Rich and restless

By Steven Lamb | April 13, 2006 | Last updated on April 13, 2006
3 min read

Advisors catering to the wealthy are facing a challenge — one that represents an opportunity to those looking to break into the affluent market: The wealthy are restless.

That was the key message from Keith Sjogren, director of strategy consulting at Investor Economics, speaking this week at the Strategy Institute’s tenth annual conference on Marketing Wealth Management Services to High Net-Worth Individuals.

According to Investor Economics research, the wealthy appear to have mixed feelings toward their service providers. By far the most commonly used channel is the full service broker, with 64% of survey respondents currently using one. But brokers also had the highest turnover, with 25% of respondents saying they had used one in the past, but did no longer.

Sjogren says full service brokers were even more commonly employed just five years ago, when the percentage of wealthy investors using their services was “in the high seventies.”

Discount brokers, investment counselors and financial planners were less commonly used, but also had much lower loss rates. For example, only 34% said they currently employed an investment counselor, while 15% said they had in the past but no longer did.

Having attained their wealth, the majority have rather conservative financial objectives, with just 38% focused on capital accumulation. More conservative goals, such as capital preservation and income generation, are the focus of 35% and 16% respectively, while 6% are most interested in tax minimization and 5% are concerned with debt reduction.

While full service brokers were acknowledged for the transparency of their fees, the wealthy are critical of the level of fees they pay, and question the value they get for their cash. It seems there can be such a thing as too much transparency.

Sensitivity to fees increases with age, understandable considering clients are likely taking a more conservative tack in their senior years and earning lower returns. Among those surveyed under the age of 50, 46% said they tracked the fees they paid for their financial services. That figure rises to 57% among wealthy investors aged 70 to 79.

The Investor Economics team is not counting the full service brokers out by any means, but believes they will face stiff competition from the banking industry.

According to Goshka Folda, senior consultant and managing director at Investor Economics, full service brokers will see the greatest growth in assets by 2014 and will rank as the top managers by assets. In 2004, these brokers accounted for $512 billion in wealth market assets, second only to branch-direct distribution, which held $548 billion.

But by 2014, Folda predicts assets under management of brokers will surge to $1.43 trillion, nearly double the $774 billion the branch-direct channel will represent. Combine that with an additional $619 billion in the branch-advice channel, and the banks will be very close to the brokers in terms of assets under management.

Folda says the Canadian wealth market was worth about $2.1 trillion by the end of 2005— not including real estate holdings, which total another $2 trillion in Canada. The downside for advisors is that the number of millionaires is growing at a slower rate than the number of financial professionals seeking them out as clients.

For the most part, the wealthy downplay the role financial planning played in attaining their wealth, with only 22% ascribing their success to this, according to research from Investor Economics. They are more likely to attribute their wealth to their choice of career (42%) or to their own hard work (41%).

One finding should come as a relief to the individual advisor however: Corporate brand means little to the wealthy, compared to the quality of the advisor. This loyalty to the individual was highest for full-service brokers, with only 22% of HNW respondents saying the brand mattered more. For investment counselors and financial planners, brand affinity rose slightly, to 25%.

The greatest brand loyalty at the expense of the individual advisor came in the insurance field, where 39% of HNW respondents viewed the brand as more important.

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Steven Lamb