Working with the affluent retiree market

You’ve decided to go upscale. Your goal for 2015 is to add fewer, but wealthier retirement planning clients. It’s a good time to make the move.

According to Lake Forest, Illinois-based research firm Spectrem Group, the ranks of wealthy U.S. households continues to grow.

The number of households with a net worth over $1 million, exclusive of residence, reached a record high of 9.63 million in 2013. The $5 million-plus count increased to 1.24 million households; the $25 million-plus club — the ultra-rich — welcomed 15,000 new members to reach a still-exclusive total of 132,000.

The good news is that wealthy near-retirees and retirees often share the same financial concerns as their less affluent peers.

“You know, everybody wants to make sure they don’t run out of money when they get older,” says Roy Janse, CFP with DeHollander & Janse Financial Group in Greenville, South Carolina.

“Everybody wants to have their investments or their money grow in the most tax-efficient manner. Everybody wants to be able to give to charities in a way that maximizes the benefit for both them and the charity. And, so, there’s a lot of similarities,” Janse said.

Working in the affluent market can make business sense because it allows you to leverage your time and staff more efficiently by serving a smaller number of clients.

Before you start transforming your business, though, first consider the pros and cons of working with high-net-worth (HNW) clients and whether you’re ready to serve this market. For the pros and cons, read on.

Pick your sweet spot

A first step is to decide which HNW market segment you’ll serve. Do you want to work with the millionaire next door or the newly minted IPO billionaire? The wealth categories are arbitrary, but target market selection matters for several reasons.

As the Spectrem results show, the pool of available prospects shrinks as you move up the wealth scale. The number of HNW prospects is also location-sensitive. In parts of the U.S., a $1 million net worth qualifies someone as top-tier wealthy. In other parts of the country, $1 million isn’t considered wealthy, but the number of HNW prospects is much larger.

That means competition is an important factor to consider. Every local, regional and national organization with a wealth management or private banking division wants the high-end client.

Advisors have told me of cases in which they were one of a half dozen wealth managers pitching their services to HNWs who were shopping for new advisors. The playing field gets crowded when there are more competitors chasing fewer qualified prospects.

An advisor’s business offering and expertise, both current and anticipated, should also match the segment’s needs. This is the “sweet spot.” The advisor understands the market and can deliver what those clients want, because many of them fit the same profiles.

From a broad perspective, retirees in the $1 million to roughly $3 million wealth range often don’t consider themselves wealthy. This group shares many of the same financial and lifestyle concerns as the mass affluent market, generally considered to be between $500,000 and $1 million.

As a result, the products and services an advisor has provided successfully to mass affluent clients should continue to work with clients up to roughly the $3 million level.

At some point, though, the degree of complexity in a client’s finances can start to strain an advisor’s capacities. Potential challenges could include a lack of direct access to investments such as hedge funds, private equity offerings or banking and credit facilities.

Other HNW clients want family office-type services, such as paying bills, coordinating philanthropy programs and multiple trusts, overseeing property and staff management, among others. Even if an advisor can outsource these duties, staying on top of everything still requires staff time.

Beyond the amount of a HNW client’s wealth, the source of the money also influences attitudes and expectations, says Cindy Richey, CFP with Prosperity Planning Inc. in Kansas City, Missouri. Consider a woman who’s newly and suddenly financially independent because of a divorce settlement, she says.

If the couple divided $3 million to $4 million in assets, the client didn’t suddenly become wealthy — it was just suddenly put in her hands and now she’s the decision-maker.

“A business owner who built their wealth from selling a business is going to be very different from, say, a corporate executive who builds it through a compensation package, maybe some deferred compensation plans and traditional types of retirement plans. And then an inheritor, someone who has inherited money, again, is very, very different,” she adds.

Ramp up your technical skills

Some HNWs’ finances are uncomplicated relative to their wealth. They have a workable number of bank, investment and retirement accounts, own one or two homes and their philanthropy consists of writing checks to their preferred charities.

But higher wealth and increased financial complexity often go hand-in-hand. HNWs frequently have taxable estates, highly diversified, complex investment portfolios and holding structures like trusts. They may have banking and investment accounts, residences and properties located in multiple countries.