Wealth Management Is Hot. Is It For You?

Wealth management is the phrase du jour. Across the financial services industry the term is being bandied about. Increasingly, everyone (from stockbrokers to life insurance professionals to private bankers) is calling themselves a wealth manager.

What is so interesting is that while more people are becoming wealth managers, the term itself–in many circles–is harder to pin down. A lucid definition of “wealth management” is quite often quite elusive. Different kinds of advisors seem to have a different take on what the expression means, as do many of the senior executives in financial institutions.

It is important, however, to sort out what this business model offers, so we can evaluate its effectiveness.

What is necessary is to achieve real clarity when it comes to wealth management. First, it is essential to precisely define just what it is. And, with that definition in hand, the bottom-line question is: “Does wealth management work?”

Defining Wealth Management

Very often “wealth management” is discussed in nebulous terms. It is said to have something to do with a more intense version of investment management or–closer yet–a “holistic approach” to serving the client.

However, while these concepts are not wrong they are of limited value in enabling any advisor to be more successful. Being more successful–in the final analysis–is why advisors are motivated to create a wealth management practice.

From an empirical perspective, defining wealth management is straightforward. Quite simply, wealth management is the cross-selling of services and financial products.

The point is that wealth management can be a different array of services and financial products depending on an advisors current portfolio of offerings. For example:

  • For a stockbroker who presently provides investment management services, wealth management would be the addition of advanced planning services and life insurance products.
  • For an accountant, who is offering tax planning services, the incorporation of investments and insurance in the context of advanced planning equates to wealth management.
  • For life insurance professionals, wealth management becomes the inclusion of money management services and products.

It is therefore best to think of wealth management as a platform from which the advisor provides a number of interrelated services and financial products.

That is the easy part. We now come to the real crux of the matter: Is it a good idea for life insurance professionals to be wealth managers?

Does Wealth Management Work?

There is a lot of anecdotal evidence supporting the wealth management model. Most everyone from producers to senior executives at insurance companies can readily point to producers who have been successful adopting this approach. But, are these just isolated cases or is wealth management a viable business model for producers?

To answer this question, we empirically evaluated the matter. We directed our investigation at those producers who provide wealth transfer planning.

Our research sample comprised two matched sets of producers making between $75,000 and $100,000 annually selling life insurance. All the producers in the study generated their income through commissions on life insurance sales. A total of 266 producers (133 in each group) were followed over a two-year period. The two groups were matched statistically so we could compare apples to apples.

One group (Life Only) continued to exclusively market life insurance. The second group (Life + Investments) sold life insurance, but also sold fee-based asset management services in the form of a mutual fund wrap program or managed account program. The Life + Investments group saw their income shoot by the Life Only group. (See exhibit).

Over the two-year time frame, the average annual income for the Life Only group was $87,000. All income was derived from commissions on the sale of life insurance (renewals were not calculated into this income number).

For the Life + Investments group, the average annual income over the same time period was $139,000. The majority of the income–$101,000–came from commissions on life insurance (again, renewals were not calculated into this income number). Meantime, $38,000 came from fee-based investment management.

What we see is that by adopting a wealth management approach, producers are able to meaningfully increase their income. Significantly, fee-based investment management results in a 16.1% increase in life commissions.

The reason for this is straightforward. Often it is easier to interest prospects in fee-based investment management than life insurance or estate planning. However, once that prospect becomes a client, he is more receptive to life insurance now that he has rapport with the producer. And, because of this rapport, producers are perfectly positioned to provide these clients life insurance.

This is the wealth management model at work. Wealth management is effective because the same client can buy an array of products from a single producer. This data shows that this integrated business model works.

Another advantage of the Life + Investments group is that the life insurance agents are positioned to generate more annuity-type revenues. That is, they are set to collect the ongoing investment advisory fees without having to necessarily make another sale.

A Caveat

It is important to recognize that the wealth management model is not the be-all and end-all. While it is an excellent way to conduct business for certain producers it does not fit the practices of others. Research proves that producers who do implement wealth management find it is a very profitable business model.

To ascertain if the wealth management model is for them, producers should evaluate their practices by examining the type of clients they have. In our study the clientele were the emerging affluent and affluentprime customers for wealth managers.

The other big consideration is how a producer will be sourcing investment management services. As in the research the use of third-party asset management platforms–the mutual fund wrap and managed account programs–is often a very effective way to go. Still, to really make this component of wealth management excel, it is necessary that the producer become adept at managing, not money, but client expectations.

The best way to understand wealth management is that it is the cross-selling of services and financial products. For life insurance professionals, wealth management is often the inclusion of money management services and products. Wealth management is a platform from which an advisor can provide a number of interrelated services and financial products.

Although there is a lot of hype about wealth management, there has not been a lot of data on whether or not it works. Now there are empirical results supporting the value of the wealth management model. The research reported here proves that a wealth management model can boost production significantly–especially life insurance production.

That said, wealth management is not for everyone. It works best among producers with an affluent clientele, or whose client base is trending towards the affluent. Not all producers have the motivation to transform their business model. However, we would have to say that wealth management is here to stay.

Russ Alan Prince is principal of Prince & Associates, a research and consulting firm in Shelton, Conn. He can be reached via e-mail at princeasoc@aol.com. Arthur A. Bavelas is CEO and president of Resource Network LTD, Radnor, Pa. He can be reached via e-mail at aabavelas@aol.com.


Reproduced from National Underwriter Life & Health/Financial Services Edition, July 8, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.