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Financial Planning > Tax Planning

The Independent Advantage

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If you’re an independent advisor, take a few seconds and feel the love. Industry research shows that more investors who chose an advisor within the past year selected an independent advisor.Your clients are super-satisfied with your work. And you’ve got a larger share of the high-net-worth market than any other financial provider.

Feel it?

As Bing Waldert, associate director of Cerulli Associates, notes, “Especially as you get into the high-net-worth arena, clients are very, very savvy. They get it. They understand the meaning of objective advice better than most advisors think they do.”

Moreover, he adds: “Wirehouses have come a long, long way. They’re not proprietary product pushers anymore. That’s no longer what defines them as an advice provider. But the new money of the world is looking for open architecture and best of breed solutions and that’s what’s really drawing them to the independent channel, especially the fee-only advisor but the broker-dealer, too. There’s a real appetite for this.”

Here’s what some of the latest research says:

o Independent advisors, both registered investment advisors and independent reps, are used by 22 percent of millionaires, a key finding this past March of the inaugural Fidelity Millionaire Outlook. Of these, almost three-quarters, 71 percent, use advisors who offer comprehensive wealth management while the remainder use advisors who focus on money management.

o On top of that, independent advisors hold, on average, 56 percent of millionaires’ investable assets — the largest share among any other financial provider.

o Meanwhile, a Spectrem Group study late last year comparing “affiliated” to independent advisors put the overall client satisfaction rate at 82 percent for independent advisors. Affiliated advisors, defined as those selling on behalf of a larger company, ranked 72 percent.

o More than twice as many investors using independent advisors have been with their advisor less than one year — a trend that Spectrem Group says indicates that those choosing an advisor are leaning toward the independent channel.

“We think the value of providing independent, objective advice is growing, and it’s being fueled more and more by millionaire baby boomers who are reaching levels of financial success where they are looking for very sophisticated services, breadth of product, tax planning and legacy planning and wealth preservation,” notes Emily Chien, senior vice president, Fidelity Registered Investment Advisor Group. “The high-net-worth segment is the fastest growing segment in the retail investment world. There’s an enormous opportunity here for independent advisors to continue to grow their presence and their role to help.”

What the Wealthy Want

In the Fidelity survey, millionaires cite three chief reasons for choosing an independent advisor: a focus on the client’s interest, not the firm’s, 73 percent; objective recommendations, 68 percent; and not pushing a firm’s products, 61 percent.

“A lot of what spearheaded this interest in independent advice is the mutual fund crises a few years ago where people were saying: Is the company I’m dealing with really being objective in their advice? There’s this overall yearning for [advisor] objectivity, for not having any bias, for not recommending their own products,” says Tom Wynn, a director with Spectrem Group, a strategic consulting firm specializing in the affluent and retirement markets. “All those things are coming together to make people want to go to an independent.”

Another big marketplace driver: the growing number of wealthy families.

Spectrem’s Affluent Market Insights 2007 reports that the number of U.S. households with a net worth of $5 million or more, not including their primary residence, rose to a record 1.14 million in 2006 — surpassing 1 million for the first time ever. The bump represented a 23 percent increase from 2005 and a quadrupling from 250,000 in 1996.

Meanwhile, millionaire households, those with a net worth of $1 million or more, grew to 9 million in 2006, an 8 percent increase over 2005. Affluent households, defined as having a net worth of $500,000 and up, reached 15.3 million last year, an annual jump of 9 percent.

Chien identified three core areas she views as a “very large opportunity” for independent advisors who wish to build a high-net-worth practice. First, not surprisingly, is a continued focus on retirement planning, legacy and wealth preservation. Next, she says, investment management performance will be key. “We’re not talking about pushing product, but open architecture and being able to bring a breadth of client services from simple cash-based products to very complex alternative investments or private equity investments with higher yields.” Finally, Chien says advisors must be completely clued into their clients’ individual situations.

As she puts it: “A very, very important element to building that personal relationship is a deep understanding of each millionaire client’s situation — not only the financial planning but the life planning. It starts with the financial picture but takes into account a richer understanding of the hopes, aspirations and expectations of the client as they move through their life stages. The financial picture becomes a way to enable that.”

