Investment mind-set of the ultra-rich – what can Joe Average learn?

Frik van Wyk, wealth manager at Sanlam Private Wealth.

Ordinary South Africans often look to the investment behaviour of the ultra-rich in the hope that some of this success may rub off on their own efforts at growing their wealth. The widely held belief that the seriously wealthy are all financial ‘cowboys’ who pursue high-risk investment strategies at any cost is far from the truth, however. Depending on how they made their money in the first place, South Africa’s high net worth individuals appear to have very divergent investment mind-sets and approaches to managing their wealth.

“It’s all about control, or rather, the fear of losing control – of either the wealth itself, or of the investment decision-making process, or as a result of the transfer of assets from one generation to the next,” says Frik van Wyk, wealth manager at Sanlam Private Wealth.

By 2014 estimates* South Africa has around 48 000 high net worth investors – people with R10 million and change in investible capital – who sport their high net worth ‘stripes’ at wealth and private client managers countrywide. And this number is growing.

Van Wyk says Sanlam Private Wealth has identified three general categories of high net worth investors:

• Entrepreneurs. Self-made millionaires are generally thought of as risk-takers, people who are prepared to lose money in order to ensure substantial gains at a later stage. “Contrary to what one would expect, these individuals are not prepared to take the same risks with funds they want to invest. They are often wary of handing over control of the investment decision-making process to wealth managers. They don’t want to lose anything, and generally seek preservation of their capital plus some performance,” says Van Wyk.

Entrepreneurs tend to think in terms of short-term turnover rates, and sometimes need to be made aware of the importance of long-term investing, diversification and how asset classes react, and investment cycles. “When it’s a bull market, everyone loves you. But the moment the markets fall, you tend to become a psychologist.”

• Individuals with ‘old money’ or generational wealth. For these individuals, safeguarding of wealth tends to be paramount, not only for themselves, but also for the generations to follow. But the ‘old money’ ultra-rich often do not want to relinquish control over the family assets, and it can be a challenge for wealth managers to remind them that they won’t always be there, and to guide them in transferring these assets in the most appropriate wealth-preserving structures.

“Our biggest work is often with the heirs to family fortunes, however. There is an old saying: ‘The first generation makes the money, the second enjoys it, and the third wastes it’. We find that this is true. Since the heirs didn’t build up the assets themselves, they often need to be taught the principles of wealth management, including financial discipline.”

• Professionals and corporate executives. Depending on their life stage, professionals such as doctors, lawyers and engineers are more inclined to take on some risk in order to see their wealth grow. “In the main, they are prepared to hand over control of their assets to their wealth managers to facilitate this growth. Whereas they may be brilliant at what they do, they often don’t have the necessary financial skills to make the decisions themselves.”

Corporate executives on the other hand are sometimes reluctant to lose control over the management of their wealth. “These individuals have always had to answer to someone else, no matter where they are in the command chain, so when it comes to their assets, they want to make their own decisions. Some take chances, listening to ‘advice’ dispensed around the braai, and lose money in the process. Our role as wealth managers is to guide them – not only towards a good retirement, but towards financial independence over the long term,” says Van Wyk.

So given that the members of jet set don’t approach wealth management and investment decision-making in a uniform manner, what can Joe Average learn from them? “The one thing most high net worth individuals have, is financial discipline. Your best recipe for riches is the discipline to invest regularly and the patience to give your investments enough time to unleash the magic of compounding.

“The ultra-rich are also not shy to get appropriate advice to steer their investment decisions. A good wealth manager will assist you with risk-appropriate investments and sensible asset allocation strategies to match your life stage, to ensure your assets will grow and be safeguarded over the long term,” concludes Van Wyk.