As is typical in the business world, the decision to expand an organization’s operations–offering a broader range of services–is often triggered more by the need to survive than by a desire to capture a bigger market share. The advisory business just might be at this crossroad, where concerns over continuity, and not just prosperity, are forcing more advisors to decide whether to jump on the wealth management bandwagon. In part I of this series, we examine the current attitude of advisors toward wealth management and how that attitude was developed. In part II, we will delve deeper into the hurdles facing advisors who aspire to become wealth managers, the financial and logistical make-up of successful wealth management shops, as well as the best business practices of such firms.

To Wealth Manage or Not To Wealth Manage

For many advisory firms, offering a narrow range of services–such as basic financial planning and investment selection– continues to lure new clients and retain existing ones. Nearly 63% of the 655 RIA firms that participate in AdvisorBenchmarking.com’s survey research offer two main services or fewer to their clients. This type of firm saw healthy profits of $241,000 in 2001, compared to $229,000 for the entire universe and a growth rate of 18.7% compared to 21% by the total universe, as shown in Charts 1 and 2 linked below.

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But for those who are already aware of the onslaught of full-service brokers into their market, growing into a family office-like shop is perceived as a necessary defensive measure rather than a proactive strategic business decision. Too paranoid? Perhaps not. The latest research from AdvisorBenchmarking.com shows that 23.4% of advisors lost 3.4% on average of their clients to a full-service broker in 2002, up more than one and half times from a year ago. The Merrill Lynches of the world, with their armies of estate planning experts and executive-compensation consultants, may appeal more to a retired business owner than would a single practitioner with a slim array of offerings. Of course, customized service and personal attention is the key differentiator for such a single practitioner, but for even the biggest wirehouses, gaining such an attribute may not be too far out of reach.

As such, of the 410 firms (63% of the total universe surveyed) with two or fewer service offerings, 19% have indicated plans to add one or more new services to their practice, ranging from estate and tax planning to trust services and bill payment. Now get this: for those 19%, the average client loss to full-service brokers in 2002 was 5.78%, 1.7 times higher than the universe’s average, as displayed in Chart 3 linked below.

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A coincidence? We think not. It is this growing competition from full-service brokers and others that is driving these firms to expand. And though the majority of firms participating in the survey still do not have plans to incorporate more services, more than 26% have rated “competition from full-service and discount brokers” as a top business threat, up from 18.1% a year ago. Don’t get us wrong, within this challenge lies a great opportunity for firms to evolve into true wealth managers. A recent survey by J.P. Morgan showed that clients of advisors who offer three or more services were significantly more satisfied than clients of advisors with fewer than three service offerings.

So what does it take to become a wealth manager? The challenges are many. In our next issue we will examine the various obstacles facing advisors, as well as the options available to them in incorporating comprehensive wealth management into their practices. Until then, advisors who are considering wealth management should recognize the main drivers behind this trend and pursue their ambitions accordingly.