How to Build a Firm to Serve the HNW: Part 2 - A "New School" Business Model

Ths is the second in a three part series on how to build an advisory firm to efficiently serve high-net-worth clients. In part one, we discussed the role of specialists. In this posting, we will dicuss why the HNW want more involvement in investment management decisions. Our final entry in the series will discuss the new reporting approach that clients are demanding from their wealth managers.

There has been much attention focused on breakaway advisors and how they are pursuing the promise of greater independence. Although this movement shows no signs of waning, the drivers for starting an independent firm today are dramatically different than they were just a few years ago. Granted, going independent is still about the pursuit of greater opportunity, but how a firm's vision, structure and process are engineered to pursue that opportunity have changed.

In the wake of the economic crisis, ultra high-net-worth investors feel they  need to be more involved with investment management decisions.  They want to reassert themselves into the relationship with their advisors. Previously the focus was on performance, but now it’s been broadened to encompass strategic conversations where clients now view themselves as partners to their advisor.

What's behind this changing dynamic? For one, ultra-HNW families are becoming increasingly sophisticated when it comes to their investments. These clients are seeking a relationship with their advisor where they can contribute ideas in a meaningful and measurable way; they want to influence, as well as inform, the course that an advisor will pursue on their behalf. This level of involvement is seldom possible at institutions where tactical execution often rules over what might otherwise be an active and strategic approach.

Of course, defining a goal is the first crucial step in achieving it. Advisors must decide who they are serving in order to determine what they are building to best serve those clients. Do they want 100 $10 million clients or 10 $100 million clients? Increasingly, breakaway advisors are focusing on the latter.

As clients seek more inclusive relationships with their advisors, leading firms are evolving to put client relationships at the core of their practice. In the words of one of our clients, "it's no longer enough to simply speak of process and performance." Advisors must be committed to managing relationships and delivering the kind of service he calls "mass customization," achieving the perfect blend of a tailored client experience that still allows the firm to be efficient and scalable. This is something not easily accomplished.

In order to successfully create such a model, advisors must determine which competencies they want to closely manage hands-on, in-house and which can be successfully handled by external specialists. The goal is to deliver to the client a well-balanced blend of the qualitative and quantitative. Items like clean data aggregation and

 

premium reporting, research and a disciplined manager selection process can all be brought together as a seamless delivery of an exceptional client experience.

In many cases, advisors will work with an array of external specialists—premium reporting from one and research from another, for example—to deliver a differentiated offering to their clients. Advisors don’t view these specialists as competing against one another, but rather as complementary best-in-breed providers that can be brought together under the single brand of the advisor’s firm. Most importantly, by engineering the model this way, the advisor can devote more time and attention to the one thing that can never be outsourced:  the client relationship.

By delivering a tailored, consistent service—one that shows instead of just tells the true value of the advisor's offering—advisors position themselves for future growth. In fact, with industry surveys indicating that greater than 87% of new business comes through existing client relationships, I would argue that this is a business imperative.

By remaining focused on client interests and managing their external specialists, advisors have an unprecedented opportunity for success by redefining and deepening the client relationship.

In the final segment of this three part series, scheduled to run May12, we will explore how the reporting standard for advisors has been raised by the increasing sophistication of their ultra high net worth clients and how these requirements can best be satisfied.

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