Strategy 2:
Implement Wealth Management
Strategy 2 Contents
1. The Affluent Market
2. The Nine High-Net Worth Personalities
3. The Five Key Financial Concerns of the Affluent
4. The Six C's of Client Loyalty
5. The Four Business Models
6. Wealth Management Formula
7. The Compelling Logic of The Wealthy Client Pipeline
8. Bringing Two Powerful Business Drivers Together
9. Conducting Discovery, Step By Step
10. Components of an Effective Agreement
11. The Thought Leadership Process
Resources
A key element in gaining clarity about the practice you want is being extremely clear about your business model.
An important aim of The Elite Wealth Manager is helping you implement the wealth management business model at a very high level, potentially even at the elite level.
Here in Strategy 2, we set the stage for you to become an elite wealth manager by exploring some of the most important aspects of today’s affluent market along with crucial characteristics of affluent individuals, including high-net-worth personality, major financial concerns and what they want from their financial advisors. We then put that in context within the four major business models used by financial advisors, and give you an important tool for effectively communicating your value as a wealth manager.
Implement Wealth
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Management Transcript
1. The Affluent Market
We begin with a look at the affluent market overall, including the various levels of affluence and the size and growth of the affluent market in the United States today.
Levels of Affluence
Some financial advisors tend to treat all clients and prospective clients largely the same. However, the affluent can be very different from those of more moderate wealth. Even more important, affluent clients at varying levels of wealth can differ significantly from one another in their goals and what they want and need from their advisors.
In The Elite Wealth Manager, we define three distinct levels of affluence, ranging from the affluent who hold investable assets in the range of $1 million to $5 million; the super affluent who have between $5 million and $25 million in investable assets; and the ultra-affluent, who have more than $25 million in investable assets. (See Exhibit 2.1.)
Many financial advisors focus on the mass affluent—a group we define as having between $100,000 and $1 million in investable assets. While this might appear to be an attractive market at first glance, it has clear limitations. It is exceedingly difficult, if not impossible, to profitably provide a comprehensive wealth management experience to clients with this level of investable assets, particularly those at the lower end of this range. To make a significant impact on your clients’ lives, on your practice and on your own quality of life, you will need to serve clients with more wealth.
For a great many financial advisors, the affluent stratum represents the “sweet spot” for clients and prospective clients—the one where they can most effectively add substantial value to their clients’ financial lives. For this reason, we will focus on those in the affluent category throughout The Elite Wealth Manager. The wealth management client experience you will build throughout this program will meet the needs of clients at this level extremely well.
In contrast, individuals and families in the two upper strata, particularly the ultra-affluent, frequently present financial challenges of such complexity that they are better addressed in a traditional or virtual family office setting. This is also often the case with people with a net worth of $10 million or more—even when they have investable assets of less than $5 million. As you perfect your wealth management practice, you may choose to continue to move up market to serve clients at these higher levels of affluence. Roundtable, CEG Worldwide’s mastermind group of elite wealth managers, is devoted to a great extent to helping advisors attract and serve clients at these higher levels.
A Word About the Super Rich
We will make reference from time to time to the Super Rich, which we define as individuals and families with a net worth of $500 million or more. We do this not because we recommend that you pursue Super Rich clients, as the needs of virtually all of these clients are best addressed in institutional or elite single-family office settings. Instead, we will share insights from the Super Rich in their approach to managing their money and their lives when they are applicable and useful to clients of much less wealth and to you as their advisor.
The Size and Growth of The
Affluent Client Market
There has been substantial growth in the number of affluent individuals in the United States since the economic downturn of 2008-09. As Exhibit 2.2 shows, the number of individuals with investable assets of at least $1 million nearly doubled from 2.9 million in 2009 to 5.3 million in 2018.
Likewise, the overall amount of wealth of those with investable assets of at least $1 million nearly doubled in the 2009-2018 period, growing from 2.9 trillion to 5.3 trillion, as you can see in Exhibit 2.3.
There are approximately 420,000 financial advisors working in the United States right now. With 5.3 million individuals with $1 million or more in investable assets, that works out to an average of over 12 affluent clients per financial advisor—if the playing field were level.
