“…Today in many ways, high net worth individuals (HNWI) walked right into the 2022 stock and bond market meltdown. Few made adjustments ahead of the 2022 bear market in the S&P 500. Investors now have lost nearly $12 trillion just this year and just from stocks, says Wilshire Associates. No other asset classes are helping much, either, other than cash. The whole situation doesn’t look good. So, according to the World Wealth Report, HNWIs demonstrated measurable interest in emerging asset classes – especially ESG and digital – and vocalized their desire for better digital and personalized offerings from WM firms…”
Topic of the week: what do the millionaires invest into?
Millionaires invested more than three-quarters of their money in stock, bonds, real estate and alternative investments, says recently-released World Wealth Report from Capgemini Research Institute. All four of these assets types are down an average of more than 15% over the past year. The only asset not falling apart, cash and equivalents, is only a 24% weight in multimillionaires’ portfolios. That’s down from 27% three years ago.
COVID-19 had minimal impact on global HNWI asset class selection in 2021. Investors adopted a wait-and-watch approach and a positive mindset as growth allocation (equities and alternative investments) remained on par with January 2020 at ~43-44%. However, yet to be seen is whether market corrections and geopolitical crises will push HNWIs to restructure their portfolios over time.
Well, you have to rely on various sources when you look at the asset allocation breakdown. And all the sources and respectable companies are usually grabbing their information from surveys. So you can get different asset allocation %, depending on the survey criteria and methodology.
For example we can have a look at the data from KKR (2021) and already mentioned Capgemini:
But today in many ways, high net worth individuals (HNWI) walked right into the 2022 stock and bond market meltdown. Few made adjustments ahead of the 2022 bear market in the S&P 500. Investors now have lost nearly $12 trillion just this year and just from stocks, says Wilshire Associates. No other asset classes are helping much, either, other than cash.
The whole situation doesn’t look good. So, according to the World Wealth Report, HNWIs demonstrated measurable interest in emerging asset classes – especially ESG and digital – and vocalized their desire for better digital and personalized offerings from WM firms. Family offices witnessed increased demand from HNWIs due to better life-stage understanding and emotional connections.
Globally, 55% of HNWIs say investing in causes with positive environmental, social, and governmental (ESG) impact is a critical WM objective. HNWI clients focus on potential ecological threats and ethical and practical corporate governance systems, followed by socially conscious business policies and practices.
- 28% of HNWI clients told their advisors they want theme-based investment products that support specific causes.
- 21% say they want to be able to screen out companies or industries with a negative ESG impact.
- 64% of wealth advisors say their firm offers SI (Sustainable Investing) products, and 20% of firms say they plan to provide sustainability options in the near term.
- 64% of HNWIs ask for an ESG score to know more about the fund’s societal impact and performance.
- 78% of Ultra HNWIs and 81% of HNWIs younger than 40 are likely to request ESG scores from their WM firm.
Capgemini Research Institute HNWI survey revealed that 71% of HNWIs globally have invested in digital assets, and 91% of HNWIs younger than 40 have investments in digital assets. Furthermore, they say cryptocurrencies are their favorite digital asset investment. Exchange-traded funds (ETFs) and metaverse investments are also sought-after digital assets.
Anyway, how do the rich make the decisions about their assets allocation?
Svetlana Bender, James J. Choi, Danielle Dyson and Adriana Z. Robertson have published an interesting article titled “Millionaires speak:What drives their personal investment decisions?” in the Journal of Financial Economics. Dr. Elisabetta Basilico did a great overview of that article.
What are the Research Questions?
By surveying a sample of 2,484 U.S. respondents, each of whom has at least $1 million of investable assets,18% of whom have at least $5 million, and 4% of whom have at least $10 million, the authors examine four categories of factors (investing in equities, concentrated stock ownership, cross-section of stock returns, and active equity investment managers), to find out what drives these investors’ investing decisions?
What are the Academic Insights?
The study finds the following:
#1
On average, respondents hold 53% of their portfolio in equities. Non-participation in equities is rare—only 6% of respondents hold no stocks. There is a strong home bias in respondents’ equity holdings: 83% of their stocks are U.S. Stocks. Only 10% hold any assets in hedge funds, venture capital, or private equity, but conditional on doing so, they allocate 13% of their portfolio to these funds. Professional advice, time until retirement, personal experience with markets, rare disaster risks, and health risks are the most important factors in determining their portfolio equity share.
#2
12% report that more than 10% of their net worth is currently invested in the stock of one and only one company, and an additional 3% report that more than 10% of their net worth is currently invested in the stock of each of two or more companies. A surprisingly high 67% report that their concentrated position has no effect on their total amount invested in equities; slightly more say that the concentrated position causes them to hold more in stocks than less in stocks (14% and 12%, respectively). Standard portfolio choice theory predicts that their total equity position should decrease. The belief that the concentrated position is a superior investment seems to be the predominant motive for foregoing diversification. In fact, 46% say it is the belief that the stock would provide higher returns on average while 33% answer it is the belief that it would provide lower risk.
