What Does Investment Portfolio Management Do For High Net Worth Individuals and Families?

What Does Investment Portfolio Management Do For High Net Worth Individuals and Families?

By
Savvy
|
August 6, 2024

For high net worth individuals (HNWIs) and families, managing substantial wealth requires sophisticated investment portfolio management strategies that go beyond what the average investor needs. HNWIs, defined as those having investable assets of $1 million or more14, face unique challenges and opportunities when it comes to preserving and growing their wealth across multiple generations.

Investment portfolio management involves creating a tailored plan for allocating assets across different investment vehicles and asset classes, with the goal of maximizing returns while managing risk in alignment with the investor's goals and values. For the affluent, this demands a highly personalized approach that takes into account their specific financial situation, family dynamics, and long-term objectives.

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Key Elements of High Net Worth Portfolio Management

Effective investment management for HNWIs encompasses several critical components:

1. Customized Asset Allocation

Asset allocation—the mix of stocks, bonds, cash, real estate, and alternative investments—is the primary driver of portfolio returns and risk12. For HNWIs, cookie-cutter model portfolios simply won't suffice. Their unique circumstances require bespoke asset allocation strategies that reflect their risk tolerance, time horizon, liquidity needs, and wealth transfer goals.

"No two HNW clients are alike, which is why customized portfolio construction is essential for aligning high-net-worth investment strategies with individual goals and preferences," notes Arete Wealth12. By optimizing asset location across taxable and tax-advantaged accounts, skillful portfolio management can enhance after-tax returns.

2. Sophisticated Risk Management

With more wealth comes greater risk exposure. HNWIs need robust risk management frameworks to navigate threats like market volatility, inflation, interest rate changes, geopolitical events, and regulatory shifts13. Stress testing, hedging strategies, and insurance solutions can help mitigate downside risk.

Effective risk management also involves diversifying globally across asset classes and investment structures. "Expanding investment portfolios beyond domestic borders can offer growth opportunities and risk mitigation through exposure to global markets," advises Long Angle13.

3. Access to Alternative Investments

Alternative investments like hedge funds, private equity, venture capital, and real assets can play a key role in HNWI portfolios, providing diversification benefits and return potential uncorrelated with public markets.12 19
"Alternative investments are any investment beyond the traditional investments, like stocks, bonds and cash. Such alternatives can provide a good counterbalance to traditional investments, because alternatives can react differently to market or economic stimulus," explains Watts Gwilliam & Company.4
However, these investments often have high minimums, limited liquidity, and significant complexity that requires specialized due diligence. "Family offices are emerging as viable alternatives for capital as other investment sources (institutional) have been constrained, resulting from persistently high interest rates and market uncertainty," notes Empaxis.15

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4. Tax Optimization Strategies

Minimizing tax drag is paramount for wealth preservation. HNWIs can leverage tax-aware investment management tactics like asset location, tax loss harvesting, and charitable giving to enhance after-tax returns.12 18

"Tax-efficient investing is a particularly important process for high net worth individuals who may face complex tax situations due to diverse income sources, multiple residences, and investment portfolios which may consist of a variety of financial assets," notes Hancock Whitney Bank.11

5. Integrated Wealth Planning

For HNWIs, investment management doesn't occur in a vacuum—it's deeply intertwined with all aspects of their financial lives. Integrating investment strategy with wealth transfer, charitable giving, and estate planning allows for a cohesive approach to building a lasting legacy.13

"Estate planning for HNWIs is a comprehensive strategy to protect and transfer assets efficiently. It may include setting up trusts, gifting strategies, and charitable giving plans," advises Paraclete.3

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The Importance of Professional Guidance

Given the complexities of managing substantial wealth, HNWIs often turn to wealth management firms and family offices for guidance across investments, planning, and family governance.

"For annual fees in the millions, ultra high net worth investors enjoy complete investment management, far exceeding the generic target date funds or robo-advisors available to retail investors. This high-touch guidance helps them maximize returns on substantial capital," writes Prillionaires.16

In fact, in a survey done in 2022, 46% of HNWIs plan to change or add new wealth management relationships in the next 12-24 months, according to PwC research11. Key criteria for selecting an advisor include expertise with HNWI needs, breadth of services, personalized attention, transparent fees, shared investment philosophy, robust technology, and cultural fit13.

"Wealth management relationships with high-net-worth individuals are not as sticky as once believed," cautions PwC11. Firms that deliver digitally-enabled, hyper-personalized client experiences tailored to HNWI needs could be best positioned to attract and retain this coveted clientele.

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Trends Shaping the Future of HNWI Investing

As we look ahead, several key themes are influencing how HNWIs are approaching investment management:

1. Emphasis on Private Markets

HNWIs are boosting allocations to private equity, private debt, venture capital, and real estate in pursuit of diversification and return potential. "Family offices have maintained a consistent pattern of augmenting their allocations to private markets," with 41% planning to increase private equity fund investments, reports Empaxis.15

2. Sustainable and Impact Investing

Aligning investments with personal values is a growing priority. Over half of family offices have already invested in sustainable assets, with many aiming for fully sustainable portfolios by 202515. Strategies that integrate environmental, social and governance (ESG) factors can help HNWIs generate positive societal impact alongside financial returns.

3. Embracing Digital Assets

While cryptocurrency investing remains controversial, a growing contingent of HNWIs are testing the waters. 26% of family offices invested in crypto in 2023, up from 16% in 2021, according to Goldman Sachs research cited by Empaxis.

4. Preparing for Generational Wealth Transfer

Over the next 20 years, an estimated $84 trillion of wealth will transfer to younger generations in "The Great Wealth Transfer"15. HNWIs must get ahead of succession planning to prepare the rising generation to be responsible stewards of family wealth. This includes defining governance structures and engaging heirs early on.

5. Harnessing Technology and Data

Artificial intelligence and advanced analytics are transforming HNWI investing—62% of family offices are using or plan to use AI for investment analysis, risk management, and decision making15. Harnessing these powerful tools can enhance portfolio management and the client experience.

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Maximizing Wealth for Generations to Come

For high net worth investors, the stakes are high when it comes to managing and preserving wealth. By implementing sophisticated investment management strategies—from dynamic asset allocation to rigorous risk mitigation to savvy tax planning—HNWIs and their families can secure their financial legacy for the long haul.

In an increasingly complex and rapidly evolving investment landscape, access to specialized expertise and cutting-edge technology will be the key to success. 

Forward-thinking wealth management firms that stay ahead of the curve in delivering bespoke HNWI solutions stand to win the lion's share of this lucrative market.

Ultimately, investment portfolio management is both an art and a science. It takes a village of skilled professionals collaborating to craft an integrated wealth strategy as unique as each HNWI and family. With thoughtful planning and steadfast discipline, today's wealth can be a source of prosperity, purpose and family unity for generations to come.

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is an investment adviser representative with Savvy Advisors, Inc. (“Savvy Advisors”). Savvy Advisors is an SEC registered investment advisor. The views and opinions expressed herein are those of the speakers and authors and do not necessarily reflect the views or positions of Savvy Advisors. Information contained herein has been obtained from sources believed to be reliable, but are not assured as to accuracy.