Part three
Shaping wealth to shape the world
We have established where UHNW individuals are channelling their wealth and why, but how will they meet their goals? Our study reveals that UHNW individuals are taking an active, hands-on approach to managing the growth of their wealth and are willing to take risks to meet their objectives. But as tax legislation becomes more complex and the geopolitical environment remains volatile, UHNW individuals need the right financial and legal structures to protect and deploy their wealth.
Approaches to wealth growth
Today’s UHNW individuals are proactive, future-oriented investors. Ninety-one percent of our respondents describe themselves as active wealth creators, identifying their own investment opportunities alongside their advisors. Meanwhile, just 9% leave their wealth management entirely to the experts. This is a dramatic shift from previous generations of UHNW individuals, who largely left the management of their wealth in the hands of professionals.
UHNW individuals are becoming more willing to take risks and consider more unorthodox approaches to wealth growth. Sixty-four percent describe themselves as opportunistic investors, utilising liquid wealth to take advantage of unique investment opportunities. However, a minority, only of 39% of respondents, told us that they regularly take large stakes in start-ups in a quest to find the next £1 billion company. Younger generations are more likely to be looking for that next unicorn, with 53% of UHNW millennials, 46% of UHNW Gen X, and 24% of UHNW baby boomers taking large stakes in start-ups.
While wealthy individuals can be more agile than institutional investors, proper due diligence on investments and the credentials of those involved, particularly in start-ups, is no less important to identify both potential financial and reputational risks. Where investments are being made through wealth-holding structures additional considerations apply.
These structures comprise multiple entities in a number of jurisdictions and complex control mechanisms mean that investment decisions likely sit with individuals or entities that have fiduciary obligations to protect wealth for current and future generations.
These structures are not seen in commercial transactions and UHNW individuals investing through wealth management structures may be unfamiliar with the formal requirements for decision making. Strong governance is often critical for ensuring structural advantages are maintained. The potential for disputes is also far greater where riskier investments are acquired through such structures and where investments are made jointly with others. Advisors will play a key role in helping evaluate the potential risks and rewards and reducing the potential for disputes.
No less important is ensuring that wealth management structures respond continuously to changing regulatory needs and law enforcement requirements, in particular around anti-money laundering. Advisors will be essential for ensuring that compliance requirements are met, while at the same time balancing the need for privacy and optimising structural efficiency.
UHNW individuals’ attitudes toward investing The market view
Percentage of UHNW individuals who told us they are opportunistic investors, utilising liquid wealth to take advantage of unique investment opportunities as they arise.
Percentage of UHNW individuals who told us they are contrarian investors, not afraid to go against the market to pursue an opportunity.
Property But not as we know it
While many UHNW individuals are exploring alternative routes to generating returns, most still believe that traditional asset classes will continue to play a significant role. UHNW individuals believe that property investments will be the number one lever for growing wealth over the next three years; they are cited as important by 77% of our respondents.
Property investments
Equities and bonds
Alternative investments (private debt, equity, infrastructure, hedge funds, derivatives, cryptocurrencies)
Inheritance
Directly investing in start-ups
M&A - acquiring and selling companies
Investing in the industries of the future (life sciences, technology, media and communications, cleantech)
Challenges to wealth growth
There are several challenges standing in the way of wealth protection and growth. Just over half of all UHNW individuals in our study – dropping to 35% when looking at millennials only – think that their net worth will increase in the next year, by an average of 14%. The remainder (48%) expect their wealth to remain static.
How UHNW individuals think that their net worth will change over the next year.
UHNW individuals believe that the number one challenge to wealth protection is the geopolitical environment, with 89% citing this as a significant barrier. Some of the most likely geopolitical threats in 2022 include technology decoupling between the US and China, major disruption caused by cyberattacks and a resurgence of COVID-19, according to Blackrock’s geopolitical risk dashboard. Other risks include political crises in emerging markets, terror attacks, climate policy gridlock and further European fragmentation.
Challenges to wealth protection.
Increased tax legislation is the second most significant barrier to wealth protection, posing a challenge to 79% of UHNW individuals. For many UHNW individuals with wealth in a number of jurisdictions, their primary concern is not an increase in the rates of tax. On the contrary, we have recently seen clear evidence of the desire among the world's wealthiest to support post-pandemic recovery.
In the United States, the nonpartisan organisation 'The Patriotic Millionaires' have called on government to "make us pay more tax" in order to raise revenue to reduce financial inequality. What does concern these same individuals, however, is the increasing complexity of a tax system which is already overly complicated.
Over recent years tax authorities have received huge volumes of new information about taxpayers' wealth through global transparency measures. This information is frequently used as the basis for approaching taxpayers about their tax affairs. However, the analysis of this information is poor and often presented in an accusatory way when the vast majority of the structures from which this information derives are genuinely created to protect wealth.
Tax authorities have more visibility than ever before and tax legislation is now more complicated than ever. This creates a challenging environment for UHNW individuals and their advisors. UHNW individuals need to ensure that they are keeping on top of where their money is.
Nick Warr, International Head of Private Wealth
UHNW individuals need advisors who have expertise spanning multiple jurisdictions and who are up to date with fast-changing legislation across the world. We live in a transparent world, and advisors need to be sophisticated, international and fast-paced to ensure their clients are staying on the right side of the rules.
Jens Escher, Partner, Germany
In the UK, the tax affairs of UHNW individuals have been under growing scrutiny in recent years with specialist units established to conduct risk reviews of structures used to manage wealth. There is an uninformed assumption that any structure has been created for nefarious reasons, which is disconnected from reality in current times. One would hope that, recognising that UNHW individuals often have complex affairs, the UK authority, HM Revenue and Customs, would take a different approach to such taxpayers, engaging directly with UHNW individuals and their advisers to develop an understanding of their tax affairs.
Sadly this is not always the case. Advisors with experience of dealing with these specialist HMRC teams and understanding the way they work play a key role in ensuring enquiries are kept to a minimum and dealt with efficiently, especially when there is a natural cynicism from the authorities involved.
A world of increased complexity requires a holistic approach
Against this backdrop of complexity and volatility, UHNW individuals have high expectations of their advisors and the wider ecosystem that supports their wealth. Three-quarters of UHNW individuals say that an advisor who can support in all areas of their personal and professional lives is essential.
Complex structures comprising multiple entities are often needed to adequately protect wealth for the long term, but to remain fit for purpose, as well as being robust enough to withstand challenges, those structures need to be flexible enough to meet changing times and needs.
The pandemic highlighted the need to be able to react quickly to rapidly changing circumstances – not only in terms of the wellbeing and needs of family members but also wider societal needs - and prompted many UHNW individuals to review structures and consider making changes.
UHNW individuals need advisors who can take a holistic approach, incorporating expertise that ranges from commercial and corporate to tax, wealth structuring and reputational risk and who can look at structures from a global perspective. The best advisors can draw on a range of different disciplines and specialisms so that an UHNW individual has all the support they need from a single firm.
UHNW individuals expect more from their lawyers now. They want partners who can not only advise on legal issues but can also understand the business space – in order to help grow the UHNW’s business and to achieve their goals of making an impact.
The UHNW individuals of today are looking for a more personalised experience, an ecosystem where legal advisors are innovative with how they mould, grow and protect wealth and introduce their clients to new ways of working and contacts that support their personal vision.
Dr. Martin Bartlik, Partner, Germany
UHNW individuals expect to access a range of legal services over the next few years to help them navigate a challenging environment while protecting their wealth and meeting their goals. Over half expect to seek support for dispute resolution in the next three years.
The areas where UHNW individuals expect major legal issues to arise over the next three years.
