Tough times don't last, tough people do. Yet for the tough to survive, tactics must be devised so that they have both an offensive and defensive game plan so they can make the most of opportunities that arise and avoid the pitfalls that lay in front of them.
That is how high net worth (HNW) investors have emerged post the global financial crisis (GFC).
Regardless of how badly some were stung by turbulent markets and high-profile company collapses, HNW investors have resurfaced keen to play a more active role.
They're paying closer attention to what's happening in financial markets, they've reduced their appetite for risk, they're asking more of advisers and inquiring about new investment avenues as well.
Investment Trends analyst Uwe Helmes says the average HNW investor today is 54 years old, with two-thirds of the HNW market now aged over 50.
The general consensus among industry heads is that they tend to have around $1 million in investable assets outside of things like their family home or business.
Helmes says the recovery of the stock market and markets overall largely contributed to the number of Australians with $1 million or more in investable assets increasing from 250,000 in December 2008 to 300,000 in December 2009.
"While the stock market recovered the most quickly, all markets rebounded quite well, which has no doubt impacted the number of HNW investors there are in Australia," he says.
"Similarly, residential property, commercial property and private companies all bounced back to some extent, which would have assisted in the rise in the number of HNW investors."
Macquarie Private Wealth division director Jeffrey Wrightson says while the number of HNW investors may have increased in the past 12 months, it was more so a reflection that the number of wealthy Australians was returning to more normal levels after a period of volatility.
"I don't think there has been a significant rise or fall in the number of HNW investors so to speak, but more so a recovery in markets, so levels of wealth have returned," Wrightson says.
As to whether the market rebound has helped HNW investors regain their appetite for investment, Helmes says people are certainly more confident about investing but at the same time are maintaining a keener sense of caution about what they invest in.
"The proportion of HNW investors accumulating cash, for instance, fell from 40 per cent in December 2008 to 15 per cent in December 2009, according to our figures," he says.
"In essence this shows fewer people are sitting on the sidelines adding to their cash reserves.
"HNW investors are also expanding the range of investments they have, while contemplating new investment types after a period in which it was hard to get them to invest in anything other than relatively safe options, such as blue-chip shares and term deposits."
He says when financial markets were highly turbulent, many HNW investors moved away from a longer-term investment approach as well as many complex products.
"After a period of deviation, however, they now appear to be moving back to a longer-term approach, with our research highlighting that more HNW investors planned to leave their long-term plans intact in 2009 in comparison to 2008," he says.
"Despite greater levels of confidence, a third of HNW investors still said they intended to avoid complex products in future as their risk appetite had decreased since the downturn."
He says despite this, HNW investors have continued to invest in some non-mainstream assets, particularly index funds, resource funds, structured products, commodity funds and exchange-traded funds (ETF), which trade exactly like stocks and are generally designed to track the performance of an index.
"Diversification is still a focus but HNW investors are still quite keen on those investment classes they understand and know best," he says.
"While many still do not have any offshore exposure, I think more will do so going forward but that it is likely to remain a smaller fraction of their portfolio."
Dealer group Centric Wealth chief executive John McMurdo agrees that the investment appetite of HNW investors is returning, with many starting to reinvest a lot of the cash they previously had in reserves into other investment options. "They are looking at international markets more, wanting to increase their international exposure and participation, and they're looking to greater weighting towards alternative investments, such as ETFs and private infrastructure," McMurdo says.
The more money they have, the more they are seeking advice, he says.
"In the $1-1.5 million category, 55 per cent of HNW investors used advisers in the last year and out of the $5-10 million category, 62 per cent used advisers," he says.
Wrightson says he too has noticed the market rebound has given HNW investors more confidence to invest, with more of them inquiring about opportunities in regards to where they could redirect some of their cash reserves.
"There is definitely more discussion happening, but there is certainly more caution and more people sitting on the fence in light of the last couple of years," he says.
"There was a lot of activity last year, but in 2010 there's a bit of optimistic caution.
"With the added issues of markets in Europe currently, investors are asking whether we will see more of this volatility reverberated around the globe."
Credit Suisse managing director and head of private banking for Australia Ray McGregor agrees that while investor confidence has lifted it has been tempered slightly by problems and recent volatility in European markets.
Perpetual state manager of advice for New South Wales and the Australian Capital Territory Andrew Baker says while markets could be volatile, things always stabilised sooner or later.
"I think HNW investors are slightly more comfortable than ordinary investors in such times because they're more sophisticated in their knowledge of market movements," Baker says.
"They have a greater understanding and more experience, and in some cases have been working with advisers for longer periods of time.
"For clients with higher amounts in equities, they knew if they held on, the market would come back eventually. They knew not to sell, so from our perspective we didn't have too many clients trying to time the markets."
He says HNW investors have emerged from the GFC a little more conservative.
"You need cash flow available for six to 12 months as you can't always rely on monthly dividends to pay your bills. Some HNW investors had cash frozen so they needed to sell assets to live on, which was horrible," he says.
"We recommend clients always have six months in cash to avoid these situations, which is on top of the portfolio allocation that is already there."
