Strategy

Turning Income into Capital - Wealth Managers Target High Earners

Emma Rees, 24 September 2007

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While traditional private banking tends to cater for those with substantial assets under management, increasingly the wealthy are making their fortune through savings from earnings. According to research by Ledbury on behalf of Barclays Wealth, around 70 per cent of the wealthy have amassed their wealth this way compared to 30 per cent who have inherited the majority of their wealth.

While traditional private banking tends to cater for those with substantial assets under management, increasingly the wealthy are making their fortune through savings from earnings. According to research by Ledbury on behalf of Barclays Wealth, around 70 per cent of the wealthy have amassed their wealth this way compared to 30 per cent who have inherited the majority of their wealth.

Whilst many private banks say that they are targeting City professionals and high earners, this often refers to clients who have already built up capital of several million pounds, rather than the low-capital high-income bracket:

"Those with high incomes who have yet to build up assets have specific needs and a huge amount of financial planning and most private banks still haven’t gone down the planning route," says Cath Tillotson, head of research at Scorpio Partnership.

"Creating plans for clients from scratch is time consuming and expensive – an independent financial advisor might charge £10,000-£20,000 ($20,200-$40,400) for this as a one-off exercise. For a private bank to do this as part of their services is a huge investment and it could take years to recoup through commission and other services."

The Route Group is a UK-based niche wealth manager targeting City professionals in the wealth creation phase in London and South East England with a set of products that aims to focus specifically on the needs of this group.

Route positions itself directly between IFAs and private bankers. Clients have anything from £250,000 to £10 million and are in their 30s to 50s. Clients – or members - include those in non-trader areas such as property, recruitment, senior management and law as well as, increasingly, those from an entrepreneurial background:

"Whereas the previous generation were focused on planning to meet liabilities, today’s movers and shakers are interested in what they will do with their lives after the City," says managing director, Mark Worrall. "We need a clear understanding of what our clients are trying to do with their lives, not simply 'how much' they need. It needs to be more about aspiration and less about income protection," he says.

Last year Route evolved from a more traditional IFA firm and following an analysis and segmentation of their client base, set about implementing a membership scheme for clients. Clients pay a fee of £2,400 per annum, which guarantees a minimum set of services in that year:

"There was some consternation at board level when we put forward the membership proposal," admits Mr Worrall, but he says it has had a significant and positive impact on Route’s relationship with its clients, which is now adding one new member a day and has around 300 members so far:

The Route Group’s strapline is "turning income into capital" and in order to help its clients to achieve this, it conducts a position audit - a more complete version of a KYC in which it obtains all data on a client. The client then gets sent a report which gives a consolidated view and provides the basis of strategy decisions, investment opportunities and how to mitigate as much tax as possible.

"We provide clients with reports every six months which present all of their assets and liabilities, so they know their exact position", says Mr Worrall.

Route group are not alone in helping clients grow wealth out of income.

"We believe that the longer we’ve been working with wealthy individuals the better, rather than ignoring them until they have £20 million," says Kunle Olafare, senior private banker, Kleinwort Benson, which also has a dedicated service for high earners and City professionals.

"For those with established wealth, it’s about wealth preservation, generating income and cascading wealth to charitable foundations and family. High earners’ financial needs are driven by income and concerns such as how to manage financially for a first or second child, how to buy the first place in Fulham, the second place in Notting Hill, the holiday home in Cornwall and the overseas home in St Tropez."

Mr Olafare says that wealthy lifestyles today require credit and borrowing arrangements:

"High earners with large six figure salaries often don’t have a lot of spare cash on a month by month basis as it goes towards funding their lifestyle; paying the nanny, the school fees and the mortgage. Many are reliant on their bonuses and work in high risk areas where there is a high chance of them losing their job, particularly when markets are as volatile as they are at the moment."

He makes the point that whilst it is easy to assume that high earners are risk takers, whilst it may be true in their professional lives, when it comes to their personal finances, they tend to be more risk averse.

"Many high earners have a ten year shelf life and they want to make their money work as hard for them as possible over those 120 months. They are often very family-orientated, not hanging out at Home House or buying the latest Patek Phillipe watch or the Aston Martin DB9. Priorities are often basic things like getting the mortgage paid off or down to a low level and planning for school fees. They might want to invest in themselves – take an MBA or a course at the LSE – or invest in a non-working partners’ business idea."

Mr Olafare says his clients include those in the entertainment and sports industries as well as those who work in capital markets and that he not prescriptive about who he takes on:

"It’s about potential. If we see someone and think that three years down the line their career will be flying, we’d like to provide them with advice on how they can increase their wealth through the income they’re earning."

Mr Olafare says that currency mortgage type products are popular, as well as offset arrangements where large savings can be offset against large borrowings whilst also being also tax-efficient:

"High earners like the flexibility of offset type products which means they can pay down the mortgage with their bonus rather than pay it off, meaning they can still access the money easily. High earners are time poor – a long meeting with them can be 20 minutes – and they don’t want to have the hassle of filling in forms to borrow more money when they need it."

School fees planning is also a key area and Kleinwort Benson can offer innovative ways of drawing down borrowing and let clients know how big their pot of capital needs to be to pay the school fees in the required number of years time.

The Route Group has also developed specific products for high earners. These include a bespoke mortgage solution which as well as taking bonuses into account when setting the maximum figure clients can borrow, has low sustainable payments for 11 months of the year. There is a single high payment timed to coincide with the month in which the client receives their bonus, leaving the monthly salary for school fees and other bills.

"Our clients also like networks and access to syndicated investments, such as private equity and small deals", says Mr Worrall. "Route also provides access to opportunities which as individuals, the high minimums would mean were inaccessible. For example the film fund we have just launched was an opportunity brought to us by a client and has proved popular as it provides a point of interest as well as an investment opportunity - the chance to go on set and the red carpet factor. Once you have got the car and the house, there are only so many ways you can spend the money."

Mr Worrall also points to schemes that enable paying less stamp duty on £500,000 plus properties and a "buy to let" property fund with quarterly trading days to provide liquidity:

"The very top earners demand sophisticated structures and we help them make more of the money they’re making."

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