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.
Now, while 71.5 percent of the surveyed advisors believe that mitigating capital gains taxes is important to affluent clients, only 8.2 percent feel that mitigating estate taxes is important to their affluent clients. Thus, with respect to mitigating estate taxes, the advisors are off by nearly a factor of three for the lower-net-worth group (21.7 percent felt it was important versus the advisors’ surmise of 8.2 percent), and off by an order of magnitude for the higher-net-worth group (81.3 percent feel it is important, but only 8.2 percent of advisors know this).
Advisors’ misreading of this substantial concern makes it likely that they are also severely underestimating the importance of other related issues such as providing for heirs, health insurance, long-term care, etc. Conversely, an issue the advisors believe that affluent clients hold as being very important — mitigating capital gains taxes — is on average far less important than surveyed affluent individuals actually feel it is.
If advisors are out of touch, then what is the cause, and what is the cure? The cause of the problem is an all-too-human one: We all look at the world through our own colored glasses, and until someone challenges us to take them off, we usually aren’t even aware that we are wearing any. Advisors work in their own minds and typically are only clued into their own heads. Since they are usually certain that they know what’s important, they often don’t actually check in with their clients, affluent or otherwise, to find out what they really want and need. In short, for those who think they already know the answers, there’s no reason to inquire any further.
To bridge the gap, advisors need to recognize that they are often out of touch and uninformed about who their clients really are and what is going on with them. For example, at a recent conference I met an advisor who had done a sliver of business with a new client. Only later did he find out that the client was worth $30 million to $40 million. This advisor did himself and his new client a huge disservice: Had he made the effort to fully understand the client from the beginning, he might have found a way to gain the lion’s share of a huge account while meeting more of the client’s needs.
The key to bridging the knowledge gap, then, is to regularly touch base with your clients as to their actual need, fears and goals. What are their values, goals, key relationships and interests? What is the broad scope of their financial assets and other investments? Who, really, are they? You simply can’t uncover everything you need to know through a basic fact-finding checklist or risk-tolerance questionnaire. Only an in-depth discovery process and ongoing consultative relationship will really give you the insight necessary to serve the affluent well.
It’s a clich? to say that we should “step outside the box,” but how many of us really take the time to step outside of our own minds? If you think you know your clients, you won’t dig any further. Remember when all Detroit could do was produce large, gas-guzzling vehicles simply because it assumed that’s what Americans would want forever?
So stop assuming and sit down with your clients, ask them about what’s really going on with them, and then shut up and listen. Stop assuming and start inquiring, and you’ll find that you’ve already built most of the bridge that you need to get over the knowledge gap.
PATRICIA J. ABRAM is a senior managing partner with CEG Worldwide, a research, training and consulting firm.