#3
47% of respondents think that value stocks are less risky than growth stocks, while only 135 say the reverse. Consistent with a belief in a positive relationship between risk and expected return, respondents collectively believe that value stocks have lower expected returns than growth stocks, although with considerably less conviction: 24% say value stocks have lower expected returns, compared to 22% who say the reverse. Additionally, more people believe that high-momentum stocks are riskier rather than safer (28% versus 8%), and more also believe that high-momentum stocks have lower expected returns than higher expected returns (27% versus 10%). 34% believe that high-profitability stocks have higher expected returns—consistent with the historical data—versus only 11% who believe the opposite. 38% say that high-profitability stocks have less risk, versus only 8% who believe the opposite. Generally speaking, these responses cast some doubt on rational explanations for why these stock characteristics are associated with different expected returns. These results also challenge many prominent behavioral theories of characteristic premia. Models with non-standard preferences often assume that investors have rational expectations which are inconsistent with our respondents’ beliefs about how characteristics vary with expected returns. Theories with heterogeneous investor beliefs (perhaps sustained by overconfidence) fit these findings better.
#4
45% report that they had invested in active equity investing while 49% report that they had not, with a further 6% report being unsure. Those who answered positively cite the following as motivations: advisor recommendation (45%), higher average returns (44%), and hedging demand (23%). Additionally, 42% of respondents agree or strongly agree that past returns are strong evidence of stock-picking skill, but only 33% agree or strongly agree that there are decreasing returns to scale in active equity investment management. Overall, the pattern of responses suggests that a significant amount of active investing through funds by the wealthy is driven by a belief that they can identify managers who will deliver superior unconditional average returns.
One surprise that emerges from the study’s results is how similar the wealthy are to the average household in terms of their beliefs about how financial markets and the economy work, and in terms of the role of non-standard preferences in their decision-making.
Summaries
Tax bonanza!
Who: Spain government and wealthy individuals
What: The Spanish Government has confirmed the forthcoming tax changes, which are based on a general reduction in personal income tax for low incomes and more taxes on large estates. These measures will be included in the General State Budget for 2023. The so-called ‘solidarity tax’ (impuesto solidario) has been labelled “temporary”. The tax is not a tax on income, but rather on assets and holdings. In the Spanish press, the new tax has been described as a tax on “big fortunes”. This new tax will be applied in 2023 and 2024 and will consist of three brackets: between 3 and 5 million euros of net wealth, 1.7%; between 5 and 10 million euros, 2.1%; and above 10 million euros, 3.5%. For example, if an individual who is a resident in Spain has €3.5 million in worldwide assets, then they will likely pay 1.7 percent on the €500,000 which is above the €3 million threshold. If they have €7 million, then they will pay 2.1 percent on the €2 million extra that’s above the €5 million threshold. At the same time, the Government will raise the taxation of capital income in personal income tax of over 200,000 euros by one point, to 27%, and for capital gains of over 300,000 euros, it will be raised to 28%, two points more.
Where: Spain
When: Will be applied in 2023-2024
Why:
- This is an attempt by the country’s left-wing government to help people in Spain weather the economic storm of the cost-of-living crisis. Spain needs funds to pay for social policies amid soaring inflation. Many consider it a ‘populist’ step ahead of next year’s elections.
- According to the government, new tax will improve public revenue by some 3.14 billion euros over the next 2 years and that money will serve the needs of the public.
- It’s about control over regions. In Spain, regional governments have the power to increase or decrease certain tax rates. In right-wing controlled regions, tax cuts have been made for the wealthy in recent weeks. This approach, Montero said, amounts to unfair ‘tax dumping’ and fiscal ‘populism’ made with an eye on upcoming elections, and many in Spain feel that the new millionaire tax aims to cancel out such regional tax cuts for the rich, as in the case of Madrid and Andalusia where wealth tax has been scrapped entirely.
- Spain is the only member of the European Union with a wealth tax and would become one of the first countries to target the rich to offset the cost-of-living crisis. Other countries will think about taking the same steps and will watch carefully how new tax affects wealthy people and whenever it will cause the capital run.
- Spain should strive to “attract wealth and investors instead of kicking them out,” said Alberto Feijo, Popular Party leader and a potential contender for the post of prime minister in Spanish elections in late 2023.
