Guy Hedley and Paul Heath mix in a world many financial advisers would give their right arm to be a part of. They have clients with extreme wealth, resources at their fingertips and enjoy the backing of global investment banks. The two men - who operate in a tight square mile in Sydney's central business district - manage the advisers who run the financial affairs of rich and powerful individuals and their families. They run the private banks - those institutions that service clients with net wealth into the hundreds of millions. And their services have never been more in demand.
"We have clients who have amassed enormous fortunes," Heath, Goldman Sachs JBWere's head of private wealth management, says. "They're dealing with a range of advisers so we don't want to waste their time. We know these clients come to us to access a broad universe of domestic investment opportunities. "The adviser really has to develop a relationship of trust and understanding." Hedley, head of Macquarie Private Bank, says his advisers need to be "chief problem solvers" for their clients. "It's a very different type of business," he explains.
Private wealth on the rise
Australia has a small population but one of the world's largest private wealth markets. According to Axiss, the financial services division of the federal government agency Invest Australia, Australia has the third largest private wealth market in the Asia Pacific, behind Japan and China, and the 11th largest in the world. Individual private wealth outstrips that of many other rich countries, such as the United States, the United Kingdom and Japan, and on an individual level Australia has more high net worth individuals than Hong Kong and Singapore combined. The private wealth sector grew by 19 per cent in the 2006 financial year with the wealthiest 20 per cent controlling 60 per cent of total household net worth.
According to United States firm Investment Company Institute, Australia has the fourth largest pool of investable assets in the world. Research house Standard and Poor's believes this will rise to $2 trillion by 2015. "The steady growth in the size and scale of the Australian market represents tremendous opportunities for wealth management firms, especially those that can adapt their service model to the needs of an increasingly sophisticated client segment," Merrill Lynch head of global private clients for Australia and New Zealand Nick Kalikajaros says.
Whether or not you believe the statistics, it is certainly the case that 16 consecutive years of growth in domestic equities and all other asset classes and compulsory superannuation have been the key drivers of Australia's private wealth. And it has changed as it has grown. The cash component of wealth has fallen, while super, particularly self-managed superannuation funds, and listed investment vehicles have risen. Favourable changes to super from June 30 are expected to buoy this stellar rise in the assets of the mega-rich.
What is ultra high net worth?
The Federal Government defines a high net worth individual as having more than US$1 million in investable assets. It is believed around 146,000 Australians fit into this category, with private banking offered to those with $500,000 to $30 million and beyond. Profitability of the sector is high - revenue grew 25 per cent last year. The private banking industry is riding on the coat-tails of a trebling of private wealth per person from $123,000 in 1996 to $362,000 in 2006 and the growth in all asset classes. Over 16,000 Australians, or 0.2 per cent of the population, had a net worth in excess of $7 million, including property assets, in 2003/04.
"The bulk of the wealth in Australia is held by people over 60. Very wealthy people tend to be older," Heath says. He adds that while his entire clientele place a value on being financially organised, they often neglect their personal finances. "Their own personal finances are the least organised," he says. "We place an emphasis on having a process . getting the super strategy right and getting the estate planning process right, particularly for those who have spent a significant time offshore." Macquarie Private Wealth's Doug Webber agrees. "Most clients come to us with a particular need in their life," Webber says.
He says a client may wake in the middle of the night and think "my God, I haven't got enough to retire on" or worry that they have a massive salary, luxury house and car but nothing to show for it in terms of long-term investments. Divorce is also a common driver of advice. Webber says when they see a private wealth adviser they have a much clearer understanding of their whole finances. "It's getting your whole house in order. It's so satisfying to see people go through that," he says.
Clients with money to spend
As every adviser knows, no one client is the same and that holds true for the ultra high net worth market. "There's no one rule. The sort of client in the ultra high net worth category varies enormously. One of the skills a good adviser has is to relate to people at all levels," Heath says. Advisers in this space tend to take on fewer clients and share the work with colleagues, but manage vastly more funds under advice. Some clients are chief executives of large companies who have risen to the top through hard work, business acumen and good fortune. Others are classified as having intergenerational wealth: wealthy individuals and their children who have inherited their fortune.
"When we get a role to play it is when they realise the sale of the business," Heath explains. "Very rarely do they come to us. We tend to go to them. Most people who are wealthy didn't just become very wealthy." Goldman Sachs JBWere differentiates itself by offering a wider range of philanthropic services than some of its competitors. Heath says this is a distinct advantage in dealing with high-end clients. "We think that philanthropy is absolutely critical to the ultra high net worth space," he says. "It's a really important part of our business. Philanthropy is often the glue that binds together the generations of wealthy families and the bulk of our very wealthy clients have some form of philanthropic motive." For the interview with IFA, Hedley politely declined to give the number of clients or funds under advice. He would only say the people on his books tend to have north of $5 million or $10 million in assets, excluding property or other "lifestyle assets". The specialised unit within the Millionaire Factory dominates the space and has only been in business for five years. Macquarie assigns up to five advisers to an individual client, usually including one partner and two associates. In contrast to Goldman Sachs, referrals account for all of the business.