Not coincidentally, she adds, 55 percent of millionaires surveyed in Fidelity Millionaire Outlook said they were looking for ways to simplify their lives.

“An advisor who can look at all the different pieces of a complicated puzzle and bring the expertise together and deliver it in simple but informed ways is going to be highly valued,” notes Chien.

Upping the Ante

No doubt, fee-only advisors have the deepest penetration when it comes to the high-net-worth market. According to Tiburon Strategic Advisors, the average account size of a registered investment advisor is $510,000; followed by wirehouses at $330,000; and independent reps at $142,000.

Tiburon managing principal Chip Roame adds, however, that top-tier independent reps, likely the top 10 percent, are on par with their fee-only counterparts.

What can independent reps do better?

One challenge is to build a brand, market en masse, and find ways to become known as a group, Roame says. As he observes: “The truth is that the dry cleaner store owner may have a pre-disposition to like entrepreneurs but how is he going to find Chippie’s Financial Planning Shop?”

Also, pay attention to segment marketing. “I think segment marketing in nearly every other business in America is the ticket to greatness. For some reason, financial advisors resist niche marketing,” he says. “It’s really as simple as defining your market, say dentists, and showing up at their conferences and in their magazines. You want to become known as the dude in the dudette market.”

Two noteworthy recommendations for all independent advisors from the Spectrem survey last year:

o Independent advisors should broadcast their ability to offer a more personalized level of client service. Less than 10 percent of affluent investors cite personal service as a reason for seeking an independent advisor — yet this is where independents could attract clients who may be disenchanted with larger firms. [Counterpoint: In the Fidelity study, 58 percent of millionaires say they use independent advisors because they provide more personalized service.]

o In order to attract more web-savvy investors, independent advisors must consider enhancing their online services, which are perceived as lacking.

Building Blocks

A snapshot of three highly regarded independent broker-dealers — LPL, Raymond James Financial Services and Commonwealth Financial Network — suggests that they’re gearing up their high-net-worth support component.

LPL, for example, has been building a one-stop shop since 2001, acquiring a trust company, a mortgage company and an insurance agency. “We saw the trend coming,” according to Bill Dwyer, president of independent advisor services. “These are the types of services high-net-worth-clients are looking for — and high-net-worth clients prefer independent advisors.”

LPL a few years ago added hedge funds and other high-net-worth-oriented alternative investments to its mix, and it launched a significant rollout of structured products last year. The heaviest users of the firm’s structured products: advisors with accounts of $5 million and up.

In August, LPL will introduce at its national conference eMoney Advisor, sophisticated wealth management software. In 2008, the firm will open a high-net-worth division to further support its 9,900 advisors.

Raymond James Financial Services formalized its Wealth Solutions Group two years ago, anticipating that baby boomer clients would undergo a major liquidity event — the sale of a business, or retiring, as examples — in the next 10 years.

The group acts as a case manager, when asked, for advisors with wealthy clients. Typically, high-net-worth clients are invited with their advisors to a day-long meeting at Raymond James’ headquarters in Florida. There’s one program for clients with an account of $1.5 million and up, and another for those with $5 million and up.

“Although our firm was built on financial planning, not every financial advisor understands or has all those pieces available. We’re building a group to give them the support they need,” notes Fred Whaley, the unit’s managing director.

Commonwealth, meanwhile, several months ago added some heft to its consulting program by suggesting that its advisors raise the annual retainer they charge clients to $10,000 from $5,000.

“High-net-worth people are looking for a more consultative approach and this allows advisors to give advice that isn’t linked to the selling of an investment,” according to Scott Schutte, director of wealth management marketing. “We’re encouraging them to use it more often because it helps them get paid for their time. It helps them remain independent because they’re not selling product, and it serves as another revenue stream, which helps them to be more competitive.”

Last year, consulting fees represented 1 percent of the firm’s revenue; in 2006, the category grew by 300 percent.

Commonwealth is also helping advisors adopt a wealth management business model, addressing clients with more than $1 million in assets but more typically working with those who have $5 million in investable assets, Schutte said.

“More and more advisors are definitely migrating to that path,” he adds. “And their competitive edge, as I see it, is that they are perceived as having no conflicts of interest.”

