From the October 2006 issue of Research Magazine • Subscribe!

October 1, 2006

The Sweet Spot

If you've ever played baseball, tennis or another racquet sport, you've no doubt felt the "sweet spot" -- that part of the bat or racquet where you can most powerfully and accurately hit the ball. When you hit the sweet spot it not only feels good, but the ball just "sings."

There's also a sweet spot in the affluent marketplace. It consists of clients who are generally underserved, but whose ample wealth can readily anchor an up-market consultative practice. By becoming familiar with how these affluent individuals and families view themselves, and with what they want and need, you can learn how to best serve them and develop a profitable business.

If nothing else, the very existence of this large sweet spot should finally put to rest the ongoing debate over whether there are enough affluent clients for "everyone" to move up-market. In truth, the amount of affluence in the United States is staggering, and for those willing to concentrate their marketing efforts and design their value proposition to capture a portion of it, there is simply no shortage of affluent clients. So, don't wait to focus your practice and raise your minimums; the sweet spot is already out there -- you just have to make up your mind now to connect with it.

Sweet Talking Statistics

According to the Capgemini/Merrill Lynch World Wealth Report, the number of Americans with investable assets of at least $1 million grew from 2 million in 2002 to nearly 2.3 million in 2003, and then to 2.5 million in 2004. Such rapid yearly growth is expected to continue for the foreseeable future. A 2005 study by CEG Worldwide principal Russ Alan Prince and David A. Geracioti surveyed 1,417 affluent individuals. Of these, 34.1 percent had $500,000 to $1 million of investable assets, 46.5 percent had $1 million to $2 million, and 19.4 percent had $2 million to $6 million.

What do we know about these individuals? First, they are baby boomers. Almost half -- 44.5 percent -- are between 55 and 65 years old, while 31 percent are under 55 and 24.5 percent are 65 or older. Second, as the first chart below shows, their source of wealth is quite surprising. When I give talks, most advisors guess that most of this wealth comes from inheritances or the sale of privately held businesses. But in fact, the great majority of this wealth is generated by individuals who have jobs and save their money. Thus, as you approach those in the sweet spot, remember that for the most part they are "ordinary" individuals who have simply worked hard and saved effectively.

Sweet and Approachable

Not only are these "ordinary" individuals in terms of how their wealth was generated, but their view of themselves is quite different than you might have expected. As the chart below shows, 57.4 percent of the individuals surveyed consider themselves to be upper-middle class, and 42.6 percent consider themselves to be simply middle class. None of these individuals -- not even those with up to $6 million of investable assets -- considered themselves to be upper class or wealthy. Not one!

It's uncertain why these individuals do not consider themselves to be wealthy. It may be that they compare themselves to the world's richest people as listed in Forbes; next to multi-billionaires like Bill Gates or Warren Buffett, maybe everyone else really is just middle class. Or it may be that America, ultimately, is a non-elitist society, and since many of these sweet spot individuals worked hard to earn their wealth, they simply view it as improper to think of themselves as being affluent.

Sweetly Serving the Middle-Class Millionaire

Another name for the sweet spot, then, is the "middle-class millionaire." Importantly, the fact that so many affluent individuals in the sweet spot hold themselves as being middle class creates an important set of opportunities. Since they do not view themselves as being wealthy, they are often woefully underserved in areas such as asset protection, life insurance and estate planning. For example, as middle-class millionaires they are likely to greatly underestimate the impact that estate taxes could have on their financial legacy. As family stewards they most certainly want to leave as much of their wealth as possible to their children (and grandchildren), but many have not taken even the most basic steps towards ensuring that this happens.

Similarly, asset protection is something that most individuals in the middle-class-millionaire sweet spot have never even thought of. Many such individuals probably don't realize, for example, that if their teenage son or daughter happens to have a few drinks at a party and then has a serious auto accident, they could end up being sued and lose nearly everything they own except for their home. With the right advice, they probably would have had an umbrella liability policy in place designed to protect the bulk of their assets.

Another example concerns IRA rollover accounts which, as the first chart above shows, is the source of wealth for 16.4 percent of the individuals studied. In the United States there are large numbers of individuals with over a million dollars in their IRA rollover, but the great majority of these end up in bank CDs or money market accounts with the owners intending to get around to figuring out what to do with them later. Most of these accounts have never been looked at by, or re-allocated with, the assistance of a trusted investment professional committed to the individual's best interests.

Home Sweet Home

You should take home four points from this article. First, middle-class millionaires -- those who constitute the sweet spot -- are out there in droves. Second, they have ordinary American middle-class values and ethics, and do not consider themselves as being wealthy, upper class or rich. Third, in part because of how they hold themselves, they are generally greatly under-served, especially with respect to asset allocation, financial and estate planning, and tax planning.

Fourth, while these affluent individuals may work with plenty of financial advisors (most have three to five), very few of them have the kind of trusted long-term relationship with a single advisor that our research consistently tells us they are truly looking for. In other words, they are not under-served because they have no advisors, but because they have too many.

Don't hesitate to take the plunge: Choose an affluent niche market, create your network of experts, and start building the kind of consultative relationships that will enable you to serve these middle-class millionaires as their personal or family CFO. Ultimately, it's not a few basis points better return on their investment that these folks are looking for. Instead, it's a trusted relationship with someone they feel completely at home with. Create that home sweet home for them and start reaping the sweet benefits of a focused up-market practice.

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

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