sizing Database, 2019 – North America expected five-Year CAGRs:
    
-- $1-$20m – 5.7 per cent
-- $20-100m – 9.6 per cent
-- $100m – 6.7 per cent

4,  The Cerulli Report, “US HNW and UHNW Markets 2023,” p 35.
5,  Wealth-X (an Altrata company) “World Ultra Wealth Report 2023,” p 9.
6,  “Fees and Pricing for Ultra-High Net Worth Client Services,” McLaughlin and Ferguson, Schwab Advisor Family Office, December 2024.
7,  The governing statute is the Investment Advisers Act of 1940.
8,  “The Firm of the Future,” James Allen, James Root, Andrew Schwedel, Bain & Co., April 2017.