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Russian HNW investors want alternatives

The Russian wealth market has been evolving and maturing slowly but surely. The country’s millionaires are starting to show increasing demand for new types of services and products, including alternative investments.

International isolation following Western sanctions, the depreciating ruble, the volatile oil price (alongside the economic crisis in the country in general), and new taxation rules for controlled foreign companies (CFCs) … The list of challenges Russian HNW investors have had to face in recent months is long. All these developments have certainly kept wealth managers operating in Russia very busy. Quite paradoxically, they have also accelerated the wealth market maturing process, highlighting the importance of high-quality financial advice, which is often underestimated in young or emerging economies.

Having more than 53% of their assets invested offshore (as per our 2015 Global Wealth Managers Survey), Russian millionaires should appreciate proper estate structuring. No wonder that demand for wealth planning, including advice on tax matters and foreign investment property, has been rising and will continue to do so. HNW investors in Russia expect their professional advisors to deliver, and this includes hedging against unfavorable exchange rates fluctuations or increased tax authorities interest in CFCs.

Looking at the domestic front, Russian investors’ behavior has changed as well. Moving away from a volatile commodities market, they have shown increasing interest in alternative asset classes, more than doubling their allocations in alternatives between 2014 and 2015. The strong performance of hedge funds is the driver behind this trend, which according to Russian wealth managers will continue in the foreseeable future. Private equity is likely to gain in popularity as well.

Clearly, well-off Russians are in search for alternatives to how they have been investing and thinking about their wealth (another indication of this tendency is growing demand for inheritance planning). This is great news for wealth managers operating in the country as it will bring lots of cross-selling opportunities. Yet they should think long term, as Russian HNW investors will not be loyal to advisors who charge fees but then underperform.

By Bartosz Golba, Interim Head of Wealth Management

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