But the playing field is not level, nor do we want it to be. We want you to have an unfair competitive advantage in order to attract much more than your share of affluent clients to your practice. You will gain this competitive advantage through The Elite Wealth Manager.
Resources
Strategy 2: Implement Wealth Management Audio
Strategy 2: Implement Wealth Management Audio
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Affluent Market Audio
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Affluent Market Transcript
2. The Nine High-Net-Worth Personalities
9 High-Net-Worth Personlities
While demographic data gives us an understanding of the opportunities in the affluent market, they do not tell us everything we need to know about who the affluent really are and how you can serve them best.
To determine the right affluent clients for your practice, and then to employ the systems that will consistently meet their particular needs well, you have to go deeper. You need to understand what we call “high-net-worth psychology”—a framework for understanding what affluent individuals want from their money and their financial advisors.
High-net-worth psychology will help you answer many questions about the affluent: Why do they switch financial advisors? Why do they prefer some services and products over others? Why do some have many financial advisors and others only one? Why do they choose the financial advisors they do?
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Strategy 2: Implement Wealth Management Audio
Strategy 2: Implement Wealth Management Audio
Quiz: High-Net-Worth Personalities: Reinforce your Knowledge
Resources
Strategy 2: Implement Wealth Management Audio
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Quiz: High-Net-Worth Personalities
In the Tools section of this strategy, you will find two interactive resources for getting the most from your knowledge about high-net-worth personalities:
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High-Net-Worth Personality Self-Diagnostic Quiz—Determine your own high-net-worth personality as well as which personalities are most compatible and profitable.
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High-Net-Worth Personalities Refresher—Test and reinforce what you know about the high-net-worth personalities.
High-net-worth psychology is applicable to every aspect of attracting and retaining the affluent. It will enable you to more effectively connect with the right prospective clients and then to build healthy, long-term relationships with your affluent clients. By using it, you will communicate better, obtain more qualified introductions and acquire more assets to manage. In short, high-net-worth psychology will underpin every part of your success in your work with affluent clients.
High-net-worth psychology revolves around an understanding of the nine personality types of affluent individuals. The original research identifying these nine personalities was conducted more than a decade ago by CEG Worldwide’s director of research at the time, Russ Alan Prince. This landmark study was—and still is—one of the most comprehensive and relevant examinations ever done of the affluent. It changed how we deliver the wealth management experience and continues to inform the best practices of serving the affluent.
Exhibit 2.4 provides an overview of the most important needs, values and motivations of each personality.
Strategy 2: Implement Wealth Management Audio
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High-Net-Worth Personalities Transcript
Strategy 2: Implement Wealth Management Audio
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High-Net-Worth Personalities Audio
As you can see from Exhibit 2.5, Family Stewards make up the largest group of affluent individuals, at 34.1 percent. The second-largest group is Independents, at 16.8 percent.
We will now take a look at each different personality type in a little more depth.
1. Family Stewards
“Good financial management lets me take good care of my family.”
The largest group of affluent individuals, Family Stewards’ primary financial concerns are about taking care of their families. Most of their financial goals and needs are linked to larger family issues such as paying for college or transferring wealth to the next generation. They are average in their knowledge of wealth management.
To work with Family Stewards, you need to demonstrate expertise, which they define as being able to provide the services that will enable them to best fulfill their chief goal of caring for their families. You also need to show that you are prudent and careful in order to work well with Family Stewards. They need to feel that you are very protective of them and value their goal of protecting their families exceptionally well.
Family Stewards are highly responsive to a variety of advanced planning services because of their motivation to do the best by their families. They readily understand why planning would put them in a better financial position. As a result, they are very interested in estate and financial planning, and most are very interested in asset allocation services.
Family Steward Case Study
A financial advisor was introduced by one of his affluent clients to an affluent individual who had a daughter, Mary, who had muscular dystrophy. From their first meeting, it was clear that everything in this person’s life revolved around how he was going to take care of his daughter. The advisor quickly realized that the prospective client was a Family Steward whose financial goals centered on the well-being of his daughter. They developed an appropriate wealth management plan, and every time financial decisions were addressed, the advisor prefaced the discussion by saying, “Here is how this is going to help Mary.”
