How well do you know your affluent clients? If you’ve been in business a long time, you probably believe that you have a pretty good sense of who your clients are, what’s important to them, and what you need to do to best satisfy them.
Unfortunately, you’re probably overestimating your insight. Our research tells us that there’s a significant gap between what advisors think they know about affluent clients and what they actually tell us about themselves.
A Classic Misperception
To begin, to which socio-economic class do you think most affluent clients consider themselves part of? A 2005 study by Russ Alan Prince and David A. Geracioti surveyed 1,417 affluent individuals. Of these, 34.1 percent had $500,000 to $1 million of investable assets, 46.5 percent had $1 million to $2 million, and 19.4 percent had $2 million to $6 million.
You might have guessed that some of these individuals would classify themselves as wealthy or upper class. However, according to the research, it turns out that none of them — not even those with up to $6 million of investable assets — felt they were “upper class.” In-stead, 42.6 percent said they were middle class, while 57.4 percent said they were upper-middle class. Perhaps these individuals compare themselves to the world’s 100 richest people; next to such Forbes multibillionaires, perhaps everyone else really is in the middle class.
Underestimating Fear of Loss
Another misperception is about the fear that affluent clients have of losing their wealth. You might think that affluent clients sleep well at night, but in reality, many don’t. As the chart below shows, 88.6 percent of those surveyed are very concerned about losing their wealth. Interestingly, the fear of loss is higher for those classifying themselves as upper-middle class, perhaps because they have more to lose and typically have more expensive lifestyles.
But the fact that nearly nine out of 10 of these affluent clients are very concerned about losing their wealth is not the worst of it. Consider the next chart, which shows what 512 surveyed financial advisors said about their affluent clients’ feelings on this matter. While 15.4 percent believe that 20 percent of their affluent clients are very concerned about losing their wealth, the overwhelming majority — 84.6 per cent — do not feel that even 20 percent of their affluent clients are very concerned about losing their wealth.
Juxtaposing these two findings, we come up with a rather amazing result: while most surveyed affluent clients are very concerned about losing their wealth, most surveyed advisors did not think even 20 percent of their affluent clients were very concerned!
A Taxing Difference
A third knowledge gap concerns tax and estate planning. Of the affluent individuals surveyed, 21.7 percent of those with a net worth of $1 million to $3 million are concerned about mitigating estate taxes, and 27.1 percent are concerned about mitigating capital gains taxes. Of those with a net worth of $3 million to $10 million, 81.3 percent are concerned with mitigating estate taxes, and 58.5 percent were concerned with mitigating capital gains taxes.