Helping suddenly rich clients stay that way

As niche advisory markets go, new wealth might be the ultimate sweet spot.

According to industry data, the ultra-high-net-worth segment of investors is pulling away from the broader consumer sector, and that's creating both opportunities and challenges for financial advisers.

The data show that last year, the number of Americans worth at least $25 million increased by 18% to approximately 252,000, which compares to 214,000 in 2020.

By comparison, the mass affluent category of investors, those with between $100,000 and $1 million, grew by just 2% over the same period.

Even with the dampening effects of inflation, an economic slowdown and the stock market correction, the trend of growth in the ranks of the uber wealthy isn't expected to reverse course anytime soon.

What makes this group so unique, aside from often having more money than they could spend during their lifetimes, is the high percentage of individuals who are experiencing this level of wealth for the first time in their lives.

According to the industry data, in 2020, nearly three-quarters of ultra-high-net-worth individuals created their own wealth, either through investments, employment or by selling a business. That’s up from 67% in 2017.

While this might all sound great to an adviser charging fees based on assets under management, first-generation wealthy can be among the most challenging client categories, said David Bokman, head of family office resources at Morgan Stanley Private Wealth Management.

“As we have more young entrepreneurs and investors that didn’t grow up with multigenerational wealth, it will have an impact on how they look at planning, perhaps differently than the advisers who might be accustomed to working with traditional multigenerational families,” he said.

Bokman and his team have been carving out a special focus on this category of new-money clients, which includes a 120-hour family wealth director program that comes with an internal designation.

While many of the distinctions and unique needs of clients with first-generation wealth might seem subtle, Bokman said the adviser’s work often begins with helping the client understand his or her relationship with wealth and money, which is the kind of thing that often comes up much later when dealing with people who grew up around multigenerational wealth.

“There’s a level of sophistication now being applied to an understanding of what your relationship is with wealth,” he said. “That’s a pressing question for every client with wealth, and that’s the kind of conversation that historically occurred much later in an adviser’s relationship with clients. We help clients understand if they don’t reflect on these issues early, it will impact them long term.”

One of the bigger areas of focus for these clients is philanthropy. as they realize that for the first time ever, they have enough money to potentially make a significant impact in areas they're passionate about.

“The people we’re talking about aren’t worried about how to handle retirement without running out of money, they’re worried about how to pass on this money and what does it mean,” said Todd Smith, a Morgan Stanley private client adviser based in Atlanta.

“It’s an arc of first being worried about what to do with the money that moves into more meaningful consideration of how to manage it for their families,” he added. “They are trying to understand the right way to structure their assets for the next generation.”

Smith, who has been in the wealth management business for 30 years, has almost 40 clients with more than $10 million worth of liquid assets, many of whom earned their money as entrepreneurs.

Bokman said advisers are trained to focus on four interconnected areas when working with these clients: Investments, estate planning, family dynamics and the relationship with wealth.

Mary DiChristofano, a Morgan Stanley private wealth adviser based in Chicago, said first-generation wealth can have a dramatic impact on family dynamics.

“When you think about someone who has created their wealth, whether through some stroke of luck or over decades, they’re different from someone who has inherited wealth because the asset is something they identify with,” she said. “Even if it’s a family business that has created the wealth, it’s not always every member of the family, because you might have a sibling that’s not involved.”

The dynamics among the family and extended family are a big part of the planning focus. Bokman explained, for example, that the best person appointed to oversee an estate or as a trustee isn’t necessarily the person who is most financially savvy.

“Sometimes, it’s more important to appoint the person who is more sensitive to family realities,” he said.

DiChristofano said the idea is to provide a broad enough perspective to help prevent a lottery winner syndrome, where wealth evaporates in short order.

“We are teaching wealthy people how to be responsible stewards of their capital,” she said. “Oftentimes families go from shirt sleeves to shirt sleeves in three generations. The family starts with nothing, the second generation grows the wealth, then the third generation spends the wealth, and the cycle starts again. Our goal is to break that cycle.”

Ned Gibbons, a Morgan Stanley private wealth adviser in Menlo Park, California, said he typically caters to first-generation wealth clients with $20 million or more in assets.

“All of our clients are first-generation wealth creators; they didn’t inherit or grow up with a lot of wealth,” he said. “Wealth creates lots of opportunities and complexity, but as wealth is created this is not a static experience, so sometimes it’s important to look forward to where the wealth is taking them.”

Gibbons said that unlike families with multigenerational wealth, the new wealthy don’t have a playbook to turn to.

“In this case, we’re starting with a blank slate, so they have the opportunity to consider things like philanthropy and how they want to help their children from a wealth standpoint,” he said. “It’s all part of their wealth journey.”