Shortly after they began working together, the client began to provide unsolicited introductions to prospective clients. These prospective clients were also affluent people with children who had muscular dystrophy. As it turned out, the client belonged to an association for families with children with this condition, and the client was so pleased with the detail and care taken on behalf of his child that he urged other parents to go to his financial advisor.
2. Independents
“To me, successful financial management means freedom.”
Independents are straightforward: They want the freedom to do whatever they want, and they seek to achieve this freedom through financial security. While they may hold corporate jobs or run businesses, they dream of financial freedom that would allow them to pursue hobbies or travel full time.
Independents are average compared to the other groups in terms of their financial knowledge and sophistication, and they will turn to you to compensate for their lack of expertise. They define this expertise as an ability to provide financial advice that will enable them to achieve financial freedom.
Because they understand the importance of allocating their assets wisely but generally do not do a good job doing so themselves, they are interested in asset allocation services. Because they typically retire early and know how important it is to keep their money working, another important area of interest to Independents is retirement distribution planning.
Independent Case Study
Carolyn, a chief engineer at an aerospace company, had a 401(k) plan into which she had put money for many years. Her company matched her contributions and also offered a profit-sharing plan. Carolyn decided to look at her options and began talking with a couple of financial advisors.
One of them realized that Carolyn was an Independent. Acting on this insight, this financial advisor began every meeting with Carolyn by emphasizing that the key objective was to figure out the best way for Carolyn to take her distributions so that she would never have to worry about money again. The financial advisor convinced Carolyn that he understood her personal goals and was rewarded with a $3.2 million IRA rollover account.
3. Phobics
“The last thing I want to talk about is my money.”
Because they so dislike dealing with money, Phobics are hard to miss. They do not understand money nor do they want to learn about it. Instead, they much prefer delegating the management of their financial affairs to a trusted wealth manager. Because they have little financial knowledge or sophistication with which to judge an advisor, they do so emotionally, going with their “gut feelings.”
For you to succeed with Phobics, they must see you as a reliable and dedicated authority. To them, this means being able to take care of all their financial matters and being dedicated to their best interests. With little interest in investing, Phobics—of all the nine personalities—are both the least knowledgeable about and the least sensitive to investment performance.
While most Phobics do need advanced planning services, they are not interested in participating in an extensive financial, estate, investment or tax planning process. This creates a challenge: to get them to commit to a process that they need but do not want to participate in.
Phobic Case Study
One advisory firm that has adopted catering to Phobics as the core of its business. As the market steamed ahead at a double-digit pace in recent years, the firm returned an average annual return of less than 5 percent.
In spite of these returns, the firm has not lost a single affluent client. In fact, it grows its client base by more than 25 percent annually. Because of the firm’s success in growing its account base, three years ago it instituted a $2 million minimum for new accounts.
This advisory firm is located in Florida and focuses on widows whose money has come from life insurance as its primary clientele. Whenever the financial advisors have client meetings, they talk mostly about personal issues—Medicare, grandchildren, golf. They touch on financial issues only briefly. In fact, this accounts for their success with affluent clients. The advisors focus almost exclusively on developing and enhancing personal rapport, not on the nuts and bolts of wealth management.
4. Anonymous
“My money is my business and no one else’s.”
The Anonymous are intensely private people who do not want to disclose their financial positions to anyone. While this clearly represents a challenge—it will take some time before the Anonymous will provide you with information—it can also be a plus. In part because the Anonymous do not want to talk to anyone else, they tend to be loyal to advisors who have won their trust.
In order to work with a wealth manager, the Anonymous need to feel absolutely confident that their privacy will be preserved. Thus, they choose advisors who understand this and communicate the steps taken to ensure confidentiality. To work effectively with the Anonymous, you must be extremely discreet and miss no opportunity to emphasize the lengths to which you will go to protect client information.