Wilson HTM Investment Group head of wealth management Alex Ihlenfeldt says investors are generally more cautious, but the savvier ones are looking for more opportunities through both their own research and via professionals.
Ihlenfeldt says about 40 per cent of HNW investors still did not seek advice.
"I think they don't seek advice because a number of them are financially literate and because it has become easier to trade securities and do research independently these days," he says.
"Another problem is you have accountants, brokers, private bankers and advisers who all want a piece of the HNW pie when in reality the one thing clients want and that not many groups actually offer is a full range of services and number of specialised experts."
As to whether the investment nature of HNW investors has changed, Helmes says just over 50 per cent of HNW investors were investing in alternatives, such as structured products, index funds, ETFs, options and futures.
"Compared to direct shares and residential property and commercial property, however, the percentage they invest in alternatives is still relatively low," Helmes says.
"About 16 per cent of their total assets on average is invested in alternatives, about 27 per cent of all assets is in direct shares, with 26 per cent in residential property and 10 per cent in commercial property. "If we look at ultra HNW clients, these proportions are slightly different again."
According to Helmes, the top three growth areas flagged by planners are direct equities, ETFs and indexing.
"These are all lower-cost investment options, which is not unusual following a period where investors have lost money," he says.
According to Helmes, the number of Australian investors using ETFs has doubled to 38,000 since November 2008, with an additional 64,000 considering an investment in ETFs.
"Diversification and liquidity, combined with low cost have been the main drivers fuelling growth in the ETF market," he says.
Wrightson says there has been more movement by HNW investors across asset classes as they're typically more proactive.
Ihlenfeldt says part of the reason for this is because there was a major scare when the government guarantee was put in place, guaranteeing only the deposits of customers of authorised deposit-taking institutions.
"HNW investors have therefore become a lot more wary of where they put their money than they were before," he says.
McGregor says over the past 18 months investors have also become more wary of how volatile listed equities are.
"Going back to the GFC and what we're seeing now in European markets, it reminds people that markets can fall and as a result I think that has increased the appetite for alternatives as they are exposed to less volatility," McGregor says.
"HNW clients and advisers are not as confident that they can time the share market as it is a skill very few people possess and can do consistently.
"That's why it is important to diversify across asset classes and markets and have a portfolio that will weather the downturn but that can still maximise on opportunities."
Wrightson says HNW investors have also grown a greater appreciation of liquidity.
"They realise that without it, it's harder to make changes," he says.
"Another thing they're also tapping into a bit more is how debt plays a role in any form of investment and ensuring an appropriate level of gearing.
"If you don't have liquidity and you have high debt, you're restricting your opportunities."
He says investors have been asking a lot of questions about these things lately and their desire for greater education is evident.
"They're asking a lot about ETFs, which are relatively new in Australia, so that's definitely something we're taking note of too," he says.
Ihlenfeldt says people are also being mindful of the regulatory reviews going on and that investors have been burned in recent years.
McGregor says Australians are on the path to becoming savvier investors.
"Investing only in Australian shares is not the way to maximise returns over long periods of time, however, and I think we're still behind our overseas peers in terms of utilising other asset classes, even such as bonds, foreign currencies and commodities and putting them together in a portfolio," he says.
"We still have a long way to go in terms of sophistication and similarly advisers specialising in the HNW space have a long way to go too." As to whether advisers are changing their recommendations to clients, industry heads seem to think if that is the case it is more on the back of client demand.
McMurdo says while some advisers might be reviewing their recommendations, things at Centric Wealth have not changed dramatically.
"Our advisers have educated clients really well over a number of years. They have sought to understand clients' time frames, risk appetite and have been clear that markets do have their ups and downs," he says.
"There are advisers out there who are all about short-term investment advice and stock picking, but those clients that have good advisers who understand their long-term goals tend not to change strategies dramatically nor on a frequent basis."
Baker agrees that if advisers are doing their jobs properly, there shouldn't be a great need to overhaul recommendations as they should take into account market volatility and changing circumstances.
"It was trying for advisers that hadn't recommended appropriate strategies but for those who did, they stuck to their guns and clients respected that," he says.
"It's harder to remain a trusted adviser if everything you said went out the window and you had to change your philosophy."
Ihlenfeldt says good-quality advisers gave good advice throughout the cycle.
McGregor says volatile markets were a reminder for many advisers that they didn't have a crystal ball and that some had got complacent in their ability to choose winners.
"Before the downturn everything they recommended went up so they started to feel as though it was easy," McGregor says.
"Then there was the GFC and now Europe, which has played as a reminder that it is not that simple and that a lot of work needs to be put into a portfolio.
"Advisers are also recommending less speculative investments as too many advisers were putting clients into things like small-cap resource stocks and now advisers have pulled back and are doing much less of that."
Helmes says client interest plays a big part in what advisers are recommending.
"There is currently less demand for traditional markets like the US and heightened interest in China, India and to a lesser extent emerging markets broadly," he says.
"Currently 32 per cent invest in the US and only 12 per cent are interested in investing in the US. In comparison, 25 per cent invest in China but 29 per cent are interested in investing in China. Similarly in India, only 13 per cent invest there but 23 per cent are interested in it.
