From this year’s annual Phoenix Wealth Survey taken in the first quarter, we know the high-net-worth showed record levels of pessimism about the short-term outlook for the economy. Our research also shows that feelings of personal financial security have declined significantly since last year. Given recent events, the attitudes of the wealthy probably may have worsened.
And yet high-net-worth consumers are moving away from using professional financial advisors compared with recent years. Significantly more wealthy consumers report they are not regularly receiving advice from advisors and that they do not have a primary financial advisor. What’s going on here?
Wealthy consumers look at their advisory relationships differently during difficult economic times. For one thing, they are more likely to “commoditize” their advisory relationships, evaluating them more on the basis of performance and fees than they do when they are making money. This can present advisors with a difficult challenge. If they do all the right things for their clients’ investment portfolio, they could still be blamed for poor performance during a down market due to no fault of their own. What’s an advisor to do?
Tough economic times offer advisors an excellent opportunity to evaluate and expand their value proposition, in part by redoubling contacts with clients and reminding them that they are investing for the long term. From numerous focus groups with high-net-worth consumers, we know the wealthy look for a holistic approach that encompasses multiple financial needs and concerns and is not focused only on investment advice. Based on findings from the Phoenix Wealth Survey, now in its ninth year, we have several suggestions that advisors can pursue toward this end.
Retirement security planning
The most pressing financial concern of the affluent individual today is planning for financial security in retirement. Only half of high-net-worth households with primary advisors indicate they are receiving assistance with retirement planning. The disconnect may stem from the fact that many advisors equate retirement planning with their work to help build a client’s investment portfolio.
Of course, effective retirement planning also includes an insurance component. We don’t just mean annuities, although annuities can play an important role. Many new products offer insurance features, such as guaranteed income benefits for managed money portfolios. Such guarantees can help protect nest eggs from asset-depleting healthcare costs or an uninsured long term care event.
The approach of 2010, when the estate tax sunsets for one year before reverting to pre-2001 levels in 2011, has exacerbated another concern of the high net worth: estate planning. With continued budget deficits, wars in Iraq and Afghanistan, the prospect of a Democrat in the White House and deepening financial woes in general, estate tax repeal seems increasingly unlikely.
Many high-net-worth people realize they need to figure out what to do. More than 1 in 5 of all high-net-worth households without an estate plan indicate they’ve either delayed or put off estate planning. Of those whose estates are worth $3 million or more, this percentage nearly doubles. Additionally, more than half of all the high net worth (54%) believe that estate planning is more or much more important for someone with their level of wealth than in the past.
Also, many existing plans are old and need to be revisited. In fact, 30% of wealthy consumers have estate plans that were implemented more than 5 years ago. An estate plan review should be comprehensive and include reviews of wills and legal/health powers of attorney. Thirty-nine percent of high-net-worth survey respondents indicate that they do not have an up-to-date will.
Without getting into a debate over what comprises a financial plan, our research shows a shift in attitude regarding the importance of a formal written financial plan among the high net worth who have such a document. Compared with last year, a significantly greater percentage said such a plan was either “extremely” or “very important” to their overall financial planning efforts. This suggests that high-net-worth consumers find direction, or at least comfort and reassurance, in a written financial plan during more difficult economic times. Yet, only one-third (34%) of these households report having a formal written financial plan.
How can advisors avoid becoming commoditized? You can start by looking at your advisory practice and seeing what needs to be changed. This may be the time, for example, to beef up your focus on the tax aspects of estate planning.
You should evaluate how your firm stacks up against the trend toward a more team-based financial advisory model. Inherent in this is collaboration with other advisors, such as attorneys, accountants and investment bankers. Such collaboration requires clarifying which services will be provided and by whom.
Greater use of wholesalers and home office specialists can also help you add value to your client relationships, which in turn can help expand your practice. Finally, you need to look at your fee structure.
Part of a team
Clearly, there are numerous ways to expand your practice. As a successful life insurance professional said to me recently, “I don’t want to be the high net worth’s primary advisor. I want to be the life insurance specialist on his or her team of trusted advisors.” Finding the right answer for you will not be accomplished in one step, but in a series of steps and even experiments.