And it is not only about the rich, but it’s about famous, dead and respectful too
Who: Department for Business, Energy and Industrial Strategy (BEIS), Queen, Information commissioner
What: Late monarch used a secretive financial facility to hide from the public the shares in commercial companies that she owned, along with the value of those shares. The Queen successfully lobbied the government to alter proposed legislation to prevent her shareholdings from being disclosed to the public. As a result of her lobbying in the 1970s, the government created a state-backed shell company, Bank of England Nominees, which appears to have kept secret the Queen’s private shareholdings and investments for more than three decades. The shell company, operated by senior individuals at the Bank of England, was set up in 1977 to hold royal investment. This vehicle, relevant trustees and investment managers and certain members of the royal family were granted an exemption from the requirement to disclose an interest in a company’s shares. Bank of England Nominees appears to have kept secret the investments of the royal family until at latest 2011. The company was wound up five years ago. In 2020 the Guardian submitted a freedom of information request to BEIS for copies of these annual reports of Bank of England Nominees. The department has failed to respond. Now Information commissioner demand to respond until the end of October.
Where: UK
When: BEIS has until end of October to respond to request from information commissioner or risk being taken to court and face contempt of court proceedings.
Why:
- Documents obtained by the Guardian show that other members of the royal family were able to use the same company to conceal their investments in companies. So it may be the mechanism for tax evasion. But does the royal family pay taxes? According to the royal family’s website, “The Queen pays tax.” “In 1992, The Queen volunteered to pay income tax and capital gains tax, and since 1993 her personal income has been taxable as for any other taxpayer. The Queen has always been subject to Value Added Tax and pays local rates on a voluntary basis.”
- Although the initial reasoning for secrecy was not about taxes but it was build around the idea that the revelation of Queen’s holdings in certain companies to “any person would be embarrassing”.
- Accumulated secret wealth from investments may amount to hundreds of million dollars.
- Unlike the better-known procedure of royal assent, a formality that marks the moment when a bill becomes law, Queen’s consent must be sought before legislation can be approved by parliament. Consent process, which gives the Queen and her lawyers advance sight of bills coming into parliament, has enabled her to secretly lobby for legislative changes. Some people want to prevent that happening in the future.
- It is also not only about Royal family. If the government is in the power to exempt certain companies from the requirement to declare the identities of their shareholders that in theory can be used for the benefit of a variety of wealthy investors. It can cover, say, heads of state, governments, central monetary authorities, investment boards and international bodies formed by governments. People want more transparency, not less.
What about Queen’s inheritance tax?
It is unlikely that the Queen will have to pay inheritance tax on her estate. Inheritance tax is usually charged at 40% of the value of an estate over the usual allowances. “Usual allowances” are the individual allowance of £325,000 and up to £175,000 where there is a residence left to children/direct descendants; plus any unused allowances which can be transferred from a pre-deceased spouse. The Queen’s Sovereign wealth is actually “owned” by the UK as a nation and is therefore exempt on the basis it isn’t owned by the monarch and can’t be sold or transferred. As regards her private wealth, a “Sovereign to Sovereign” deal agreed in 1993 with John Major’s government, provided that any assets left by the current UK monarch to their immediate successor would be free from inheritance tax. The agreement is recorded in “Memorandum of Understanding on Royal Taxation”, which makes for some quite interesting reading. The rationale behind the deal is to prevent the erosion of the monarch’s private wealth. It preserves the Sovereign’s financial independence from the government of the day and compensates them for not being able to make an independent living. In addition, it records that some of the monarch’s private assets are used for official functions, e.g. Sandringham and Balmoral. The exemption however applies to all the Queen’s wealth – not just those used for official functions and so would apply to her own money, art, jewellery, racehorses etc.
Links to consider
- Has the rise of indexing made active outperformance even harder?
- Guiding Clients To Design Their Rich Life With A Focus On Spending Dials Not Goals, With Ramit Sethi
- Wealth Manager vs. Financial Advisor: What’s the Difference?
- Government support and culture shifts drive Japan’s PEVC growth
- Listen to analysts, not management
- Why ESG is fatally flawed
- Softbank: Twilight of an Empire
- Crazy rich relocations: Singapore becomes a haven for Chinese elite
Infographics
Quotes
Books that caught our attention this week
Oldies but goodies today on psychology of the rich and the art of selling to them.
The Wealth Elite: A Groundbreaking Study of the Psychology of the Super Rich
by Rainer Zitelmann
What makes the super rich tick? Is there a specific mindset that sets ultra-high net worth individuals apart from the rest of us? Are they meticulous planners ― or is their wealth an unintended by-product of their entrepreneurial activities? Is it nature or nurture that sets them on the path to great financial success? This book represents one of the most comprehensive modern-day studies of the super rich. Based on interviews with members of the financial elite, and rigorous academic analysis, this empirical study investigates the link between personality traits and the creation of enormous wealth. In short, the book provides a fascinating insight into the world of the super rich ― and how they think, behave and make their fortunes.
