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Financial Planning > Tax Planning

The Wealth Boom

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Just as the baby boomers transformed nearly every aspect of the financial services business, the massive assets controlled by the fast-growing affluent middle-class, combined with increasingly complex issues surrounding such wealth, are certain to have a transformative effect on the financial advice industry over the next decade. According to population studies, these “Middle-Class Millionaires” have put us on the brink of a wealth boom. To find out what makes the Middle-Class Millionaire different from other wealthy clients, we begin our analysis with a private study done for a publication that caters to the super-rich.

In 2004, Elite Traveler, likely the most exclusive consumer magazine in the world, asked Russ Prince to conduct a marketing survey of its readership. Prince’s job was, in part, to measure how much influence the buying habits of these very affluent readers exert on those around them.

With over 20 years of experience studying the habits of the high-net-worth, Prince knew that carrying out a methodologically sound survey of very wealthy individuals is a difficult, time-consuming task. To find more than 200 of them willing to answer a long series of personal questions posed by a researcher in individual interviews, he had to network his way through lists of financial advisors, private client attorneys, and private-jet service providers who served as go-betweens.

The research turned up an unwelcome surprise for Prince’s client. The survey concluded that the buying decisions of very high-net-worth individuals–those with net worth in excess of $10 million–exert very little influence on the people around them. Except for certain celebrities, wealthy people who are influential by almost every other measure don’t serve as role models when they purchase many luxury goods and services. If they buy something for their home or office, they tend not to talk about it very much. In the case of more easily observable purchases, such as clothes, watches, and jewelry, they seldom interact with enough people on a day-to-day basis to exert any significant influence. When it comes to personal service providers–such as financial advisors–the very rich can be very secretive. Express too much praise for your advisor, after all, and he or she might get poached by someone else.

Prince had managed to measure in a meaningful way, perhaps for the first time, the profound insularity of the very wealthy. This conclusion wasn’t terribly helpful to Elite Traveler, but Prince found himself intrigued by one small set of details buried in the data. The sample was too small to draw any concrete conclusions, but it seemed to him that a handful of the least affluent in this group reported behavior patterns that set them apart from the rest. As Richard Rossi, an education entrepreneur from Washington, D.C., put it, “I’ve gotten to the point in my life where I’m pretty clear how I want to spend my time: with my family, my friends, my business, and with my own evolution as a person. I don’t want to spend my time worrying about anything else to the degree I can avoid it. And that’s what my circle of support is for.” This slice of the affluent demographic actively developed support networks. They solicited opinions from others and talked with a lot of people each day. Here was a subset of the multi-millionaire cohort who didn’t act like multi-millionaires.

In a subsequent survey, Prince’s researchers interviewed 1,417 people who declared net worths between $1 million and $10 million, including the equity they hold in their primary residences. With this data, the influencing qualities he uncovered in his first survey became even more pronounced when compared to those individuals with both higher and lower net worths. It was here that Prince discovered, as a sociological phenomenon, the Middle-Class Millionaire. Most are baby boomers, but some were born after the boom’s end in 1964. They are likely to have made their money through technology, real estate, entrepreneurship, or a mix of all three, and can be found in just about every kind of community across the country.

In this article, the first in a series of monthly columns in Investment Advisor titled The Affluentialist, along with a supporting blog posted at, I will plumb the behaviors and expectations of these demanding but lucrative Middle-Class Millionaires. I will explore the ways an advisor can attract the emerging affluent middle-class, and hear directly from a select group of IA readers about the challenges they’ve faced and solutions they’ve developed in serving them profitably and successfully.

Economists consider the Federal Reserve Board’s triennial Survey of Consumer Finances as the most accurate assessment of wealth distribution in America. According to the 2001 and 2004 surveys, affluent middle-class households are the fastest growing segment of the middle-class. Between 2001 and 2010, families with a net worth of $1 million to $10 million are projected to grow by 50% and reach a total of 11 million–about 1 out of every 10 households in America. The combined net worth of these families has surpassed that of households with more than $10 million by nearly two-to-one ($21 trillion controlled by families with net worths between $1 million and $10 million versus $12 trillion for families with net worths of more than $10 million.) (See “Growth of the Affluent” sidebar.)

We are thus on the brink of a wealth boom that may dramatically change the business you are in. The challenge is to understand these wealth boomers and decide how to profit from them.

Who Are These People?

