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Experts share strategies for succeeding in the competitive high net worth market

By Andrew Rickard | October 18 2007 03:58PM

Statistics Canada’s most recent Survey of Financial Security confirms that the rich are indeed getting richer. Between 1999 and 2005 the most affluent members of society saw their median net worth increase to $862,900, a gain of more than 28 per cent. About 70% of all the country’s personal wealth is now controlled by 20 per cent of all Canadian families.

As the bank balances of affluent people have increased, so too has the number of financial advisors who want to serve them. "There is congestion on the Persian carpets of the wealthy," says Investor Economics consultant Keith Sjögren. In a presentation to the Toronto Chartered Financial Analysts Society earlier this year, Mr. Sjögren warned advisors that while the high net worth market is growing, it is also intensely competitive.

To succeed, he says advisors need to focus on the needs of the specific market segment they wish to serve. The demands of wealthy entrepreneurs, for example, can be very different from those of well off retirees. The former take a more active interest in the management of their assets, while the latter tend to be more passive. He also says it’s important to understand how the prospect became wealthy, because that will dictate the sort of advice they require.

Globally, most wealthy people joined the million dollar club when they sold a business. In Canada, however, Investors Economics research shows that personal income is the single largest source of riches. Mr. Sjögren says that millionaires often say everyone who contacts them wants to manage their assets, but that nobody wants to help them manage their income. "Cash flow to a millionaire is as important as asset management," he says.

The source of funds will also determine the kinds of expectations they have. If a prospect has worked long hours to accumulate a fortune, he or she will expect a similar amount of effort from the financial advisor. "You need to demonstrate you’re working hard for your wealthy clients," says Mr. Sjögren.

Communication crucial

Once advisors have a handle on the attitudes of their wealthy prospects, there’s documentation to consider. Dan Hallett, president of the independent research firm Dan Hallett & Associates, believes that an investment policy statement (IPS) is an absolute must-have for those working the high net worth market.

This shouldn’t be a cookie cutter version produced by a financial planning software package, but rather "a real IPS with substance." Clients don’t want "charts showing a bunch of meaningless information," he says. Advisors need a document that will win over not only the prospect, but also the prospect’s other professional advisors.

Several years ago, Mr. Hallett helped an advisor land a client who had a little less than one million dollars to invest. The advisor hired him to prepare an investment policy statement and, along with the advisor, he helped to present it to both the prospect and the prospect’s long-time accountant. The accountant was impressed and the advisor won the business.

"Depending on the prospect’s knowledge, an accountant, lawyer, or knowledgeable relative or friend may be present for your presentation and will surely offer feedback when the advisor is not present," says Mr. Hallett. "The point is that you need to not only have your advice documented, but it must be documented professionally, and with rigor in a way that does not use too much jargon."

Candour and disclosure

When making a pitch, Mr. Hallett also recommends that advisors put the estimated all-in cost of any proposed portfolio in writing. "I’ve done it for every IPS I’ve ever done and sometimes people are taken aback by the dollar amount of fees. But hiding it just leaves you vulnerable to your competitor who may be willing to show the client the full details to steal the business."

He says the advisors who are reluctant to disclose fees are generally the ones who are less confident in their competence and value-added. "Those who are willing to try it, even if they don’t embrace it at first, are the ones that HNW (high net worth) clients tend to deal with because they are more confident in themselves as professionals. I can’t tell you how many times a client has read the IPS section on fees and has responded, ‘Nobody has ever broken that out for me before.’"

Working your way up

What about those who are trying to break into the affluent market? How should they conduct themselves? "It’s strange how advisors sometimes approach rich people," says Les Herr, senior vice-president of individual products at Empire Life. "They act as if the wealthy person has the problem and they are going to solve it." Mr. Herr thinks that kind of attitude is likely to turn off prospects. "If I’m a millionaire, who has the problem, you or me?" he asks. "They may think the advisor has an income problem and is trying to make them the solution."

Instead, Mr. Herr recommends getting the person’s attention with an idea or concept that might be of interest, and then backing off. Once advisor has demonstrated he or she has something of value to offer, then there might be an opportunity to get into a deeper discussion. "If they don’t know you, you had better have one hell of a good introduction," he says.

The advisors who have been in business the longest are the most likely to have access to the high net worth market simply because they’ve grown up with their clients. Mr. Herr says that younger advisors who stick to the middle marketplace will gradually accumulate the contacts, expertise and credibility they need to move upscale. As the size of an advisor’s book increases, so do the opportunities to work with wealthy clients. "Over time, there’s no question that you’re going to grow with them," he says.

Flexibility and choice

Rick Wood, a financial planner with TD Waterhouse Private Client Services, agrees that there’s no magic ticket into the high net worth market. Wealthy clients, he says, are similar to other clients in that they rely on word of mouth. "It has a lot to do with the circles they run in," says Mr. Wood. "The bottom line is to build relationships."

Business owners are the lifeblood of his Bay Street office in Toronto. They may not have been high net worth clients when they first came into the office, indeed they may have funded their startup company with credit cards, but Mr. Wood says that the advisor who takes the time to help entrepreneurs earlier in their careers will likely be the one they turn to when they are bought out for several million dollars.

Mr. Wood believes that being able to offer products and services not available to the typical retail customer is a key ingredient for success in the affluent market. High net worth investors want access to new stock issues, hedge funds, and private placements. Many also want to keep costs down through flat fee asset management programs.

"There’s a perception that brokers make money whether the markets are moving up or down, but in a fee-based world, there’s no perceived conflict of interest," says Mr. Wood. Besides transparency, he points out that fee-based programs offer multi-million dollar investors the ability to make an unlimited number of trades for a fixed rate of anywhere between 0.5 and 1 per cent. That, he says, allows him to offer pricing that’s similar to that of the discount brokerages.

Costs and competition

Mr. Hallett says that high net worth investors do tend to be cost sensitive, but points out that it can be difficult for some advisors to lower their fees. A broker may be able to offer a wide range of products, but he may not have a great deal of discretion over the fees charged.

In a fee-based account, many dealers require a minimum annual charge of one per cent, and this may be a hard sell once the GST and the embedded cost of the individual products have been factored in. Ideally, he says that advisors should have flexibility in both product selection and fee structure so that they can adjust their rates depending on the type of advice required, the level of service (e.g., the frequency of meetings) and the complexity of the client’s circumstances.

Mr. Hallett also warns against using wrap accounts because they generally offer a turnkey approach and don’t allow for the amount of customization that wealthy clients require. "If a client has existing securities that can’t be sold, or would be costly to sell, or has some concentration of holdings (i.e. employer’s stock), the vast majority of wrap accounts can’t begin to address the former while none can address the latter," he says.

Advisors who aren’t able to become more flexible on fees had better look over their shoulders. Mr. Sjögren says, even in good markets, about seven per cent of millionaire households are looking for a new primary advisor each year. That’s more than 30,000 dissatisfied high net worth accounts in search of a new home. "The rich have choice," says Mr. Sjögren. "And more and more, they’re willing to exercise that choice."

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