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The Affluentialist: The Challenges of Advising the Affluent

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Advisors to very wealthy clients like the complexity of their work, but they find technical knowledge of their discipline isn’t enough to do the job right. In last month’s column, we reported on the findings of a new study that looked at the interaction between wealth counselors and their ultra-high-net-worth clients. Although this group represented a range of backgrounds, their practice models reflected the overall concept of comprehensive team planning, which at this asset level often includes wealth psychology professionals as team members. They confirmed that the planning issues, service demands, and family dynamics of affluent families are just too multi-dimensional to be left to a single skilled financial professional–outside experts in charitable giving, multiple-jurisdiction tax planning, and even private banking, for example, may need to join the team to fully serve this clientele.

More Than Technical Skills

Regardless of the particular technical discipline, all advisors–not just the team captain–require advanced listening skills, a subtle understanding of client and money psychology, and some familiarity with the full range of financial planning issues. The combination of these abilities permit advisors to build up relationships based on trust. Interestingly, trusting relationships guide wealth counselors more than their technical knowledge or experience in a particular discipline, according to the findings in “From Wealth Counselors to Wise Counselors: A Dialogue with Leading Advisors to Wealthy Families” from Wise Counsel Research, Inc. As one advisor expressed it, her deep technical background in economics and professional experience in running family offices weren’t enough–they only partially prepared her for clients who needed help with both financial challenges and their feelings about being wealthy.

For these kinds of clients, going beyond one’s discipline can be seen in the area of retirement planning, for example. Many advisors have expanded their practices to include client support well beyond investment management of retirement assets to include life planning, guidance on volunteer opportunities, post-retirement career strategy, relocation planning, and healthcare planning.

Wisdom as a Service

Not surprisingly, the advisors in the study spoke in terms of a client-centered view of their activities, which goes beyond the financial details to understanding goals, values, and history. As one wealth counselor expressed it, these savvy clients can recognize when solutions are truly best for the family. “I think clients can tell when wise counsel is involved because the outcomes are more in their self-interest [than the advisors'].”

Many of the respondents see providing wise counsel as discovering missing elements in planning which clients might not have recognized and helping them to fulfill them. “How do I define wise counsel?” asked one of the advisors. “Meeting the true needs of a person, gaining clarification so that these people will make wise choices in how to connect and implement their capacities and their aspirations. This [approach] enables the client to make wise choices.” These advisors follow a defined process that gives them a fruitful path for building relationships and creating comprehensive plans, but the wisdom works when clients gain new perceptions of their situations and greater understandings of their wealth.

Advisors achieve the true wisdom they need from sources beyond schooling and even beyond the core knowledge of their own discipline. They develop a wider network of experts that goes farther than just their slice of estate planning or investment management, for example. As one attorney expressed it, “The real problem is ‘Who heals the healer?’ Most disciplines don’t have a supervisory function [to help them]. . . I look to several people whom I practiced law with. I also have wonderful friends from other disciplines.”

Them vs. Us

The study also highlights the differences between how these consultative advisors view themselves and how they see more transactional-based practitioners who focus on just the money details without the necessary insights or client-centeredness to bring appropriate solutions.

Here’s a story I heard recently: A wealthy 90-year-old retired businessman received a phone call from an insurance agent. The agent was trying to convince him to sell one of his life insurance policies. The agent was attempting a viatical settlement where the policy owner sells the policy for far less than the face value. The man turned down the insurance agent–he didn’t need the cash, and he had no reason to sell. The agent then went on to call this man’s son, and said he was coming to the father “as a friend. I don’t get anything out of this.” When the son told him the father wasn’t interested, the agent offered to increase the offer higher and then pushed on how it was really “the right thing to do.” The son told him again “no deal.”

For someone with large medical bills and no way to pay them, such an arrangement could help if no other avenues are available. With this affluent retiree, however, it was a case of a service in search of a client. It was unnecessary and unwanted. The agent’s total lack of fact-finding doomed this transaction before he dialed the phone.

Fee Challenges

The complex needs of demanding affluent families require sustained intellectual and emotional effort, as well as time on the advisor’s schedule and access to his or her network of experts. Getting paid for all the effort spent on client tasks is still a challenge. One advisor noted, “The only problem with how I set the rate is that it doesn’t capture the benefit of the relationship and the outside resources I bring to the situation. But I haven’t figured out how to measure that in hours yet.”

A small, but growing trend among independent advisors looks beyond the traditional annual percentage of AUM to a new structure of fees based on total client net worth, which addresses payment for the broader range of services they offer. It compensates for time spent on client concerns where no AUM fee would be involved, such as mortgage refinancing, providing advice on assets within a company retirement plan, or working with an estate attorney on a new will. There is also a question of mind set–if an advisor is only paid by a fee on AUM, investments and gathering more assets naturally become the major focus of the practice.

Another insight revealed in the study, which collected observations from advisors soon after some of the worst months of the financial turmoil, is the dramatic change in client focus for those whose levels of wealth shrank rapidly. For clients whose spending levels were consistent with their previous levels of wealth, the concept of asset depletion may have never been discussed before. The adjustment could be harsh as they learned a new behavior–a lower responsible rate of consumption. As one advisor expressed it, “I am currently counseling families dealing with a lot of anxiety. It used to be that I had to help them answer their kids’ question, ‘Are we rich?’ Now I’m dealing with the question, ‘Are we poor?’”

Even advisors to those wealthy families who don’t need to rethink their budgets have had to adjust to a new fear of risk, according to findings from the Spectrem Group in Chicago. In 2008, only 5% of U.S. households with a net worth of $5 million to $25 million (not including primary residence) saw themselves in that group.

The Spectrem study also highlights the challenges of gathering AUM from such clients. As advisors have known anecdotally and the findings document, the majority of wealthy clients remain actively involved in managing their assets, letting professionals handle just 18% without client input. A significant 47% of their assets they handle themselves–without any professional input.

Lewis Schiff is the principal of Advanced Planning Group, a private wealth specialist for advisors and their clients and the author of The Middle-Class Millionaire. He can be reached at [email protected].


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