In our forthcoming book, The Middle-Class Millionaire: How the Influence of Affluence Is Transforming America, Prince and I conducted a survey of 3,500 households to better understand the new affluent. Tracking today’s wealthy has taken us from the frontier of medical innovation, where new, expensive blood tests detect disease early, to the California desert, where we visited a self-described “Ritz Carlton” of mobile home parks (or “motor coach parks” as the residents prefer to call it), complete with golf-course views and concierge services. In particular, the research reveals several ways that the

Middle-Class Millionaire’s strong desire for that “circle of support” has led to new types of businesses that may serve as models for financial advisors hoping to serve the new affluent. One is a healthcare firm in Baltimore called PinnacleCare.

In 2001, John Hutchins, a medical administrator who had run hospitals in Saudi Arabia and the VIP programs at the Cleveland Clinic and Johns Hopkins, started a “healthcare advocacy” business. For a $10,000 initiation fee and annual fees starting at $5,000, PinnacleCare’s members have themselves looked after by a lead representative, as if each member’s health were a financial portfolio. A staff of healthcare advocates, mostly registered nurses and social workers, assess goals, draw up plans, monitor progress, and attend to crises. This team keeps after members with diet and prescription reminders, accompanies them to medical appointments, hammers out problems with insurers, and consults with the company’s staff physicians about second-opinion referrals.

Increasingly, Middle-Class Millionaires are looking for someone to help solve their financial problems across many domains of expertise in much the same way clients of PinnacleCare want to have their physical care coordinated. For a financial advisor, following a similar model means becoming a high-net-worth client’s “problem-solver,” addressing a client’s specific needs by leveraging expertise in estate planning, insurance, tax planning, and cash and credit management–experts (like medical specialists) who have more experience and up-to-date knowledge on those topics than the primary advisor does. The payoff for the advisor is that this role could yield significant new revenue streams several times greater than the asset-management fees generated from those clients by sharing fees and commissions with those other experts.

A Boon to Advisors

Corporate executives, professionals like physicians, and business owners have always been an advisor’s bread and butter. But many of those same clients now possess–or will soon–net worths in the seven and eight figures and investable assets well in excess of $1 million. More to the point, unlike retirees, their wealth is still growing. Most Middle-Class Millionaires are actively engaged in accumulating wealth and report goals of increasing their net worth by as much as ten times over the long term. In addition, Middle-Class Millionaires have expensive lifestyles, leading to fragility in their financial affairs–both real and perceived. They are the “working rich.” Nearly nine out of ten Middle-Class Millionaires report they are “very concerned about losing their wealth,” according to Prince & Associates, and consider addressing this concern one of the most important issues in choosing an advisor.

Unfortunately, there is a gap between what the affluent want and what asset management-oriented advisors currently deliver. In stark contrast to the concern most Middle-Class Millionaires express about their financial security, Prince & Associates’ research shows that only 15.4% of advisors believe that 20% or more of their affluent clients are worried about losing their wealth.

Indeed, becoming a client’s problem-solver may be more than just a great opportunity to raise revenues–it may be all that prevents an advisor from losing a client completely. According to Prince & Associates, 73.3% of affluent clients are either receptive to other advisors or will switch their advisor soon. Of those, 87% say it’s because of a “poor service relationship” while only a minority (13%) cite poor investment performance. The good news is that 90% of affluent clients want to work with an advisor.

To take advantage of this new model, an advisor faces a number of challenges, including:

- Repositioning himself to the firm’s affluent clients as a “problem-solver.”

- Leading a more comprehensive discovery process than usual to uncover the totality of an affluent client’s financial picture.

- Identifying several proven practitioners who specialize in working with the high-net-worth in the fields of tax, estate, and charitable planning, insurance and credit.

- Establishing a compensation arrangement with these experts that satisfies all parties and navigates regulatory issues.

- Coordinating, tracking, and reporting all aspects of a “problem-solving” relationship with their HNW clients over years.

Rather than remaining a specialist, an advisor who positions himself as a problem-solver can become his high-net-worth client’s most valued financial counselor. In addition to sharing in the fees and commissions generated by other experts, a problem-solver can further increase revenues by consolidating his top clients’ assets–the average client with assets in excess of $1 million, according to Prince & Associates, has more than three advisors.

The Best Days of Your Careers?

Already, the excitement–and the anxiety–the new affluent are causing among advisors is palpable: Along with the increase in household wealth are new questions: What expectations do my newly affluent clients have? Is my office capable of solving their problems? Are my partners and I well-versed in their needs? Are my institutional partners prepared for the creative and flexible solutions these clients will require? Most of all, will I be able to become their “problem-solver” profitably and productively?

You’ll be hearing more from me on innovation and affluence in the months to come (see “Invitation to the Conversation”). Finally, you’ll have an opportunity to share your concerns and anxieties as you re-engage your clients as a true problem-solver. The best days of the independent advisor are yet to come.


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