Alan Shields says high-net-worth clients are becoming more willing to take on risk, and this could lead to greater competition among advisers.

As consumer sentiment in Australia picks up, interest rates rise and the financial crisis seems all but over, Australian high-net-worth investors (HNWs for short) are starting to feel more confident about taking on risk. However, the losses of the financial crisis have had an impact, and it is likely that HNWs will have a more conservative investment outlook for some time yet. Retail Financial Intelligence (RFI) and the Australian Private Banking Council (APBC) have conducted a number of surveys since September 2007, which give insight into changing HNW perceptions of investment and risk over the course of the financial crisis.

Working to maintain wealth

As part of the APBC surveys, we have asked HNWs what they see as their primary investment goal. The dramatic changes in responses highlight the changing attitudes towards risk and wealth management over the past two years. In September 2007, just before the onset of the global financial crisis, HNWs were most likely to identify either capital growth or wealth accumulation as their primary investment goal, with 37 per cent nominating capital growth and 30 per cent nominating wealth accumulation. Conversely, just 17 per cent nominated wealth preservation, while 16 per cent said they invested for an income stream. By March 2008 attitudes had changed dramatically, with 28 per cent saying that their primary goal was wealth preservation and just 19 per cent nominating wealth accumulation.

Between March and September 2009 economic indicators and general consumer sentiment improved, and with this general shift in outlook HNWs were also changing their outlook. However, while the proportion of HNWs focusing on wealth preservation decreased between March and September 2009, the proportion of HNWs looking for wealth accumulation also decreased. The highest proportion ever, 43 per cent, of HNWs stated their primary goal was an income stream. It is not surprising that HNWs are increasingly looking to their investments to provide income. It signifies a deeper shift in attitudes, away from the extremes of boom or bust and toward a cautiously optimistic outlook.

Cautiously optimistic about risk

As the financial crisis hit and then worsened over 2008, HNWs increasingly stated that they were not willing to allocate any of their assets toward riskier investments for higher returns. With the collapse of several high-profile investment banks, such as Merrill Lynch, risk was at the forefront of investors’ minds. But with the relative stability of the Australian banking industry, as well as sustained increases in the sharemarket, the emphasis is shifting back from “risk” to “return”.

In March 2009 the proportion of HNWs who stated they would not allocate any of their assets to higher-risk investments for higher returns was at an all-time high of 29 per cent; but by September, this had fallen significantly, to 13 per cent. While this is still higher than the 6 per cent seen in September 2007, it is still lower than at any point since the financial crisis began. The increasing willingness of HNWs to take on risk for a potentially higher return shows a turnaround in attitudes and optimism about the future of investments.

Future asset appeal

In the March and September 2009 surveys we asked questions around the appeal of various asset classes for HNW investors. When asked which asset classes they were likely to invest in over the next 12 months, shares saw the biggest increase. In particular, Australian shares were very popular, being the most likely asset class for HNWs to invest new funds into in both March and September 2009, and seeing a large increase in likelihood of investing over this period. This popularity is likely to be driven by the strong performance of the Australian sharemarket, with the All Ordinaries gaining more than 1000 points in that period. International shares were also increasingly popular, although HNWs were not particularly likely to invest in them; and the appeal of residential property decreased.

Future behaviour

Australian HNWs are increasingly confident and willing to take on risk, presenting an opportunity for private client advisers to reach HNWs as they invest new capital, offering them advice backed by experience and understanding. In terms of investment preferences, as the sharemarket remains stable, shares will become an increasingly popular asset class. Advisers linked to domestic retail banks are likely to face increased competition as HNWs become less focused on stability and happier to take on risk.

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