Understanding the HNW: Q&A with Keith Sjögren

(March 2008) Are you able to be both a specialist, a generalist and incredibly professional at the same time, all in the face of long business or sales cycles and intense, hyper-competition from institutions just dying to eat your lunch?

Not every advisor can pull it off. In fact, most can’t.

Of course those already in this space have a vested interest in saying as much — competition in this narrow but highly lucrative segment of the market is fierce — but even relatively objective observers like Keith Sjögren, director of strategy consulting with research firm Investor Economics, agree these advisors know exactly what they’re talking about.

If the first set of challenges weren’t enough, the even bigger hurdle to effectively serving the HNW set is developing a very unique assembly of skills, knowledge, network connections and expertise, along with a relatively unique approach, to meet the needs of a relatively small group of people who have more choices available to them than most other clients in the country.

Sjögren has been watching this part of the industry and tracking the opinions of HNW investors since 1999. Investor Economics, meanwhile, has focused on tracking the financial services industry as a whole since 1992.

At the moment the firm estimates there are approximately 470,000 households in Canada with more than $1 million in investable assets. Ten years ago, that number likely came in around 200,000. “The pool to fish from has grown considerably,” says Sjögren, and it’s projected to grow even further.

For more statistics and figures from Investor Economics, click here to read Big books: How does yours compare?

In a recent interview with Advisor.ca, Sjögren discusses HNW client needs, competition, the secret to running a successful HNW practice today and his thoughts about successful HNW practices in the future.

What does it take to build and maintain a big book of business in the past compared to today?
I think it was really persistence and almost a case of being in the right place at the right time. Persistence and the establishment of a high profile was important, as is being linked to the right type of firm that actually encouraged people [to pursue HNW business].

But I don’t think there’s any one factor. Certain people, I think, realized early on that they could find their niche in certain segments — it could be entrepreneurs, it could be corporate executives, it could be professionals. I think those advisors who realized that opportunity early on and refocused the strategy for their practice, I think they’re the ones who do pretty well.

What do you mean by persistence?
The sales cycle with high-net-worth investors is fairly long. It’s easy to get discouraged. I think those people who actually said I’m not going to be put off, or I’m going to target certain clients, gear my practice and develop a level of expertise in issues common only to high-net-worth individuals, they would do well.

Tell me about competition today.
I think competition for the high-net-worth is more intense than it ever was. You’re not just fighting other brokers, you’re fighting investment counsellors, family offices and the foreign element that’s beginning to appear in Canada — whether they’re Swiss banks or firms like Goldman Sachs.

Is that serious competition?
I think it is and I think it will be, particularly for the upper end of the market. The nature of competition has changed too. I think it means that advisors who want to build up these very large books have to be increasingly focused to ensure that they’re seen as experts in the field.

What’s technology’s role in all this?
I think technology has enabled these teams to function reasonably effectively, but I think, in the end, the high-net-worth client sees technology as a means to an end. They don’t see it as a replacement for the expertise provided by the advisor. It’s a people business. It hasn’t changed at all since then. If you ask the high-net-worth investor what they’re looking for, technology and [low] fees probably come fairly low. What they’re looking for is expertise, a broad vision and the ability to provide access to other experts in the field of wealth management.

Next: What sort of relationships do HNW clients want?

What sort of relationships do HNW clients want?
I don’t think the high-net-worth are a homogenous group at all. Literally, they are all different. I think it’s naïve to talk about the high-net-worth as if they all have similar characteristics, other than the fact that they’re fussy and they have choice.

Wealthy people have the ability to choose between a wide variety of investment providers. Somebody with a small RRSP probably doesn’t have much choice, but if you’re somebody with $10 million, you have a lot of choice, and they exercise that choice judiciously.

They [the HNW] are generally very successful people, successful for the reason that they understand risk and they understand the need to protect capital.

Some just want to get a statement that shows their investments are performing in the way they expected. Others have a far more involved relationship [with their advisor].

I think that’s one of the challenges for any advisor, to understand the type of relationship that the high-net-worth family wants. I think too many advisors assume that all wealthy people are the same. They all want the same type of relationship. That’s just not the case.

I don’t think enough advisors actually sit down with their wealthy family clients and ask, ‘What sort of relationship do you want to have? How frequently do you want to get together? When we do get together, what topics do you want to cover? Who in your family do you want to be involved?’

Is it that simple? Is it just a case of flat-out asking what they want?
It’s a case of being a good listener as well as understanding. It’s a case of viewing the family as the client; being sensitive to family issues. I get a lot of comments from individual investors who say, ‘Well, the guy just didn’t understand me. He was a good technician, he just didn’t understand me. He didn’t take the time. He was way too focused on my assets and not focused on me or my goals and objectives.’

I think those people who deal with the high-net-worth need to be good listeners and go well beyond the conventional to understand the client.

It sounds like there might not be a “typical” practice in the future if everybody wants something a little different.
I don’t know. I think you need to have flexibility. It’s unlikely that an advisor with a single focus is actually going to do that well with the high-net-worth. If you’re a guy who only promotes discretionary management or separately managed account programs and you don’t offer a wider range of services, by default you’re going to be limited to those high-net-worth clients who actually find that solution appealing. I don’t think people who are devoted to a single product or single solution are going to win necessarily.

It’s also going to be critical to be able to provide access to other experts. I think the high-net-worth client does not see the advisor as an expert in all things related to wealth management. I think they see the good advisor as an access point.

Next: HNW practices in the future.

Advisors providing access to other experts, do you expect to see more of that in the future?
I do. We’re seeing evidence of alliances being created by brokerage firms with insurance companies. We’re seeing links between brokerage firms and accounting firms who provide very extensive tax advice. The brokerage firms are not going to be able to do that on their own, but they do need to be able to provide access to expertise.

I think having an understanding of global markets is going to become increasingly important. I think access to things like private equity is going to be important in the future as well. We’re seeing a definite increasing in the interest high-net-worth families have in private equity.

You need to be able to understand those issues. You need to be able to deal with the interest they have in diversification and alternative investments. I think things like philanthropy are going to become a critical component. Advisors need to understand that a lot of the capital they manage, or some of the capital they manage, is going to be donated to various causes. How you give that money is going to become a critical issue, not just from a tax point of view, but from a timing point of view, and that involves family. You’re effectively saying ‘I’m not going to pass this wealth on to the family; I’m actually going to pass it on to the local hospital.’ It’s going to become a very important issue.

Just drive up University Avenue [in Toronto, and you'll] see that very wealthy people have been very generous. The people who are not in that snack bracket are also interested in being generous and giving back and they need advice. I think it’s going to be an area of considerable growth.

[Overall] I think it will take people who are really technically competent. I don’t think you’re going to be able to get away with surface knowledge anymore. I think high-net-worth clients are willing to pay full fee for full service and they’re willing to pay for exceptional technical competence, but I think they’re going to have an increasingly high level of unwillingness to accept the average or the mediocre. They realize they have choice and they’re going to exercise that choice.

Filed by Kate McCaffery, Advisor.ca, kate.mccaffery@advisor.rogers.com