Publisher: LID Publishing
Language: English
Hardcover: 422 pages
Luxury Selling: Lessons from the world of luxury in selling high quality goods and services to high value clients
by Francis Srun
Srun shows how the psychology of luxury brands truly plays into high value customer motivations and unlocks the potential to understand their decision processes which are unlike that of any other customer. Selling to very wealthy, demanding customers – whether you’re selling luxury products or high value bespoke professional services – is a very different process to selling anything else to anyone else. You need to truly understand your client. High value customers today are younger, international in outlook and residence, and increasingly from Asia. Their buying motivation is always about self-affirmation and pleasure and never about money. The luxury customer’s decision process is unlike that of other customers. While emotion is important when selling anything to anyone – with luxury selling it is paramount. Srun shows how the psychology of Brand, Product, Place, Price and Time all play a role in customer’s motivations. Finally this book guides you step by step with concrete examples and useful techniques through the seven steps of luxury selling: be prepared to sell, welcome appropriately, listen genuinely, propose and present with style, meet objections with persuasion rather than refutation, conclude sharply and finally gain loyalty for a long term relationship.
Publisher: Springer
Language: English
Hardcover: 256 pages
The Art of Selling to the Affluent: How to Attract, Service, and Retain Wealthy Customers and Clients for Life
by Matt Oechsli
Much has changed since the original The Art of Selling to the Affluent was published. The financial crisis has affected the affluent as well as the less affluent. This book brings you up to date with today’s affluent and helps every salesperson understand what adjustments need to be made in order to successfully attract, service, and retain lifelong affluent customers and clients. Completely updated and revised, it is based on The Oechli Institute’s latest 2013 comprehensive research. The Art of Selling to the Affluent offers a detailed landscape of affluence today. Get ahead of the competition by understanding how the Great Recession has shifted the mind-set and where the opportunities are moving forward. The affluent work hard for their money. Now it’s your turn to work hard in order to win their trust and their sales.
Publisher: Wiley
Language: English
Hardcover: 256 pages
Selling Luxury: Connect with Affluent Customers, Create Unique Experiences Through Impeccable Service, and Close the Sale
by Robin Lent and Geneviève Tour
Selling high-end luxury creations requires a different set of skills than does traditional selling. Clients have high expectations for the service they receive and base their purchasing decisions more on emotion and desire than practical need. Whether you are selling diamond bracelets or sports cars, the key to concluding the sale lies in how well you sell rather than what you sell. In Selling Luxury, Robin Lent and Geneviève Tour explore every component of luxury sales and offer proven, practical strategies for connecting with customers. Rather than sales associates, the luxury market calls for “Sales Ambassadors” who represent the brand with distinction. Sales Ambassadors understand how to connect with customers by discovering their unique motivational desires. This requires a multitude of specialized skills: passion, perseverance, empathy, daring, and curiosity. Through personalized service each and every time, Sales Ambassadors are able to build trust, brand loyalty, and lasting customer relationships.
Publisher: Wiley
Language: English
Hardcover: 176 pages
Photos
Apocalypse Wow? These Insane New Bunkers Let You Build a Complete Luxury Home Underground. Your panic room now comes with a private pool.
When the zombie apocalypse finally arrives, ask yourself—where will you hide out when everything goes down? Robb Report writes, how one company believes it has an appealing solution—and it comes with all the comforts of a five-star hotel.
Oppidum, a supplier of fortified underground residences, has unveiled its new L’ Heritage bunkers, for people who want to live lavishly—even if the world is coming to an end. The bunkers, designed by French architect Marc Prigent, aim to provide a secure location for ultra-high-net-worth individuals their close circle during what the brand described as “unprecedented times”—without sacrificing the comforts of their homes.
Bunkers attached to luxury homes are nothing new, of course. Oppidum’s bunkers, however, aim to offer a complete home and business environment. To achieve that, each offers over 10,000 square feet of space. In addition, the posh residences can be customized to the owner’s tastes, with the option of choosing to add extra facilities such as a private art gallery, a garage big enough to house your entire collection, meeting lounges, an indoor garden and even a spa with a private pool along. Not to mention enough bedroom suites to accommodate everyone in the family.
Because these bunkers are made for the end times, security is the thing. That starts with the entrance: Fortified blast doors are controlled by a multi-biometric meter that simultaneously scans the face, iris, palm and fingerprints, only you and your designated loved ones can get it. In addition, all of the residences come equipped with an integrated complex security system with military-grade protection. Even better, every bunker offers off-the-grid operations so you go underground in more ways than one.
“They are places of serenity and absolute safety for owners and their families. We are privileged to offer our clients the highest levels of service, creating beautiful places that will protect them and their legacy for generations to come,” says Jakub Zamrazil, founder and CEO of Oppidum, in a press statement.
The bunkers come with different options for short and long-term stays, and are available for commission across the EU, USA, UK and UAE.
