Ultrawealthy investors, with their $25 million apiece in household net worth, might be a tempting prize for advisers, but any professional money manager who wants them as clients must sharpen his or her knowledge about alternative investments, new research says.
That is because, though these wealthy investors are wary of the current investing conditions, they remain entrepreneurial risk takers at heart who like alternative investments such as hedge funds, according to a study by Spectrem Group in Chicago.
Half of the ultra-high-net-worth households surveyed this year own hedge funds. The mean holding was $4.6 million, and this was a 43% increase from 2007, when just 35% of the wealthiest households had invested in hedge funds, according to Spectrem, which released its report Nov. 9. Spectrem queried 136 wealthy households in August for the study.
This wealth segment is not just buying hedge funds. More than half, 56%, of the households own private-equity investments, and 52% of them have invested venture capital. These holdings were up from 39% and 37%, respectively, in 2007. They also own private placements, 49%; precious metals, 44%, and commodities, 38%.
In terms of the distribution of investable assets, alternative products comprised about 20% of their overall holdings. Stocks and bonds made up 20%; professionally managed accounts held 16%; mutual funds and deposit accounts each had 11%; other investments accounted for 14%, and rollover contributory and Roth IRAs had 9%.
This investor group is defined by several traits that explain their bolder investment choices. For one, more than half of them are still working and intend to increase their wealth. About 40% intend to retire in the next 10 years.
"They are in a position where they can take more risk," said Tom Wynn, a director at Spectrem Group. Also, a significant share of these households are business owners or senior corporate executives. This means they will eventually deal with issues regarding their companies or restricted stock.
Any financial adviser who approaches this group must be knowledgeable and proactive. And because these investors are savvy about finance and investments, advice to them must be sophisticated, not parochial. Indeed, 77% of the respondents said they enjoy investing, and 46% said they could do better at investing than a professional adviser.