Because they are so tight-lipped about their holdings, many of the Anonymous have not been through basic estate and tax planning processes. If you can secure their trust, these advanced planning services are appropriate for the Anonymous.
Anonymous Case Study
Alex was referred to a financial advisor by his attorney. The financial advisor consulted initially by phone and set up a meeting. One of the first things Alex told the financial advisor was that he hated taxes. Alex also said he thought that the Internet made personal information too easy to access.
After a few questions, the financial advisor determined that Alex was one of the Anonymous. He told Alex he thought his concerns about privacy were justified and that confidentiality of all interactions was a priority. He then asked Alex where he would like to meet in the future in order to ensure privacy. Alex said he preferred his office. During the meeting, the financial advisor emphasized his security measures in all dealings with clients and was rewarded with Alex’s account.
Alex has been a client of this financial advisor for seven years, although they meet infrequently. Because of Alex’s concerns about Internet security, they exchange documents only by messenger. Alex has rewarded his financial advisor with a 60 percent increase in assets over the initial account, totaling $6.8 million.
5. Moguls
“Being rich means power.”
Moguls are motivated by power. They seek control, influence and power in their families, businesses, communities and finances. While they do have some financial knowledge, they are not interested in it per se but regard it as another forum for flexing their power and control.
To successfully work with Moguls, you must acknowledge their power and be powerful yourself. At the same time, you must understand that they want to be in total control of the relationship. This means that you must be appropriately deferential and that you must emphasize ways in which they have control over their financial affairs in terms of making the big decisions.
Moguls find the idea of asset allocation very appealing because it means they can have control over their investments without having to be involved in the day-to-day details. And because they see themselves as important, prominent people who may be likely targets for lawsuits, they are interested in wealth protection.
Mogul Case Study
Bob was a partner in a very successful law firm. He and his wife had a daughter and a son. A year ago, Bob had a stroke. Although he fully recovered, he was still worried about his health as well as his family’s financial well-being. His daughter continually maxed out her credit cards, just like her mother, whom he blamed for this behavior. His son had problems with drug and alcohol abuse and had never been good with money.
Bob felt he had no one he could trust, and he wanted to make sure his family did not fritter away all his money. He decided he needed to structure his estate so that his wife or kids would not lead themselves into financial ruin after he was gone. He felt that he was the only one strong enough to ensure his family’s financial well-being.
Bob’s financial advisor was sensitive to his psychology and control issues. He helped Bob structure an estate plan that addressed his concerns and met his control needs.
6. VIPs
“There are lots of ways to get respect, and having money is one of them.”
VIPs are status-oriented, enjoying prestige and the respect of others. VIPs are the type of affluent people who look rich, and wealth management for them is about the ability to buy status and possessions.
VIPs are not especially knowledgeable about finances and will rely on you as a wealth management expert. To relate well to VIPs, you need to be particularly attentive and responsive. You should especially stress the reputation and prestige of your institution or firm.
VIPs often already have financial or estate plans and therefore are not very interested in them. Instead, because they see themselves as minor celebrities who need to protect themselves from lawsuits, their strongest interest is in wealth protection services. They are also interested in charitable giving because they see donations to various causes as a way to elevate their social standing.
VIP Case Study
An affluent client introduced a prospective client named Victor to her financial advisor. The financial advisor used high-net-worth psychology to determine that Victor was a VIP. Over the course of several phone conversations, it became clear that Victor already had a number of financial advisors. There was nothing really motivating him to open a new account with this advisor.
The advisor approached Victor with a game plan to develop a private foundation in his name and positioned it to appeal to the VIP profile. He did so by pitching the private foundation as “the way people of your stature give.”
Victor became intrigued, especially after the advisor showed him certain tax advantages. After almost a year of discussion, Victor had become so pleased by the advisor’s service that he transferred just shy of $3 million for discretionary management to this advisor. High-net-worth psychology enabled the financial advisor to get a foot in the door, which in the end led to greater assets under management.
7. Accumulators
“You can never be too rich or too thin, but being rich matters more.”
