Know your customer. Those sustaining words of wisdom, advisors say, should well position you to serve not only the top of the economic pyramid, the high-net-worth individual, but also a burgeoning class: so-called “mass affluent” boomers who hold between $100,000 and $1 million in investable assets.
Experts caution against taking a one-size-fits-all approach to the newly wealthy. Recommendations, they point out, must be suitably tailored to an individuals family circumstances, goals, objectives and outlook. The client who believes his financial well-being is improving, for example, would tend to be less risk-averse than the one who perceives his fortunes are declining, even if the two individuals are of comparable net worth.
“Those people who have more dollars coming in and have high expectations are more apt [than clients with diminishing expectations] to ride out dips in the market,” says Scott Kelly, a financial consultant and president of Kelly Financial Inc., Madison, Wis.
Jeffrey West, a principal at Cohen Financial Group, Framingham, Mass., agrees. “The clients with diminishing expectations tend to be more conservative in nature,” he says. “Theyre less tolerant of a market slide.”
The latter also tend to be older, pre-retirement boomers or former high-net-worth individuals who have suffered financial loss. A greater number of mass affluents, advisors stress, are boomers in the early to mid-40s who will migrate to the high-net-worth category as they near retirement age.
Clients ratio of income to assets, in addition to age, will influence their tolerance for investment risk. West observes that high-income clients generally will invest more aggressively than those whose incomes are lower, again assuming both groups have comparable investable assets.
The reasons, he says, are because the former believe they can earn the money back faster in the event they suffer a loss and because they need a higher rate of return to compensate for greater spending relative to income.
The majority of mass affluent clients, however, tend to be leery of risk. A December 2004 survey from AIG American General shows 54.3% of mass affluents would accept a “slight degree” of risk to achieve a high rate of return. This compares with 30.9% and 3.6% who would tolerate a “moderate degree” and “high degree” of risk. Another 11.3% said they would not accept any investment risk.
While an increase in a clients income to asset ratio might dictate a proportionately higher level of risk tolerance, growth in assets can have the opposite effect. As ones net worth rises, the marginal benefit of retaining risk declines. So, the client is less inclined to take chances.