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August 22, 2016 at 08:00 PM
“The rich are different from you and me,” F. Scott Fitzgerald once famously commented to Ernest Hemingway, to which the Nobel Prize winning author reportedly replied, “Yes, they have more money.”
It’s because they have more money that millionaires have been the target market for most financial advisors long before independent advice was born. Yet if the 2016 Fidelity Millionaire Outlook Study is to be believed, advisors may not understand millionaires as well as they think they do, including troubling disconnects between what services financial advisors say they are providing and the services that millionaire clients say they are receiving (see “How Advisors Can Get Referrals from Millionaire Clients” on ThinkAdvisor.com).
But first, the good news. My advice to advisors who read some of the avalanche of “studies” of the advisory industry these days is to always start with the demographics of who exactly is being studied. Survey results don’t mean nearly as much if the studiers are talking to the wrong people (believe me, it happens).
In this case Fidelity seems to have done its homework. It polled 1,287 millionaires who have a median income of $125,000 and investable assets of $1.75 million, including $750,000 in a workplace retirement fund. Sixty-two percent are debt free, 67% are men and 76% are married, with a mean age of 63 years, while 43% are still employed.
With a mean age of 63, a lot of these folks are well into their decumulation phase and not exactly the target market for most independent advisors. (Unless, you’re one of the IRA rollover “specialists” that the DOL is so concerned about.) But I would refer your attention to the fact that 43% of this group is still working: a median portfolio of nearly $2 million means that half of the whole group has portfolios larger than that.
I would suggest with more boomers working well past our 60th birthday in reasonably good health, perhaps the target market for independent advisors needs to be widened a bit.
Back to the study: 62% of those aging participants work with a financial advisor. However, of that group, only 25% fully “delegate their investment decisions to their financial advisor.” Of the remaining three-quarters, 33% “validate their own decisions by working with a financial advisor,” while 39% are “self-directed,” and the remaining 3% “validate with a digital advisor.”
Now for a bit of the bad news. The study’s authors segmented the surveyed millionaire (human) advisory clients into three groups: “Promoters,” who are described as “loyal enthusiasts who keep buying from a company and urge their friends to do the same” and comprise 55% of the participants; “Passives,” who “are satisfied but unenthusiastic clients who can be easily wooed by the competition” and comprise 25%; and “Detractors,” who “are unhappy clients, with high rates of churn and defection” and make up the remaining 20%.
Regular readers will know that I’m not a fan of cutesy names used in industry studies, but I have to admit these three groupings are pretty clear, and together paint a pretty sobering picture of today’s advisory firms.
As the majority of advisors and their firms rely on referrals for the majority of their new clients, it’s a bit disconcerting to hear that just a shade over half of the advisory firms’ clients polled (the Promoters) are inclined to be loyal and make referral recommendations. While the study reports “69% of Promoters gave a referral in the past year,” that’s only two-thirds of the 55% — diluted again by the (usually low) close rate on a given firm’s referrals. One can only believe that the retention rates for Passives and Detractors doesn’t paint a pretty picture either.