Accumulators save more than they spend, tend to live well below their means and do not exhibit any outward displays of wealth (and have a disdain for those who do). What they do enjoy is watching their money grow. The more they have, the better they feel. Capital appreciation is an end in itself.
To work with Accumulators, you have to continually repeat back to them their goals and motivations. They are performance-driven and expect you to be the same way—concentrating on piling up those assets and congratulating each other on successful performance results.
Accumulators are open to various advanced planning services, especially if those services will result in more money. Asset allocation services are also attractive to them because the point of asset allocation is to maximize long-term results.
Accumulator Case Study
A financial advisor had a physician client with an account worth more than $5 million. The physician did not particular care about protecting her family, saying, “Why should I leave it to them? They didn’t work for it.” She didn’t care about power or yachts or freedom. All she cared about was watching her money grow, and she was consistently critical of her financial advisor.
The physician constantly asked why the funds the financial advisor chose did not beat this or that fund. The financial advisor would reply that no one can pick the leading fund year after year. Then he would try to educate the doctor about investing and why returns fluctuated. Nevertheless, the doctor would become angry. The financial advisor realized he had an Accumulator on his hands.
With that high-net-worth psychology insight, the financial advisor soon understood he was doing the wrong thing in trying to educate his client on the nuts and bolts of investing. So instead, he began every meeting, conversation and sentence with, “This plan is what is going to give you the most money over our ten-year plan.” By doing so, he took the client’s focus off the year-to-year returns and kept it on the long-term plan for maximizing gains. He has kept the client for six years and counting.
8. Gamblers
“You have better odds playing the market than at Vegas.”
Gamblers love the excitement and drama of investing. For Gamblers, investing is a hobby. For some it is their work, and for a few it is their life. Because of this, they are more performance-sensitive than any other group. While they are very knowledgeable about investing, they are not always astute. They believe, for example, that it is possible to consistently beat the market. Not surprisingly, they often have a higher-than-usual risk tolerance.
Gamblers love to find people with whom they can talk about investing and need their wealth managers to be as involved as they are. They like their wealth managers to share in the emotional excitement of investing and want them to have the same level of investing expertise.
Most Gamblers are not particularly interested in having someone approach them with advanced planning services unless such services are truly state-of-the-art.
Gambler Case Study
For one financial advisor, the majority of his clients are Gamblers. Like his clients, his life is the market. His enthusiasm, coupled with his knowledge, makes him ideal for working with Gamblers.
In meeting an affluent prospective client, he requires less than five minutes to determine if the person is a Gambler. When the person is a Gambler, getting the business is a slam dunk. Why? Because the financial advisor and the prospective client are immediately on the same wavelength. Rapport is instantaneous.
One of his clients, who has about $40 million under management—half in a managed account and the other half for trading—talks to him almost every day. Even when the client goes on vacation, he calls every day. Both of them relish the excitement of the markets, which makes the relationship work.
9. Innovators
“Derivatives are the best thing that ever happened.”
Innovators are extremely knowledgeable and like to be at the cutting edge of wealth management. They like new products, innovative services and sophisticated analytical methods. They often have technical backgrounds and might be computer programmers, engineers or mathematicians.
To earn the trust and assets of Innovators, you have to prove your worth in terms of leading-edge product expertise. It is not unusual for Innovators to run sophisticated analytical software on their own.
Like Gamblers, Innovators are interested in only the most sophisticated planning services. If you conduct an asset allocation analysis, you should be prepared to review with them the various assumptions built into the model with which you are working.
Innovator Case Study
Robert is a computer scientist who made millions designing industry-specific enterprise software. In fact, his core software program is one of the most widely used packages of its kind. His software has made him extremely wealthy.
Robert is a self-proclaimed nerd. He is interested in the mathematics of money management, and his primary financial advisor is similarly focused. Critical for the financial advisor is her ability to discuss everything from Sharpe Ratios to the efficient frontier. In fact, she dissects every investment along these lines.
