The majority of wealth managers in Australia are missing an opportunity to service strong and rising demand by HNW investors for pension and tax planning, according to GlobalData Financial Services.
Despite significant demand, only approximately a third of wealth managers target HNW investors offer tax advisory services in Australia.
This lack of tax advisory services by some two-thirds wealth managers in Australia is a missed opportunity, according to the GlobalData report Wealth in Australia HNW Investors 2017. This report is available at GlobalData’s report store.
Demand for pension and tax planning by HNW investors is significant and rising in Australia because of changes to the country’s superannuation system that became effective in 2017.
On the one hand, GlobalData says offering tax advisory services would increase the overall appeal of a wealth manager’s offering.
On the other hand – and perhaps more importantly – it would reduce the likelihood of HNW investors spreading their wealth across multiple wealth management firms.
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Australia HNW individuals typically use three providers for their investments, placing around two thirds of their business with their main wealth manager.
However, the main reason to seek professional advice is lack of time, suggesting that convenience is an important consideration.
These findings also suggest HNW investors are not inherently inclined to use multiple providers. HNW investors will be likely to opt for a one-stop-shop – someone with a more sophisticated service proposition that includes auxiliary services such as tax advice and planning.
Wealth managers that lack the in-house expertise or resources to offer comprehensive tax advisory services should therefore consider partnerships with specialized providers.
For example, the GlobalData report says Estate Planning Equation assists advisers and their respective clients with an extensive list of tax planning services.
Australia’s wealth market is established compared to the wider region, where the private banking concept is still relatively new, particularly when considering emerging markets such as the Philippines, Indonesia, and China.
Expats represent a below-average part of the Australian resident HNW population, and the vast majority can be described as transients rather than migrants, having spent five years or fewer in Australia.
Only 12,824 HNW individuals in Australia are expats, but those migrating under the Significant Investor Visa (SIV) are a lucrative segment thanks to their greater likelihood to stay permanently.
Those providers that understand the distinct needs of migrants from the UK, the US, and China will find HNW expats a lucrative target market.
The more demanding nature of expats makes it crucial to offer a wide range of products.
In particular, tax advisory services should form an integral part of providers’ expat service proposition. Given that the expat community is relatively small, client referrals represent the most effective means of acquisition in this segment.
Investment style preferences
HNW investors in Australia typically prefer advisory over discretionary mandates, and retaining control remains a key driver for self-directing. The leading factor is a desire to avoid management fees.
While execution-only services currently attract only a small proportion of wealth, providers cannot ignore competition from typically low-fee robo-advisors.
This generation of HNW individuals may show little interest in self-directing, but their heirs are likely to be more open to digital services.
In terms of asset allocation, the average Australian HNW individual invests heavily into equities, which constitute almost half of the typical HNW portfolio.
Local currency deposit products, government and corporate bonds, and commercial property investments are also popular among local HNW individuals, albeit significantly less so than direct and fund equity investments.
Over the next year, GlobalData forecasts an increase in bonds and alternatives at the expense of property and equity investments, thanks to an assumed lack of capital appreciation opportunities.
A key message from the GlobalData report is that intergenerational wealth transfer represents a significant opportunity for wealth managers in Australia.
This is because compared to relatively young wealth markets in Asia Pacific (such as China, Indonesia, and Malaysia), Australia is home to an above-average number of HNW investors who are aged 61 or above.
This has a number of implications. For example, wealth preservation as opposed to accumulation strategies will resonate more strongly with this segment.
Inheritance and estate planning services that include current HNW clients’ children in the planning process are the most straightforward way to connect with the next generation of HNW investors.
As such it comes as no surprise that more than half of wealth managers in the country targeting HNW investors offer estate planning services.
The private banking arms of Australia’s big four provide customized estate planning and wealth transfer services designed to reduce taxes for heirs, but more far-reaching programmes are often the reserve of the world’s private banking giants.
While smaller players will not be able to compete with private banking giants’ programmes head-on in terms of geographical reach, GlobalData says countrywide networking or educational events have the potential to yield the same benefits.
Individuals who are more engaged with their investment partner make for a more loyal customer base, calling for a more active approach towards client involvement, even if on a smaller scale compared to Citi and co.
Australian HNW individuals hold a comparatively small proportion of their total liquid assets offshore.
This is predominately allocated to equity investments, and the major financial markets of the US and the UK are key booking centres, in addition to selected hubs in Asia.
While a belief that wealth managers abroad can achieve better returns tops the list of drivers for off shoring assets, HNW individuals in Australia invest offshore for a multitude of reasons, with access to a wider range of investments and general diversification benefits being almost equally important.
This means wealth managers looking to entice wealth back home should put greater emphasis on these factors, and make sure to highlight their wide range of products and good investment track record.
One segment that is often overlooked is inheriting spouses, says GlobalData despite them likely being the main inheritors.
As shown in Figure 9, male HNW investors are significantly older than their female counterparts in Australia.
Only 25.8% of female HNW investors are 61 or older, compared to 45.6% of male HNW investors, suggesting there will be a considerable increase in inheriting spouses taking over as matriarchs.
GlobalData’s research shows female investors are already more likely to have sourced their fortune through their family or to have inherited their wealth.
Unsurprisingly, this segment has different servicing needs than the next generation of HNW investors, and a targeted service proposition aimed at older female investors will allow wealth managers to differentiate themselves from the crowd.
Westpac’s Ruby Connection represents a good example. Run by the bank’s dedicated Women’s Markets team, it aims to provide women with education, information, and networking opportunities through a national program. It also offers an interactive online community and runs networking events designed to connect like-minded Australian women
Critical success factors for Australia
The GlobalData report recommends three strategies for success in the Australian wealth management market.
- Place greater emphasis on brand building:
Longstanding relationships with advisers are the most important retention tool, suggesting that investors are likely to move on with their advisor if they decided to leave.
To minimize this risk firms should aim to bind investors to their brand, rather than just an adviser.
- Pursue a more selective investment strategy:
Amid a fall in demand for property and equities, providers should push for a portfolio reshuffle as opposed to a move away from these asset classes.
Stock picking and a more regional real estate strategy continue to promise returns.
- Offer tax advice
The Australian Taxation Office’s (ATO’s) increased crackdown on wealthy investors, as well as strong demand among expats thanks to the growing complexity of the global tax environment, will support already high demand for tax advisory services.