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Retirement Planning > Retirement Investing

Danger & Opportunity: Selling Wisdom

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Rather than stumble like their colleagues who maintain a narrow focus on investments, advisors with a broader wealth-management practice orientation can benefit and grow as they provide the kind of services affluent families need during difficult market times.

In fact, those advisors who take an advance planning approach, which embraces a wealth-management comprehensiveness, are positioning themselves much more effectively to reach high-net-worth and ultra-high-net worth families. The term “wealth management” is used loosely by marketing people, but to be clear, true wealth management examines all aspects of a client’s financial life and goals and it provides a full range of planning services, including complex estate planning, business planning, and charitable giving. According to Cerulli Associates and Federal Reserve numbers, the HNW (with $5 million to $50 million in investable assets) and UHNW sectors (with $50 million and above) represents only 1.5% of the overall population, but they control 39% of the nation’s overall net worth.

Anecdotal evidence from advisors and industry firms highlights how clients from all segments are asking for more planning advice, not just account information. At Charles Schwab, the number of its retirement plan participants requesting personalized service grew by more than 40% from September to October 2008–a fact not surprising given what was occurring on Wall St. at that time. Cerulli’s 2008 Advisor Survey showed that 78% of advisors agree that consumers are demanding more comprehensive financial advice.

Feeling the Market

Affluent clients are certainly experiencing discomfort during these economic times, albeit on a scale relative to their normal lifestyle. “The reality is that individuals in the range of $5 to $15 million [of investable assets] have fear in this environment just as much as the individual who may just have a half a million to $1 million,” observes Howard Schneider, president and founder of Practical Perspective, a research and consulting company based in Boxford, Massachusetts, which specializes in addressing critical strategic and competitive challenges in financial services.

“Advisors who are dealing with those clients are dealing with the same emotions as the mass affluent,” says Schneider. “Those clients are thunderstruck by what’s going on in the marketplace. They’ve seen generally significant deterioration in their portfolio values. Their feeling of comfort, their feeling of wealth, their confidence in the future to a large degree has been shaken.”

Concerns about the cost of healthcare during the retirement years cuts through demographic segments. In a Northern Trust survey of high-net-worth individuals averaging over $5 million of investable assets, 92% of preretirees stated they are very or somewhat worried that jumps in health care costs would affect their ability to enjoy their retirement. They have the assets to purchase adequate amounts of health and long-term care insurance protection, yet they’re concerned about the lack of certainty about expenses when they move from wealth accumulation to the retirement spend-down phase.

In terms of a retirement lifestyle, these individuals still have enough for what most people would consider a comfortable life. A $10 million portfolio down 50% still leaves $5 million–but they do feel the pain of a pinched lifestyle. “Individuals in that wealth range may have been expecting a certain type of lifestyle with multiple homes, constant travel, gifts to charity, and leaving a significant legacy for their family,” notes Schneider. “They may have to pull back on some of those things.”

More Planning, Now

Given market conditions and client concerns, Cerulli expects advisors to boost comprehensive planning as part of their practice. When asked how they anticipate their practices will change during the next 12 months, 61% of respondents to a Cerulli survey agreed that they would offer more financial planning services. By adopting a comprehensive approach to client needs, advisors can create a repeatable discovery, planning, implementation, and review process that enhances the client experience and doesn’t rely solely on the unpredictable performance of investment portfolios.

The long view for clients also brings more stability and organic growth potential for advisor practices. Those professionals with broader service offerings based on advice–not just products–also offer the possibility of greater profitability since advisors with an advanced planning team can address more client needs. If the client connection is just based on investment guidance, challenging market conditions can bring the thinness of that relationship under sharp scrutiny. On the other hand, those same market conditions within the context of a comprehensive planning relationship become another event where the client and advisor partner. For the right clients, it also becomes a shrewd time to make some strategic investments.

Advisors who look beyond investments also have the opportunity to have more conversations with clients about something other than equities, notes Scott B. Smith, a senior analyst at Cerulli. The status of the client’s life insurance and long-term care are two good topics to pursue. Those things may have been pushed aside in the past but now have stepped back to the forefront because the advisor has more time on his hands to talk about these things,” says Smith.

In the short term, advisors will also spend a lot more time handholding and communicating with clients seeking reassurance. Especially for new clients recovering from unsatisfying experiences with other advisors–and depleted portfolios–spending habits may need to realign with new world of greatly diminished income streams.

Opportunity for Growth

Many investors are disappointed not only in the their portfolio performance but the performance of their advisors as well. When Cerulli asked advisors in Q4 2008 what was their source of new clients in the last six months, the largest number by far (55%) were clients dissatisfied with other advisors. New clients who did not have advisors came in second at 21%; and clients consolidating multiple advisor relationships came in third with 17%.

On the other side, advisors who said they lost clients during the same period stated the main cause as dissatisfaction with investment performance (44%).

Anecdotally, advisors who follow a wealth management model report gaining more referrals during recent months via clients who appreciate regular communication and a long-range approach to their finances. They’re sending friends and family members who have been dissatisfied with their advisor and feel and need to make a change.

“The first point is that we’ve always seen the primary way that somebody selects an advisor is from a referral,” says Catherine McBreen, managing director of Spectrem Group, an industry research firm based in Chicago. People really tend to go to referrals first before finding an advisor by other means. The second point is that we do think that there will be a lot of changes in the next 12 months as people start to reevaluate and how their advisor did as opposed to another advisor.”

As occurred after the tech stock bust after 2000, many self-directed investors are deciding they need a professional’s help. McBreen sees confusion and disappointment in this group and expects many to be ready to become clients of advisors.

Schneider believes there is an opportunity now to talk to clients about the breadth of capability and the breadth of service that you can deliver “that goes beyond just the investment component and talks about all of the other aspects of support that you can provide.”

When it comes to retirement planning, for example, he has been impressed with the expanded support and demonstrated value that advanced advisors have shown beyond just investment management. They’re acting as “life” advisors who can help with all aspects of retirement living, whether it’s wealth planning, longevity planning, managing against risks, or develop retirement income streams. In some cases, advisors have even set up family-office services. They help clients with healthcare issues, educating the children about financial issues, find volunteer opportunities after retirement, or look at other ways of using client’s human capital once they’ve retired.

Bring on the Team

The repeatable advanced planning process is also a highly nimble one. Rather than rely on just the output of even the most sophisticated financial planning software to create a plan, an appropriate advanced planning team works together to create the comprehensive plan. Software supports the planning; it doesn’t drive it. The issues in affluent families are just too complex–closely held businesses, wealth transfer to grandchildren, property in multiple jurisdictions, and philanthropic planning, for example. Each part of the process needs the technical focus of the right professional for that client, with team members selected from a pool of estate attorneys, insurance experts, CPAs, business valuation experts, and investment professionals, among others.

Cerulli believes that to compete for HNW and UHNW clients, advisors will need to respond with strategy and tactics to address complex financial planning issues. Private banking, charitable giving, and tax planning are the areas where wealth managers far outpace other types of advisors in offering the services affluent client needs. In fact, these services live outside the practice capabilities of many advisors. Those who succeed at working with the affluent have focused on providing very high quality, thorough, personalize serviced to a limited client list. Given the close personal attention provided, it’s not surprising that wealth management practices are 96% team based, according to Cerulli.

Lewis Schiff is the principal of Advanced Planning Group, a private wealth specialist for advisors and their top clients. His latest book, The Middle-Class Millionaire, was published in February 2008. He can be reached at [email protected].


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