Gregory Powell, a Birmingham, Ala., advisor with $350 million in assets under management caters largely to business owners. Most of his accounts range from $1 million to $10 million.

The independent model, the LPL advisor says, enables him to work at a deeper level with entire families — grandparents, parents, grandchildren — and their attendant professionals.

“Because we do comprehensive financial planning, we know all of the clients’ assets. I can tell you confidently we have pretty much all their assets,” says Powell, who adds: “In my opinion, we’re going to see some dramatic changes in the way people handle their relationships with their advisors. Those advisors who do not embrace financial planning — by its definition an independent process — and who do not create a whole client experience and service centered around it will not be in business 10 years from now.”

The way Powell views it, the value of independent advice cannot be overstated.

“Everyone is striving for financial independence. As a financial advisor, I emphasize the word ‘independent.’ The word has tremendous value in terms of the client’s goals, but also it has to do with becoming an independent thinker,” Powell says. “The client of today wants independent thinking.”

Your Millionaire Client’s Top 10

What is top of mind for millionaires today when it comes to financial considerations? Here’s what Fidelity Millionaire Outlook discovered:

o Managing Investments — 52 percent

o Supporting my desired retirement lifestyle — 52 percent

o Maintaining my household’s wealth — 46 percent

o Increasing my household’s wealth — 46 percent

o Estate planning — 42 percent

o Tax planning — 35 percent

o Supporting the lifestyle I want today — 34 percent

o Providing for my family’s security — 30 percent

o Leaving an inheritance — 27 percent

o Paying for child’s/grandchild’s education — 24 percent

Quick Question

The recent appellate court decision on just who can market themselves as a financial planner has been positioned as a big win for independent planning advice.

But will the ruling in favor of the Financial Planning Association and against the Securities and Exchange Commission actually work to further increase the popularity quotient of independent advisors with consumers?

We put the question to Chip Roame, managing principal of Tiburon Strategic Advisors:

“First, I don’t think the ruling marks the end of all this. We’re in mid-argument still. But as that argument gets parsed out and as companies respond to that argument or ultimate conclusion, the role of financial planning is going to be elevated. The importance of financial planning is going to be spotlighted and the fact that it’s different from selling investments is going to become more well-known to consumers,” says Roame.

“As a result, number one, you’re going to get more consumers looking to get financial planning from someone, and, number two, independent advisors who have a higher proclivity to do financial planning will be the bigger winners. That doesn’t mean the Merrill Lynch guy won’t do well. Let’s not forget that Merrill is the biggest sponsor of CFP candidates this year.”

Millionaires and Their Advisors

The research has been fast and furious lately when it comes to the linkage between the wealthy and their financial advisors — not surprising given the trends in the marketplace.

Here’s a quick look at some of the most compelling data:

o Almost one-third of millionaires have no paid financial advisor and 13 percent of them say they are likely to start using one in the next 12 months, according to Fidelity Millionaire Outlook. Of those, more than a quarter are likely to use an independent advisor.

o The top reasons driving them to seek professional advice: improved portfolio performance, 36 percent; investment recommendations, 32 percent; comprehensive financial planning, 30 percent.

o When asked about the main reason for hiring their first advisor, millionaires cite: receiving a trusted recommendation, 22 percent; reaching a certain wealth level, 17 percent; starting to plan for retirement, 17 percent.

o Financial planners engender the most client loyalty when it comes to the affluent, according to Spectrem Group’s Affluent Market Insights 2007. [The survey is based on the responses of 526 U.S. households with a net worth of $5 million-plus as well as 3,000 households with a net worth of $500,000 or more.] Seventy-one percent said they would follow their financial planner to a new firm; 64 percent, their investment advisor; and 54 percent, their full-service broker.

o The top four drivers to developing loyalty among the wealthy: returns my phone calls promptly, 90 percent; provides good returns on investments, 80 percent; provides someone for me to contact if he/she is unavailable, 80 percent; works to keep fees and expenses low, 74 percent. Giving gifts at holidays and providing free tickets to special events ranked rock bottom.

Ellen Uzelac is a Chestertown, Md.-based freelance writer and contributing editor of Research


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