Politicians have been keen to emphasise the importance of entrepreneurs and their role in helping the UK economy bounce back, but as a new wave of business people improve the wealth of the country, who will look after their money?
Although market uncertainty has slowed the number of growing businesses that changed hands during 2012, a more optimistic market environment could prove to be the backdrop for more entrepreneurs selling their businesses to larger, cash-rich competitors.
Successful entrepreneurs are fast becoming the new high-net-worth individuals but, as they dedicate so much time to their businesses, the issue of what to do with their money remains. There are, of course, a number of options for the newly rich, such as private banks, wealth managers and independent financial advisers. The brave may even decide to manage their own wealth.
But with investors having seen their wealth shrink during the height of the market difficulties, professional advice is likely to be near the top of their priorities.
“To my mind, large clients of banks and wealth managers are entrepreneurs,” says Charlie Hoffman, managing director at HSBC Private Bank. “You only have to look at the rich list to see the seismic change in the wealth pattern for this country.”
Those wishing to capture entrepreneurs as clients will increasingly have to offer unique services
And yet time-pressed entrepreneurs often don’t prioritise their own wealth management needs as their business demands take over any free time they may have.
Dominic Gamble, co-founder of findawealthmanager.com, says: “The difficulty that wealth management institutions have in capturing entrepreneurs is that they tend to be inherently ‘un-entrepreneurial’ institutions. “Nothing gets done quickly and efficiently, it is a cumbersome admin and procedural business – the very opposite to the businesses that entrepreneurs run.”
Entrepreneurs need to think carefully about the kind of services they require from their wealth manager or private bank as the products and services available differ hugely. This may be considering whether they require investment or pension advice or whether they also need business services. More often than not, most organisations will be able to offer a range of products from mortgages to insurance, rather than just traditional investment services.
Those wishing to capture entrepreneurs as clients will increasingly have to offer unique services, however.
Mr Gamble asks: “Will they lend against business assets or private shares of the owners? Not many can do this. Will they provide SME M&A [small and medium-sized enterprise mergers and acquisitions] and corporate finance services? Not many can do this either.”
Other services provided by some firms may include non-financial services, which can offer entrepreneurs the chance to engage with like-minded people.
“Many of our clients are movers and shakers within the business world, and we see it as our job to connect them with the entrepreneurial sector,” says Stuart Cummins, managing director at Barclays Wealth and Investment Management.
“Some clients have created successful businesses themselves, and we use events to bring them together with new entrepreneurs who might be establishing their first start-up, allowing them to share energy and ideas.”
But where do entrepreneurs want to put their money? Philippa Gee, managing director of Philippa Gee Wealth Management, says many individuals are more than used to hiring a professional team around them.
She explains: “I find that not many have stopped to really look at what they want to achieve in their life and where they are. They have spent years looking at finance as products and not actually considering their ‘purpose’ which are two very different issues.”
Karen McCaffrey, managing director of JLT Wealth Management, agrees saying entrepreneurs often demand tailored services. “Generally, these individuals want sound advisory and execution support to help develop a successful and efficient investment strategy,” she adds.
“Most prefer bespoke products, as opposed to off-the-shelf solutions with the key to success being the ability to be both flexible and innovative.”
David Owen, senior investment director at Investec Wealth & Investment, says entrepreneurs are used to having a great deal of control over their affairs, so they like to know where their investments are going. “They want to see it, almost touch it,” he says. “Understanding that psychology from the outset is crucial.”
Mr Owen says understanding risk appetite is key when making any proposal to an entrepreneur. “By nature they will have an intuitive understanding of risk when it comes to their own business, having spent many years building the value of their businesses. A reappraisal of their risk appetite and how that sits with long-term returns is vital.
“There has been a significant evolution in the way investment is offered over the last decade. In an era of relatively high personal and inheritance tax rates, it has made much more sense to offer investment advice alongside advice about how to invest in a tax-efficient manner,” he adds.
One of the key challenges is to manage expectations in a low-growth environment, many wealth managers agree. As savers will be aware, the low-interest environment and continued uncertainty have put returns under pressure, something even the most risk-tolerant entrepreneur will have to accept.
“Entrepreneurs are accustomed to generating high returns from business, often in a relatively short space of time,” says Mr Owen.
“However our investment role is to manage capital over long-term cycles to grind out returns by understanding where we are in the capital cycle, and adjusting our asset allocation accordingly and managing return expectations.”
Quilter’s head of onshore branches, David Loudon, says: “Capital preservation is a common investment objective for many of our entrepreneurial clients. While they are quite used to taking risks in their business life, they often have a conservative and longer-term approach for the money we manage for them on a discretionary basis.”
However, for a group of people used to investing in their own businesses, the appeal of investing in another group of entrepreneurs might be strong.
“Wealth managers are recognising that many high-net-worth individuals and self-made entrepreneurs are choosing to directly control a proportion of their wealth to invest in a selection of businesses that really resonate with them,” says George Whitehead, head of the Octopus Venture Partners at Octopus Investments.
“Many are becoming angel investors, which is a growing phenomenon in the UK and no longer the reserve of a few rare dragons. Providing access to angel networks and encouraging angel syndicates is a great way of giving additional customer service to these types of clients.
“For them, it is as much about active engagement with a business, sharing expertise and contacts, as it is about making returns – although these can be significant.”
With a number of services and providers to choose from, it can be difficult for the entrepreneurial client to choose. Often personal recommendations can lead to introductions; however, there are a growing number of online services to choose from.
For those with an existing provider, there are also benefits in reviewing current arrangements to ensure that you are getting the right help and advice.
Ms Gee says entrepreneurs are starting to review their existing arrangements, following recent regulatory changes in the way financial advice is provided. She says entrepreneurs are increasingly willing to pay the money for professional services, particularly since the introduction of new regulation – the retail distribution review (RDR) – which has put a premium on “independent” financial advice.
“The retail distribution review had served as the opportunity for many to take stock on the position with their existing adviser, and I have found many have realised that they need to make a change and should switch advisers,” she adds.
With the focus on a smaller business-led recovery in the UK, it seems certain there will be more new start-ups in the years ahead, particularly as banks are actively encouraged to lend to these businesses.
And with the right financial backing and acquisitive larger companies, who have hoarded cash during the economic difficulties, we could see greater numbers of affluent entrepreneurs.