Prospecting Strategy

A  recent survey by Cerulli showed that wirehouse broker-dealers had about a 43% market share of retail asset management as of end-2010 — down from almost half the market in 2007. Naturally, other distribution channels were gaining, among them independent broker-dealers and registered investment advisors.

Cerulli suggested the wirehouse share would drop to 35% by 2013.

Question: Why are independents and RIAs growing at the expense of the wirehouse advisor?

Anyone who has been talking to advisors in different channels — wirehouses, independents, RIAs — knows the answer: Independents and RIAs are out there prospecting. Wirehouse advisors are not.

Of course there are exceptions to the rule.

From my observations and conversations, new client development is not sufficient to overcome disintermediation and assets lost due to death and normal attrition. The loss of clients through death is compounded by firm account minimums.

Advisors cannot take “starter accounts,” and smaller accounts are sent to the hated call centers in New Jersey. Some of those sent packing are the heirs to parents whose advisor is at a competitive wirehouse. So when Momma Oldebucks dies, the assets don’t even blow a goodbye kiss.

The independents and RIAs, with no minimum account requirements, are out there scooping up the small change which will become big bucks when she and her generation die.

It’s the same problem for investors whose liquid net worth is almost entirely in their 401(k). They may have only chump change outside of that account. When they retire, the wirehouse advisor who would not talk to them is not even in the race. Bye-bye assets.

This puts an even greater strain on the wirehouse advisor to prospect and do so heavily. With this in mind, I recommend the following prospecting strategy.

Prospect Enough

In any class or speech I give on the subject of prospecting, I always ask, “How much prospecting is enough?”

The usual snap answer is, “There’s no such thing as ‘enough.’”

My response is always, “Not true. There is ‘too much’ and quite obviously, ‘too little.’ Therefore, there must be ‘enough.’”

We have all known great prospectors. They get so addicted to the adrenaline rush of the hunt that they never develop a clientele. They open an account, sell a product and move on. That’s “too much.”

The flip side of “too much” is “not enough.” This is clearly a condition where new client development does not overcome losses. Asset balances are shrinking, not growing. Too many wirehouse advisors live here.

Your first step in shaking yourself to life is to decide how much is enough for you. Let me give you a defensive and offensive guide that can help you decide.

Defensive: You need to bring in enough new assets to counteract possible asset losses through bad investment performance, client attrition, disintermediation, and assets fleeing as a result of death.

The average wirehouse rep has $94 million under management. If you think the market could drop 6% and you could lose another 4% from these other leaks, then to counteract the hated income reduction plan, you need to bring in $9.4 million a year. If you get market growth and Velda doesn’t die as expected, your business grows. But investment performance is down, and if Velda does die and her dreadful nephew takes the money and invests in a racehorse, for your income not to have dropped you need to be bringing in $783,000 a month.

In developing a marketing plan, we generally assume you can get half of that asset goal from existing clients. So your new asset goal from prospects would be about $400,000 per month — a far cry from what is actually being done in the wirehouse channel.

Offensive: Suppose you want to double your business from $94 million to, say, $200 million. Let’s assume you want to do this in three years.

You therefore need $106 million more under management. That’s about $3 million a month. Again, assuming we can get half of that from existing clients, you need to bring in one and a half million per month from new clients. That’s some serious prospecting.

Can it be done? Of course.

There are two great sources of money in motion — death and retirement. You better have your hand in the stream. Let’s continue with our strategy.