From the June 2006 issue of Wealth Manager Web • Subscribe!

A Brand New Bag

In the last few decades our industry has undergone a profound transformation. Client needs, the regulatory environment, and investment opportunities and delivery mechanisms have all seen tremendous change. Individuals today can buy a broader variety of investments than ever before--mutual funds, index funds, hedge funds, ETFs, REITs, private equity funds, commodities, and more--and they can do so through an ever-widening number of sources, including traditional brokerage firms, discount firms, online venues, and even accounting and insurance firms.

Business models have changed as well. Some older business models are simply inadequate to face today's challenges. For example, in the "old days" a mutual fund specialist could make a great living based on information that only he or she had access to. Today, that same information is available to almost anyone who wants it, through both online and offline sources.

Business models once enthusiastically embraced, have proven fundamentally flawed. For example, "financial planning"-- widely heralded in the late 1970s and early 1980s-- ultimately failed for two reasons. First, there was a fundamental mismatch between the services being offered and clients' ability to appropriately value and then pay for those services. It just wasn't true that any client, regardless of size, both needed and could afford to pay for a thorough financial plan, or that financial advisors could create and deliver those plans in a cost-effective manner. Ultimately, it is impossible to take high quality services and "mass customize" them, because those who can afford such services want uniquely customized and truly personalized solutions.

Second, advisors couldn't effectively and expertly deliver all of the services called for by the financial planning model. Despite the prevailing dogma not to send clients to other professionals for fear they might be lost to them, the one-stop shop proved to be a smoke-and-mirrors pipe dream, especially for clients of substantial size or complexity. Today's wealth management business model-- which we'll turn to shortly--firmly embraces the idea of advisors creating maximum benefit for their clients (and themselves) by establishing and making good use of a network of experts with diverse skills.

Why Bother?

To paraphrase former New York City Mayor Rudy Giuliani, it takes a tremendous amount of courage to change the status quo, especially when the status quo is pretty good. Despite ongoing industry-wide transformation, why should a reasonably successful advisor change his or her business model? After all, many advisors today make a good--even a great-- living by working hard, being persistent and diligently searching for new information, ideas and products to share with clients. If you are such a successful advisor, why would you want to change your business model?

Start by asking yourself whether in your heart-of-hearts you are really a financial advisor, or whether you are an entrepreneur who happens to be in the business of delivering financial advice. Unfortunately, while older business models make a decent-paying practice possible, they don't enable you to build a business with maximum transferable value. Perhaps commission-based revenue should be just as valuable as fee-based revenue, but it's a simple, incontrovertible fact that at the end of the day (or the end of the career), fee-based practices are worth far more than commission-based practices. So, if you want to walk away after 30 years and sell your book for half of last year's revenue, that's fine; but if you want to sell your business for five times that amount or more, you will need to have moved to a business model that is primarily fee-based and that generates substantially more predictable revenue.

Moving Up-Market

If you (a) have an entrepreneurial heart and soul, (b) are ready to take maximum advantage of industry-wide changes, and (c) want to build a business with as much transferable value as possible, then you must move up-market and orchestrate the delivery of a variety of valued services to those who can afford to pay for them. Put differently, wealth management calls for the creation of consultative (in-depth, ongoing) relationships with affluent clients to whom you deliver a broad and deep set of customized financial solutions.

There is solid evidence that affluent clients want this type of relationship: Surveyed investors with between $1 million and $5 million in investable assets have, on average, 2.9 financial advisors each. This figure increases to 3.4 for those with between $5 million and $10 million and to 5.7 for those with more than $10 million (Russ Alan Prince and Brett Van Bortel, "The Millionaire's Advisor," 2003; analysis from CEG Worldwide).

At the same time, however, interviews with wealthy investors reveal that 84 percent would prefer to deal with only a single advisor. It seems, then, that many investors have not yet found an advisor who can provide them with multiple services and, even more importantly, a high-trust consultative relationship. (Ironically, while some investors feel that they achieve a kind of diversification by working with multiple advisors, without a single advisor familiar with all of their investments, their asset allocation is likely to contain over-concentrations and be otherwise sub-optimal.)

What, then, are the affluent looking for from their advisors? First, they want someone they can completely trust, who will always put their interests first, who will deliver effective customized financial solutions, and who will communicate with them on a regular basis. Research clearly shows that highly satisfied affluent clients receive, on average, more than two dozen contacts a year from their primary financial advisor.

Second, the affluent are typically looking for a relatively small number of key services including investment management (sensible asset allocation), financial planning and estate planning, tax planning, and to a lesser degree, charitable planning. However, as indicated previously, they prefer to obtain these services through a single advisor. The satisfaction level of affluent clients increases dramatically with the number of services they obtain from their advisors. Most impressive is the fact that the overwhelming majority of surveyed clients who received three or more services --96.1 percent--stated that they were satisfied with their advisors. With two services, the satisfaction level was 73.6 percent, and with just one service, it went down to only 39.9 percent (Prince & Associates; analysis by CEG Worldwide).

But note that to deliver wealth management services with the quality that the affluent expect and deserve, advisors will need to develop and rely upon a network of in-house or outside experts. Importantly, while many advisors are competent in and confident of their investment management skills, a thorough and honest self-assessment is called for to determine whether wealthy clients might not be better served by relying on the help of other, more highly specialized experts for other critical wealth management components.

Making the Shift

Shifting to a wealth management business model will likely disrupt your existing business, staff and client base. If, then, you are happy with what-- and how-- you are currently doing, then moving up-market may not be the right move for you. Moreover, if you aren't committed to seeing the shift all the way through, then it's best not to even start. There's no real way to simply test the water here, and a half-hearted commitment will leave you stuck in the middle, unable to execute on what you had or what you hope to create.

What you can do, however, is think of yourself as forming a new company: "NewCo," that coexists, for a transition period, with your existing "OldCo" practice. Force yourself to free up as much time as possible from your daily OldCo routine to dedicate to NewCo. You should set firm parameters and increase the allocation to NewCo each month until you are eventually fully dedicated to NewCo. Invest your time in NewCo, and use that time to move up-market, build and refine your professional network, find wealthy new clients, and regularly communicate with those clients as you deliver the customized services that they want. Making the shift is not easy, but those who succeed will be rewarded tremendously.

Patricia J. Abram is a senior managing principal with CEG Worldwide (, an industry research, training and consulting firm.

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