"The proportion of gearing has also changed among HNW investors, with less borrowing to support their investments.
"In December 2008, 72 per cent of HNW investors had borrowing supporting investments and in 2009 that has decreased to 60 per cent."
Because HNW investors have an interest in a whole host of things, Baker says it is important planners are able to offer holistic advice on everything.
Ihlenfeldt says there is a definite shift towards direct equities, ETFs and separately managed accounts (SMA) and the market is currently in the process of reorganising itself to cater to those demands.
"What that is doing is providing the client with direct ownership of the underlying investment without the need to go through a fund structure on a platform, which makes the end result not only cheaper but also more transparent for the client," he says.
"I think one of the challenges that will arise for advisers generally is that there will be a shift to new investment options, but then that will be followed by specialisation in these options and some wanting to bring the investment component in-house.
"Advisers will have to think about whether they just stay in the advice space or partner or specialise to also provide the investment component." He says the biggest driver right now is the regulatory reviews going on in the financial services industry as these will set the pace and agenda for change.
McGregor agrees that regulatory reforms will impact on advisers.
"I think wealthier and more sophisticated clients have more reliance on brokers, private banks and wealth managers right now," he says.
Despite this he believes the share of the market that brokers advise on will fall as more clients look to advisers as to how they can invest on a holistic rather than just transactional basis.
"While brokers are popular right now, as Australians become more sophisticated, educated and interested in other asset classes and markets, the dominance of stockbrokers will decrease," McGregor says.
"In saying this though I think there will always be a place for them in the Australian market.
"At the same time it is important that advisers educate themselves on a broader range of investment options than they have in the past. HNW clients are only going to become more demanding so if advisers aren't effectively educated they won't be able to meet their needs."
McMurdo says research shows HNW investors value trust and enduring relationships; strong education and professionalism; good portfolio construction and management; and impartiality and independence overall from their advisers.
"Funnily enough fees rated 18 of 19 in terms of importance, with detailed knowledge of the law rated 19," he says.
"They are keener to see honesty, which to me says the value that is delivered to the client really goes before how advisers are remunerated.
"The value of things being done right in other words outweighs the cost in getting the advice."
He says HNW investors have a different attitude towards fees than perhaps the rest of the market.
While research shows that more than 50 per cent of HNW investors want additional advice, he agrees there are still many who do not seek it.
"They need advice on a wide range of wealth management needs," he says.
"My view is that the majority of firms with just one or two advisers will generally not have the depth and range of expertise to accommodate that. We recognised that a number of years ago, however, which is why we moved to a specialist model where we have specialist planners, risk advisers, debt advisers, et cetera."
Helmes says adviser satisfaction fell during the GFC, which was to be expected given investors were experiencing the worst market environment in 70 years.
"Satisfaction for advisers across the board has rebounded strongly since then. However, while adviser satisfaction has improved since 2008 and more clients are feeling confident about their investment selection, clients are generally happier when markets go up as they're earning greater returns," he says.
McMurdo says there is still added pressure for better education and professionalism and investors want more robust support around portfolio construction, which did not mean advisers picking good stocks in their lunch hour.
"HNW investors want impartiality. They want independence," he says.
"While they're not so worried about the cost of advice, they don't want advisers who are commission driven. They want access to an advisory group that can provide advice on broad issues. They want highly-qualified advisers that specialise, with researchers and economists."
Wrightson agrees they want advisers who have strong expertise and technical abilities.
"Advisers have got to demonstrate that they understand investment markets," he says. "There needs to be more focus on research and more integration of advice. For example, clients want a team of people that can deal with all the professional and personal financial needs that a HNW investor has.
"They want to save time, so they want to be able to access advice from the one place. Getting all the information from the one specialist I think is becoming harder. HNW investors need a group where specialists come together.
"It's about saving time; relying on others to do the research for them and ensuring faster implementation, so execution of great decision making."
Baker says more HNW clients are reassessing their relationships with advisers since markets have rebounded, with many having changed advisers and their investments.
"We stayed close to our advisers during the volatility and believe professional hand holding was vital because we knew if we didn't do something or we put our head in the sand that we'd lose clients," he says.
"Not only did our advisers appreciate the regular contact but clients also appreciated the extra attention from our advisers."
Baker says when markets fell, not everyone knew what they had invested in.
"They didn't know certain funds could be frozen and it is vital that when you are advising clients that they know what they're going into and that they understand all the opportunities as well as the risks," he says.
Ihlenfeldt agrees there must be transparency around everything.
"Particularly when times are tough, clients talk more not less. They want to hear more not less," he says.
McGregor adds that simply focusing on what are the best Australian equities is not good enough. "Advisers must be aware of international markets; other asset classes like bonds and commodities and alternative investments and smart ways to utilise foreign currencies as well as effective hedging strategies," he says.
Industry heads say the general feeling is that advisory teams that specialise in different markets and investment types will be the ones best placed to service the HNW market in the future.
Those who can devise strategies that not only maximise returns but help clients ride out volatile periods in financial markets will also attract the bigger portion of the HNW pie.