"We don't seek them out," Hedley says. Heath says his clients don't want golf days or their adviser to suggest social activities because "most of these guys could join any golf course they want". What they find valuable is rare access to the world's leading financial minds. Former Reserve Bank of Australia governor Ian McFarlane, an ambassador for the investment bank, held a private meeting with Goldman Sachs JBWere clients earlier this year.
The demand for advisers
Most of the 10 top international firms now have private banking facilities in Australia. Today, private bankers are moving far beyond their stockbroker reputations. Backed by a large institution, they will work with a team of investment and tax professionals. They need the flexibility to be on call, give a very high level of service and understand their clients' complicated financial needs. Experienced advisers in the areas of wealth protection, taxation, investments, estate planning, insurance and philanthropy are increasingly sought out for the quality of their advice. So unsurprisingly, private banks and private wealth divisions of financial services firms are suffering the skills shortage like the rest of the advice industry. Finding advisers is incredibly difficult. Hedley says he is constantly looking for staff to work in Sydney and Melbourne.
"We're growing really fast," he says. Super has been the biggest driver of private wealth in Australia. Total assets are now at $1.1 trillion and recent government reforms have created more opportunities for investing for those over 60 who suddenly are not being taxed on their super withdrawals. This has created more demand for hedge funds and alternative assets classes, popular with ultra high net worth individuals who can get exposure to higher-risk wholesale markets than the average investor. SMSFs - the domain of the wealthy - have been a major force behind the trebling of the hedge fund industry in the past five years. High-end clients are expected to benefit from recent changes to tax rulings that allow family trusts to pay superannuation to their directors. Family offices
When the Myer family wanted to manage its financial affairs early last century, it set up its own private bank. The Myer Family Office today controls funds under advice for other wealthy families from its offices in Sydney and Melbourne in order to share technologies and give a wider range of financial services. It is the most famous example of a family office in the country, mostly due to its history, its external client base and its philanthropic efforts. And not just anyone can see one of the Myer advisers. The starting threshold of your assets needs to be $30 million.
These days the notion of the family office, while still relatively new to Australia, is changing. Tax and super have become more complicated and the share market boom has called on the experience of large corporations with teams of investment professionals. "The family office has long played a significant role in servicing hyper net worth family wealth in the larger United States and European markets," Westpac-backed Magnitude Financial Planning chief executive Mark Spiers says. Spiers points to a trend towards the concierge-style service, which he says is similar to the family office but with a retail flavour.
"[This is] where the adviser has only a handful of very active and high touch hyper net worth clients who are prepared to pay high five figure and six figure amounts to have their affairs centrally and personally managed," he says. He says until now only a small number of boutique financial planning and accounting practices have serviced this market. "It is expected the number of these providers seeking to service the HNW [high net worth] market will increase," he says. John Hart, national manager for financial planners at Centric Wealth, says managing a client's affairs may mean the adviser becomes that client's chief financial officer. Or it may involve liaising with the client's host of accountants and other financial and legal professionals within the client's family office.
Centric Wealth is one of the few dealer groups that operates in this space and has set up a private wealth area. Three or four advisers out of its 44 nationwide are assigned to work solely in the division down the eastern seaboard. Tailored portfolios are constructed for clients who have between $5 million and $500 million on a predominantly fee-for-service basis. "You can go right across the market to get asset classes that suit the investors," Hart says. He says when a client with a family office gets to a certain level of wealth, they often outsource their financial affairs. The same is true for the second generation in wealthy families who do not have the entrepreneurial spirit of their parents and desire a passive portfolio. "It's an area that's constantly evolving," Hart says. He admits most of the clients are men. "I think they probably are. Isn't that terrible?" he says.
The tax man cometh
Tax is the most pressing issue for most ultra high net worth clients who pay the top marginal tax rate. James Packer famously managed to avoid a hefty tax bill a few months ago, no doubt aided by his large financial advice team and a bevy of smart accountants. Lady Mary Fairfax is currently facing scrutiny over her family's tax affairs. Now the tax man is widening his net to catch out extremely wealthy tax avoiders. The Australian Taxation Office (ATO) has identified 216, or 35 per cent, of the 601 highest-paid executives of the top 160 listed companies who earn more than $1 million each year. The ATO says they have lucrative employee share plans through which it believes they could be breaching their tax obligations.
The ATO is also cracking down on SMSFs that don't play by the rules by tripling its number of compliance staff. Meanwhile, Operation Wickenby is looking closely at Australians with large amounts of capital in offshore tax havens to flush out tax cheats. Despite the ever-looming figure of the tax office, the future for advisers with the skills and contacts to service high-end clients has never looked brighter, as more dealer groups clamber to get a piece of the action and established players compete for the lucrative business.
