Achieving millionaire, or even billionaire status, is something many of us have dreamed about. There are a multitude of ways to achieve this level of wealth. Currently, many are investing their money in building a business and making their entrepreneurial dreams come true as a way of achieving their desired wealth. When someone is successful in a wealth venture, their stories are usually well documented by the media and through autobiographies. It is rarely mentioned how they invested their money once they have achieved high-net-worth individual (HNWI) status.
Whether you are just getting started or have already achieved millionaire or billionaire status, we can all learn from what these smart and successful people are doing with their money. (For more, see: 6 Investing Mistakes the Ultra Wealthy Don't Make.)
Defining a HNWI
What makes someone someone a HNWI? According to the Capgemini World Weath Report, a HNWI is someone who has investable assets of $1 million or more, excluding primary residence, collectible, consumables and consumer durables. The growth of this particular segment has been robust to say the least, more than doubling in the last eight years. In 2016 the U.S. HNWI population grew 7.8%, to 5.2 million people, compared to 2% in 2015.
The growing population of young HNWIs is driving how wealth managers interact with and cater to the needs of these people. They are not investing like their parents and grandparents did. They have different needs and perspectives on how they should interact with their money, especially for those that made their money through risky ventures like starting a company, investing in real estate or playing the markets.
Behaviors of Younger HNWIs
It is interesting to see the divergence of younger HNWIs from their predecessors. They have steadily increased their ranks and are now able to demand more from their wealth managers than their parents and grandparents did. Younger HNWIs are also exhibiting lower trust and confidence in both their wealth managers and firms they represent.
A lot of advisors may see this as a threat to how they do business. It's a breath of fresh air for me. The financial planning industry is a service sector and should be laser focused on what the consumer is asking for. Adapting with new technologies, ways of conducting meetings, and being specialized are some of the ways wealth managers can differentiate themselves to provide the experience that younger HNWIs want, and frankly, deserve. (For more, see: 10 Common Traits of Wealthy Investors.)
Younger millionaires and billionaires are demanding more sophisticated financial planning services, including a preference for a robust digital experience. They are looking for wealth managers that truly have an understanding of what their needs are, with a higher propensity to leave that wealth manager for a new relationship if they didn’t.
Younger millionaires and billionaires are expecting more specific wealth management needs that is setting them apart from their older counterparts. They see their financial situations and investments as more complex and global in scope. They are seeking wealth managers who look at things on a global scale, while also engaging the expertise of other experts to give them more customized solutions for their financial needs.
While wanting more comprehensive and customized solutions younger HNWIs are also looking for lower cost, digital experiences. Combining robust financial planning teams with the leverage of outsourcing automated investing services is the model they are tracking towards.
It is interesting to note that younger millionaires and billionaires are most concerned with:
- Rising education costs.
- Ensuring their children’s well-being should something happen to them.
- The availability of higher education.
- Access to credit.
How Do Young Millionaires and Billionaires Invest?
They do the opposite of what they used to do. Most HNWIs created their wealth by taking calculated risks, which eventually paid off. I have noticed that once wealth has been achieved, these same risk takers are now actually a bit risk averse. This may at first glance surprise you because entrepreneurs are known as risk takers.
Once they have a lot more money in the bank they tend to look at taking risks differently. They know what it took to achieve the success they now enjoy. Their perspective and appetite for risk changes.
Although each person’s situation is different, here are some common places I have seen young HNWIs invest their money:
Cash: Yup, I said cash. Although they aren’t making much on this money, it is safe and liquid, giving them peace of mind and also the option to invest in a new opportunities.
Tax-efficient investments: Ever heard the saying, “More money, more problems?" Just because you have more money doesn’t mean your problems go away. They just change and sometimes get bigger, like taxes. Investing in things like municipal bonds, cash-value life insurance, real estate and Roth IRAs can help make for a more tax-efficient investment portfolio.
Startups: Entrepreneurs that made their money by starting, scaling and eventually selling their business know just how hard that journey is. They tend to set aside some money to invest in private placements of startups that they would like to support, both from a financial and strategic basis.
Real Estate: Although not as popular as other options, there are certainly benefits from investing in real estate like depreciation and cash flow.
Alternative Investments: Lots of younger HNWIs are actually somewhat opposed to straight up investing in U.S. equities (stocks) - thus the appeal of alternative investments like commodities, hedge funds, derivatives and foreign currency.
The Road to Wealth
There are virtually endless ways to become wealthy: start a business, build an app, invest like Warren Buffett, inherit money or win the lottery. What is the common thread?
Regardless of how someone created their wealth, I have noticed the ones that keep it eventually leverage the power of financial planning strategies to pull their entire financial life together and to ensure that they are managing their wealth in a way that lets them enjoy life, pursue their passions, give back to society, and take care of those important to them.
The ones that did this sooner were more prepared and better positioned for the transition to being wealthy. The best part of the financial planning process has nothing to do with financial planning. It starts with the fun stuff - your hopes, dreams and goals. Your financial plan is simply the roadmap to help you realize them. (For more from this author, see: Sudden Wealth: How to Handle a Cash Influx.)
Source: How Young Millionaires Invest Their Money
