Banks need to offer a full array of products, including hedge funds and international products, to compete for wealthy clients, a U.S. Trust Corp. executive said.
According an annual survey of affluent Americans that the New York unit of Charles Schwab Corp. released Tuesday, the wealthiest individuals are interested in investing more of their assets in these types of products.
"There continues to be an evolution in this industry," Paul K. Napoli, an executive vice president and the head of U.S. Trust's personal wealth management arm, said in an interview Tuesday. "In 2000 the wealthy and ultra-wealthy invested most of their money in stocks, bonds, cash, and a little real estate. Now they are interested in adding commodities, hedge funds, private equity, and, most importantly, international stocks."
(In November the $1.46 trillion-asset Bank of America Corp. announced a deal to buy U.S. Trust for $3.3 billion. The deal is expected to close next quarter.)
Hedge funds still make up only 2% of the average wealthy individual's portfolio, according to the U.S. Trust survey, but that figure increased from 1% in 2005.
Mr. Napoli said he expects it to continue to increase as investors with more than $5 million of assets become more educated about alternative products.
According to the survey, 55% of wealthy individuals view hedge funds as an investment that delivers a very good return. But despite the interest in hedge funds, 75% of the survey's participants said that the products are difficult to investigate, and that it is hard to find a good one.
Frances Aldrich Sevilla-Sacasa, U.S. Trust's president, said the survey's results reveal "there is still a limited understanding of hedge funds and other sophisticated products," even among the nation's wealthiest investors.
Wealthy investors have more confidence in international investments. According to the survey, on average affluent investors expect the U.S. stock market to return 8.85% this year, while they expect international stocks to return 9.66%.
Mr. Napoli said wealthy individuals are investing more in international stocks and reducing exposure to domestic ones; 41% of the survey's participants said the U.S. stock markets are becoming riskier.
"One of the top concerns among the affluent is that they believe that the U.S. is losing its competitive edge in the world economy," Mr. Napoli said. "These wealthy individuals are smart. They are working to construct a portfolio to take advantage of that."
The wealthiest 1% of Americans are interested in using banks again to help deal with "softer issues," such as philanthropy and generational asset transfer, he said.
Banks and trust companies "lost a lot of share to the wire houses and the broker-dealers over the past 20 years, but these firms are heavily investment-focused. They are not focused on working with wealthy families and all of the issues that come with being wealthy the way that trust departments in large banks are."
