From the August 2005 issue of Investment Advisor • Subscribe!

Serving Mid-Tier Millionaires

Individuals with between $5 million and $30 million can't afford family offices. Can you help them?

There's a growing segment of the wealthy that is ripe for the picking. This group is classified as the "mid-tier millionaires" because they have from $5 million to $30 million in investable assets. This well-to-do clan is growing faster than high-net-worth investors, the group with $1 million to $5 million in financial wealth. From 2003 to 2004, the number of mid-tier millionaires grew by 7.9%, while the high-net-worth set grew by 7.3%, according to the Merrill Lynch/Capgemini World Wealth Report.

But the mid-tier millionaires face a conundrum: they need the sophisticated products and services that their ultra-high-net-worth brethren get by setting up family offices, but they lack the assets to form one. Because this group has a host of financial services needs--trust and estate planning, banking, insurance, accounting, and legal services--they tend to have multiple advisory relationships, the World Wealth report notes. But the mid-tier millionaires desperately want to reduce the complexity of managing their wealth and consolidate all of their financial needs under one roof. According to the report, four out of 10 mid-tier millionaires are looking to consolidate the number of firms they work with and 70% want a single provider. Therein lies the opportunity for advisors--at least those true wealth managers who can provide these millionaires with holistic services.

According to one of the report's authors, Jaime Punishill of Capgemini, the "million-dollar question" is who will "get the answer first" to serving these clients.

Today, only 10% of advisors are pursuing the wealth management model, according to a report by CEG Worldwide. But advisors who have adopted a wealth management business model and are outsourcing their investment offerings to a turnkey asset management provider (TAMP) are having the greatest success, the report found. These wealth managers are earning larger incomes by managing money for fewer clients than the other 90% of advisors that qualify as investment generalists, the report says. For instance, in 2004, 50% of wealth managers working with TAMPs earned between $500,000 and $749,999, the report notes, with none of them earning less than $100,000. The non-TAMP investment generalists earned the least amount of money, with 44.4% of them pulling in less than $100,000, and none of them earning $500,000 or more.

An Argument for Outsourcing

Brian O'Toole, CEO of AssetMark Investment Services, a TAMP for fee-based advisors in Pleasant Hill, California--which sponsored the CEG report--says the mid-tier millionaires are willing to work with independent advisors, but in order to serve them effectively, advisors need to outsource investment management. "The wealth manager business model is very labor intensive for advisors," he says. "It's an advice model." Investment management requires a much higher capability today because the global financial markets are much tougher than in the 1980s and 1990s, O'Toole argues. "It's not a buy-and-hold type of environment today." By outsourcing the investment management function, advisors have the "opportunity to focus on those core competencies that we think contribute to the success of their business," he says.

Advisors must excel at helping these millionaires solve more sophisticated problems, like the estate planning and tax issues involved in managing, transitioning, or selling a small business, O'Toole says. Indeed, the Merrill/Capgemini report says that mid-tier millionaires tend to be corporate executives or small- to mid-sized business owners who are seeking a trusted advisor to provide them with estate plans and charitable giving plans, as well as investment policy statements and regular risk assessments. The World Wealth Report says that less than half of the mid-tier millionaires have created formal plans in any of these areas. "Firms and relationship managers who step into this breach will find a tremendous opportunity to play a valuable and central role in their clients' financial lives," the report says.

The Merrill report also found that mid-tier millionaires' advisors lack the "tools, processes, and personnel to efficiently and effectively" coordinate activities among third-party service providers like accountants, and estate and tax attorneys.

Mark Tibergien, partner-in-charge of the Securities & Insurance Niche for Moss Adams (and an Investment Advisor columnist), warns that if advisors intend to pursue the mid-tier millionaire market, "they must be careful not to be dabblers." Flashing "a nice brochure with gold embossed letters on a forest green background will not be sufficient," he says.

To compete with the likes of larger RIA firms as well as huge firms like Sanford Bernstein and Goldman Sachs--which have access to these wealthy clients through their investment banking arms--advisors must "invest in the client service experience, the infrastructure, the staff, and the technology to be notably superior," Tibergien says. The good news is that while the competition for this millionaire market is fierce, advisors need only capture a few of these clients to be successful, he says.

The Merrill/Capgemini report says that some of the more sophisticated advisors are already experimenting with the type of virtual service network (VSN), as Merrill dubs it, that will provide the mid-tier millionaires with the family-office-type services they need at an affordable price. The report notes that a typical family office can cost $2 million per year to operate. The VSN "combines state-of-the-art technology with standardized processes that allows collaboration among the multiple service providers," the report states. Accountants, lawyers, and bankers can view a client's account via a VSN Web site set up by the client's primary advisor. The report states that before firms will be able to truly implement a VSN, they first have to refine three key technologies: account data aggregation, secure online collaboration, and workflow-based wealth management platforms so that multiple providers can coordinate with each other.

Moss Adams recently performed research on its own database of thousands of clients' tax returns, and found that only 7% of today's wealthy have between $5 million and $20 million in assets, while just 2% have more than $20 million in wealth. This sampling shows that the opportunity for advisors in these two wealth segments is small, but capturing only a few of the clients is enough to create a viable practice.

Competing against large wirehouses with household names is advisors' biggest hurdle, Tibergien contends.

For instance, a tax partner in Moss Adams's Los Angeles office recently asked Tibergien to recommend an independent advisor for one of his wealthy clients. The client had $75 million to invest, with another $35 million on the way. Tibergien says he passed along "some of the most prominent names in the wealth management profession--the independent RIAs--who were extraordinarily well qualified." In the end, however, the client chose to work with a wirehouse because "he didn't want to be the advisor's most significant client, and he wanted to work with a brand-name firm," Tibergien says. This example may not be representative of all wealthy clients' reasoning when choosing an advisor, but it does show that independent advisors' battle against the wirehouses is alive and well.

Washington Bureau Chief Melanie Waddell can be reached at mwaddell@investmentadvisor.com.

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