It took Robert a long time to find a financial advisor who was technically astute enough to keep up with him. Being as knowledgeable as he is, why does Robert need to employ the services of a financial advisor? First, he requires someone to help him think through the issues. Second, he needs someone to bring him the latest thinking in the field. Third, he needs someone who is tied in to Wall Street and can implement his investment desires.
Working with Innovators requires a high degree of technical sophistication. Those financial advisors who recognize affluent individuals as Innovators and can keep them on the cutting edge will be greatly rewarded for their efforts.
3. The Five Key Financial Concerns of the Affluent
We now arrive at the most critical knowledge you can have about the affluent: their most important financial concerns. Affluent clients want to work with true authorities: financial advisors who can help them make informed decisions to solve their most pressing financial challenges. When you know what those challenges are and can articulate them succinctly, you are ready to position yourself as the optimal financial advisor for your prospective clients.
As with our understanding of the high-net-worth personalities, we initially identified the major concerns of the affluent during a foundational study by Russ Alan Prince. The findings of that research have been re-confirmed many times since the initial study. As we have coached thousands of financial advisors who serve affluent clients, we have heard the following five major concerns repeated over and over again.
1. Wealth Preservation
Above all else, the affluent are concerned about losing their wealth. Despite their wealth, they are not immune to financial setbacks. But wealth preservation is not only about not losing money—it’s about having enough money to fund their lifestyles, whether simple or extravagant.
The goal of wealth preservation is to produce the best possible investment returns consistent with the client’s time frame and tolerance for risk. This is the primary area of focus for most financial advisors. As a wealth manager, investment management will be only the foundation of the value you provide to affluent clients. As you will see, you will also help them to address their other four key financial concerns.
2. Wealth Enhancement
Wealth enhancement is about tax mitigation: minimizing the impact of taxes on clients’ investment returns while ensuring the cash flow they need.
We have seen that mitigating incomes taxes is one of the major financial concerns of the great majority of affluent individuals and families. Mitigating estate taxes and capital gains taxes also ranks high on their list of concerns.
It’s no surprise that so many affluent share these tax-related concerns. Taxes can—and do—eat up a great deal of wealth. As a wealth manager, you will help your clients enhance their wealth by minimizing this impact.
3. Wealth Transfer
Effective wealth transfer is all about taking care of heirs: finding and facilitating the most tax-efficient way to pass assets to loved ones in ways that meet the client’s wishes with minimal difficulty and cost.
Given the fluid nature of today’s tax environment, affluent families need to be proactive in their wealth transfer planning efforts if they truly want their wealth to benefit their heirs to the fullest extent possible. As a wealth manager, you will help them do so.
4. Wealth Protection
This includes all concerns about protecting the client’s wealth against catastrophic loss, potential creditors, litigants, children’s spouses and potential ex-spouses and identity thieves—in short, ensuring that their assets are not unjustly taken.
Many affluent individuals are worried about being sued—not surprising, given how litigious our culture has become. This means that as a wealth manager, you will likely need to address controlling risks through business processes, employment agreements and buy-sell agreements, as well as restructuring various assets and considering legal forms of ownership—such as trusts and limited liability entities—that will help put your clients’ wealth beyond the reach of creditors and other parties who may seek to take it.
5. Charitable Giving
Many affluent individuals are looking outward beyond their own families to the world at large. For these people, making meaningful gifts to charity in the most impactful way possible is a key issue.
Charitable giving comes with its own unique set of challenges—from selecting the appropriate means of giving (such as direct gifts, donor-advised funds or private family foundations) to selecting causes and specific organizations that will have the biggest impact. As a wealth manager, you will help your charitably-minded clients to navigate the charitable planning process.
Wealth preservation, wealth enhancement, wealth transfer, wealth protection and charitable giving: This list will become very, very familiar to you as build and position your business to serve the affluent in your niche community. In fact, your ability to effectively address each of these key financial concerns will become the bedrock of your value promise to your affluent clients and prospective clients.
Resources
Strategy 2: Implement Wealth Management Audio
Strategy 2: Implement Wealth Management Audio
Strategy 2: Implement Wealth Management Audio
The Five Key Financial Concerns of the Affluent Audio