From the March 2008 issue of Investment Advisor • Subscribe!

The Prospect Said What?

You may need to dig and sift for the information you need

To work with high-net-worth and ultra-high-net-worth clients, you need both a deep understanding of a family's complex emotional dynamics and a comprehensive spreadsheet of a their assets. As we discussed last month, these two pools of information fuel the discussions and solution strategies produced by the advanced planning team. Before the team can start to work, however, advisors need to dig for the truth that can hide behind the client's responses. You can't proceed to the analysis stage without a complete profile, yet for many affluent and ultra-affluent clients, the initial impulse is to speak guardedly to protect their privacy.

In a recent column (October 2007), we looked at cases of clients intentionally holding back significant financial or personal details during initial profiling. Some clients, and even more so prospects, develop trust slowly. Much of the wariness comes from an expectation that anyone providing financial advice is merely pushing product. Your job is to take a consultative approach that breaks such an expectation. The focus is always on the client's challenges and goals.

While you'll adjust the actual profile questions depending on the prospect, certain topic areas are essential. Russ Alan Prince and Hannah Shaw Grove have researched and written about the seven necessary categories of information to create a complete client profile:

  • Vitals--key demographic information (age, net worth, annual income)
  • Goals--prospect's achievement agenda (professional aspirations, lifestyle, fulfillment of obligations to family and society)
  • Relationships--who is important to the client and why (family members, organizations, business partners)
  • Assets--list of current and future assets (investments, potential inheritance, future sources of income or reasons for debt)
  • Advisors--professional advisors and trusted friends or relatives (roles of each, history and experience with previous advisors)
  • Process--preferences regarding how to work together (frequency and method of contact, others involved in discussions.)
  • Interests--helps create rapport and inform various advanced planning solutions (favorite activities, charitable interests, vacation interests)

Trust Before Answers

Ultra high net worth families regard their privacy as one of the most important aspects of their wealth, so when it comes to meeting prospects for the first time, their trust in you is always an issue--even if the referral that put you together was extremely enthusiastic.

As advisors, confidentiality is the first service we offer them. Before they'll reveal details about their assets, they must believe in the full confidentiality of the discussion.

If the referral arrives via an attorney or accountant, you'll usually have a good understanding of the prospect's financial profile before the first meeting. A referral from a client or center of influence will force you to work harder to build trust so you can acquire details. You may not learn everything you need in just one meeting. For those folks uneasy about discussing dollar amounts, you can start by asking them to break down their portfolios by percentages in types of investments. Then you can ask what percentage the investments represent of their total net worth. This approach will often ease the way to a fuller discussion of real estate and business ownership.

Prospects who speak easily about their assets and show some understanding of them are typically more comfortable talking about the larger issues of affluence, such as legacy, wealth transfer, and philanthropy.

Unrealistic Expectations

Many advisors have their favorite stories about a prospect who, when questioned about expectations, state that they believe that their $10 million of investments should give them $1 million annually for living expenses--for life. This kind of unrealistic expectation for performance may also indicate a need to cover excessive spending habits.

"I'd warn any advisor to be really careful when you're profiling potential clients to look at expectations," says Ian Weinberg of Family Wealth & Pension Management, LLC, Woodbury, New York. "Unreasonable expectations are a sure-fire way to give you a headache. We've had a few clients over the years that were completely unreasonable in their expectations for different reasons. The last thing I want to do is go home on a Friday afternoon trying to please someone who's unreasonable--knowing that I can't please them, in fact."

During profiling, Weinberg consults with a behavioral finance specialist to help him communicate to his clients the importance of acting responsibly about money and to deal with such emotional issues as taxes, inheritance, and succession planning. The advisor discusses client situations on a hypothetical level with the specialist to maintain privacy. Weinberg has seen his clients mature in their attitudes toward their wealth--and he's also helped his firm have a smoother, more productive relationship with them.

Alternative Questions

Turning the questions to views about wealth in general and previous experiences can help the conversation start to flow, especially for prospects who speak reluctantly about their assets. Such questions might include: What has been your best investment? What has been your worst? What's important to you about money?

Talking about risk experience--more than using generic risk tolerance questions--can also be an avenue to understanding a prospects money psychology. The higher the net worth, the more preservation of capital may become the prominent theme rather than portfolio growth. Weinberg, for example, asks:

"Where do you stand currently in terms of risk exposure or protection?"

"Do you know the upside/downside parameters of your investments?"

"Do you know what you can make in a good market and what you could possibly lose in a bad market?"

Clients often don't know the answers to such questions, but an analysis could show them the potential with their current portfolio compared to a theoretical new one.

A report from the Spectrem Group shows some interesting results about risk and those with a net value of $25 million or more (not including the primary residence). Of the 101 affluent individuals surveyed in August 2007 for this report, 33% described themselves as "aggressive" and willing to place a significant portion of their investments at risk, while 8 percent called themselves "most aggressive" and willing to do the same. Just 6% think of themselves as "conservative" investors.

By comparison, individuals in the $5 million and up range are more risk adverse: only 20% self-identify as "aggressive" and 4% call themselves "most aggressive."

Uneasy Answers

With some clients, getting them to talk about their assets isn't the issue--but their answers are. Through a referral in late 1999, Weinberg met a businessman who owned a highly successful, profitable company. Starting in late 1998 and early 1999, his wife had invested their money in several high-flying tech stocks. He discovered through a few probing questions that the couple was convinced that they were going to make 30% annually on their investments for the rest of their lives.

Weinberg explained his firm's philosophy of diversifying across asset classes and why owning value stocks---as well as growth stocks---would help balance the portfolio. Also, owning non-correlating strategies would prove important to them over time, he told them. The couple remained unconvinced, however. They even challenged him on why they should ever own a bond.

They contacted him again in 2000. Their portfolio had shrunk about 30%. His advice at that point was simply to clean it out and start over "They were in such shock that the portfolio dropped that they weren't willing to accept that the party was over and that it was time to grow up and be much more mature about their money," observes Weinberg. "They still weren't willing to acquiesce to the modern portfolio theory discussion."

And they came back again in 2001, wanting to know what the advisor could do for them. His response was, "I can promise you that we will not lose money for you on a permanent basis in anything that carries wipe-out risk." That reassurance helped them get over the hurdle, and they finally liquidated their portfolio.

By that time in 2002, they had unfortunately sustained a very substantial loss in their own portfolio--from a high of $10 million down to about $3.5 million.

They sat down with Weinberg and promised that they would be very disciplined and conservative investors going forward--and they were thankful that they still had the large sum of capital that he had salvaged. They completely lost had any confidence in their own ability to make investment decisions.

As with this case, profiling can produce some answers that challenge your client management skills--or make you question whether you even want the prospect as a client. Profiling also highlights the need for advanced planning solutions for wealthy prospects. "Many of these high net worth investors, if you would ask them what their investment parameters are, what their guidelines are or what their investment policy really is, and how their portfolio works together, they don't have answers," observes Weinberg. "The money usually doesn't work well together."

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