Diversification is key to wealth preservation and business owners should invest in a range of complementary assets, such as stocks, bonds, and alternative assets.
New businesses in the UK are emerging faster than ever before — and as a result entrepreneurial wealth continues to grow.
In 2018, there were 663,272 company registrations — a record high — according to data from the Centre for Entrepreneurs1 (CfE.) That figure was up almost six percent from the previous year, with the CfE describing London as “Europe’s leading startup hub.” Revenue from the UK’s small and medium-sized enterprises now totals £2 trillion, according to the British Federation of Small Businesses.
Some Millennial entrepreneurs have already grown their business to the point where they want to seek professional financial advice. “What I’ve seen so far is surprising, in that many are reaching out to traditional wealth managers,” says Matthew Hunter, associate director, relationship management at RBC Wealth Management in London.
Perhaps motivated by economic uncertainty, high-net-worth individuals (HNWIs) are looking to professionals for trusted advice as they position themselves for change. Four-in-five (83 percent) of those surveyed by The Economist Intelligence Unit (EIU), commissioned by RBC Wealth Management, say it’s more important than ever to future proof their nest egg.
The New wealth rising survey, which targets HNWIs, adult children of HNWIs, and high-earning professionals across the UK, U.S., Canada, China, Hong Kong, Singapore and Taiwan, looks at the shifting landscape of global wealth, what it will be invested in and who is investing.
Globally, 62 percent of investors surveyed say it’s now harder to preserve or attain wealth than it was a generation ago. Additionally, 76 percent say today’s market requires investors to be far more flexible and responsive in their investment strategies.
In the current economic climate, the future success of these new businesses could hinge on the strategies adopted in their early days. Business owners, in particular, present complex personal wealth challenges as much of their net worth could be tied up in their entrepreneurial endeavours.
These successful, new business owners broadly come in two types, says Nick Ritchie, director, wealth planning, at RBC Wealth Management in London. The first group of business owners are those who are akin to accidental entrepreneurs, Ritchie says. “They set up a business, from which they comfortably generate a lifestyle income, but … the business suddenly grew exponentially,” he says. As a result, they had an unexpected amount to invest. In this case, they’re more interested in preserving their wealth and they are less likely to take another chance on a new business startup.
In addition to the accidental entrepreneurs, there are those who look to follow in the footsteps of technology giants such as Facebook and Netflix. “They’ve grown up seeing the startup tech companies get multi-billion-dollar valuations,” says Ritchie, and they’re ambitious to do the same.
This second set of entrepreneurs had a vision of becoming tech innovators. This group is more likely to launch another startup and use the money from the first success to fund it. “The challenge with these clients is offering an unbiased sounding board and explaining why they shouldn’t invest every last penny into their next business venture,” he says.
What do the fortunate people in either of these groups talk to financial professionals about? The conversations usually centre around their future and what they want out of life.
Around half (44 percent) of investors surveyed in the UK say conserving wealth is a primary investment goal.
“Where we see more engagement is when we have a goals-based conversation,” says Ritchie. Those discussions revolve around likely life expectancy, future careers and the desire to leave a legacy to the next generation. Ritchie says the conversation follows a similar theme: “You’ve got X amount of money, you’re of the generation where you are going to live to a hundred years, so let’s discuss how to future proof your wealth.”
The goal-setting part of the process becomes the foundation for how the money gets managed. The client’s desires and needs will also inform what tax planning may be deployed, as well as, the broad structure of the wealth plan. Then, based on that information, the clients and advisers start to consider an investment strategy.
These conversations are often the start of significant changes to the asset holdings of the entrepreneur. Frequently, entrepreneurs have bet everything on their business, but now they have an influx of cash as well.
According to The EIU data, 72 percent of investors in the UK agree today’s market requires flexibility and responsiveness when it comes to their investment strategies.
“Generally, they will have property, such as a house or flat, and a lot of the rest of their wealth is in the business,” says Ritchie. That’s different from how things were for older generations, who might have grown wealthy slowly over decades, perhaps receiving regular dividends from their business, which was then invested in stocks and bonds.
Despite many younger investors having never seen their own wealth diminish during a major market crash, they still see a need to diversify assets. “We’ve noticed a consideration not just for how to make even more money, but also how do I preserve what I have received and diversify prudently and plan for the future and the next generations,” says Charles Lewis, head of the UK discretionary investment management business at RBC Wealth Management, based in London.
Diversification of assets is key to wealth preservation. It means holding many types of complementary assets, such as stocks, bonds, and alternative assets in a portfolio rather than having everything invested in the business.
That sentiment is reinforced by The EIU research, which found 30 percent of younger* HNW investors in the UK say they are active with hedge funds. Younger generations in the UK say they also invest in private equity funds (23 percent) and real estate (25 percent).
These entrepreneurs and business owners are keen to learn more about how investments are selected. “Younger business owners are often new to the investment process and guidance is key,” says Lewis. “We see an appetite for education and engagement on the journey.” He says that’s a change from the past. “It isn’t a question of ‘I’ve just made ten million pounds, now what stock do I buy,'” he explains. Often, these next-generation entrepreneurs are discovering new ways of investing in financial markets.
When it comes to preserving wealth, entrepreneurs often crave peace of mind. They want whatever wealth they’ve accumulated to be of zero concern. This allows them to focus on other important things. “One of our jobs is to allow them more time to concentrate on their business affairs and families, and to make their life easier,” says Lewis.
1The Centre for Entrepreneurs is the UK's leading entrepreneurship foundation, delivering research and entrepreneurial development programmes.
*Younger generations are defined as Gen Z, Millennials or Gen X (18-54 years old) and older generations are defined as Baby Boomers and those in the Silent Generation (55 years+)
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