The Emerging Investor

Once upon a time, full-service brokers were worried about losing the next generation of investors. But now, traditional firms are convinced they can attract the new wave of emerging investors--even when those investors may not want a broker.These typically younger clients have big dreams, growing earnings, and often have some knowledge and experience with investments. Prior to the emergence of widespread

Once upon a time, full-service brokers were worried about losing the next generation of investors. But now, traditional firms are convinced they can attract the new wave of emerging investors--even when those investors may not want a broker.

These typically younger clients have big dreams, growing earnings, and often have some knowledge and experience with investments. Prior to the emergence of widespread online trading services, these investors' options were limited to discount firms and no-load funds.

"Our industry has handled this all wrong. We've let the discounters set the stage," says a Morgan Stanley Dean Witter rep. "Brokers will steal your money," he says, mocking the glut of TV ads critical of traditional full-service firms. "Emerging investors see those ads and put us on the defensive."

But today, high-income emerging investors are recognized as a key segment in affluent-client marketing at the full-service firms. Mark Panfil, a Salomon Smith Barney vice president in Rolling Hills, Calif., points to the potential: "I'm fortunate, I live in California and I'm 31-years-old. Young clients [25 to 45 years old] earning 100,000 dollars to 250,000 dollars annually are not that hard to find."

Previously, these clients were in the purview of the discounters. "But many of the discount brokers are discovering that they're losing the higher-net-worth accounts because there is no accountability," says Terrence Loftus, a Prudential Securities rep in Princeton, N.J. "As accounts grow, clients want someone to be accountable. ... In that respect, the Internet has really helped us. People are not sure where the latest information came from or how good it is. If we give advice, they remember it and they know us."

Attracting Emerging Investors The obvious way to attract the emerging investor is through the Internet.

"Young people love to use Prudential Online," says Lawrence Durso, a Prudential Securities broker in Edison, N.J. "We approach it through vertical integration. We try to involve the entire family, starting with the parents [the emerging investors] and then include the grandparents and kids."

Investing can become a family project. "The [30- to 40-year-old] kids show their parents and their kids how it works. It makes them work together," Durso says.

Bob Brewster, Merrill Lynch first vice president and senior director of strategic technology and resources in Plainsboro, N.J., confirms the Web's dominance among this group. "The Internet is the way the initial investors want to be served," he says. "We offer many programs for the emerging investor and they're available through Merrill Direct."

Brewster cites the Ask.Merrill Web site, an online service that provides basic answers for beginning investors, which drew 300,000 subscriptions in its first month.

Even though emerging investors expect online access and communication, they still respond to traditional methods. For example, Panfil says he attracts younger prospects through seminars and social networking.

Making the Transition Online account access, online trading plus online self-help tools make it possible to serve a "not-quite-full-service" audience, many of whom are emerging investors. Here's a wrap-up of what several traditional firms are offering to attract and serve the self-help crowd--and give them a route to a full-service rep.

MSDW Online is using the firm's branches as service centers where a designated administrative staffer will help both online and in-person investors establish accounts. Reps receive a small amount for trades initiated by their full-service clients who open an online account.

But so far MSDW hasn't produced a wave of new business for reps. Some of the initial movement has been the other way--from full service to discount. "We've convinced the investor to do it online but now they're coming to me soliciting advice," saysone veteran of the firm. "As a result, I'm making a lot less providing advice for [a client] making his own trades."

Merrill Lynch Direct has "seamless" integration with its full-service side, according to the firm. In addition to a variety of online services and planning tools, Merrill gives online investors phone numbers and office locations for its full-service brokers. Merrill refers questions from discount customers to its salaried service center reps via an 800 number.

The choice whether to go full service is the clients'. "Clients make the decision," Brewster says. "We don't promote [the transition to] our full-service option, but we won't discourage it either."

If a discount customer wants a broker, "full service is offered through the exact same platform they've been using on Merrill Direct," Brewster says. "We can help them find a financial consultant with little or no paperwork."

American Express Financial Advisors is also integrating its American Express Brokerage discount operation with its network of planners. "Part of online service is education, so the investor should know when it is time to contact a financial planner," says Ora Kaine, vice president for financial planning and advice services at AEFA in Minneapolis.

The key tool for investors is a "Road Map to the Future" planning service. Clients input information, answer some questions, and then receive red, yellow or green lights to give them some idea where they need help. "It's educational for them to see how one area affects another," Kaine says.

AEFA makes it easy for discount customers to find help. "We offer an adviser locator where you can enter a ZIP code and get the names of AEFA advisers in your area," Kaine says.

Will brokers see more of these investors quit the do-it-yourself ranks? Many observers seem to think so.

"Emerging investors are smart, tech-savvy people with high incomes who don't have the time, ability or inclination to manage their own portfolios," Panfil concludes.

American Express Financial Advisors offers an hourly pricing option for clients. It's designed to appeal in part to emerging investors.

Paying by the hour helps "first-timers find what they're looking for to get started," says Ora Kaine, vice president for financial planning and advice services at AEFA in Minneapolis. She says hourly customers then develop into commission-based clients.

Bob Brewster, Merrill Lynch first vice president and senior director of strategic technology and resources in Plainsboro, N.J., has a different take. "My gut feeling is hourly pricing won't attract clients," he says. "They don't feel comfortable when the clock is ticking. They're much more comfortable knowing how much it is going to cost."

Emerging investors are not typically dot-com millionaires.

"Most of the emerging investors today are the result of a transference of wealth," says Terrence Loftus, a Prudential Securities rep in Princeton, N.J. And he says more inheritances are coming.

Over at Merrill Lynch, emerging investors "run the gamut" according to Bob Brewster, Merrill first vice president and senior director of strategic technology and resources in Plainsboro, N.J. "They range from the families of our investors, the sons and daughters of old clients, to brand-spanking new clients."

Ora Kaine, vice president for financial planning and advice services at American Express Financial Advisors in Minneapolis, identifies emerging investors as those who are beginning to have some discretionary income. One broker concurs by describing them with four words: "Higher income, lower assets." They often have stock options.

Emerging clients tend to be 28 to 45 years old. They are successful, tech-savvy and highly educated. They love to gather information and bounce ideas off one another. They want to build a portfolio and take calculated risks. Their performance expectations are high.

"The emerging investor is a higher-octane, performance-driven client," says Mark Panfil, a Salomon Smith Barney rep in Rolling Hills, Calif. "They're not market historians."

What They Need Retirement and college investment needs are certainly areas for brokers to explore with these clients. With smaller amounts to invest, mutual funds are in order. But many are trading stocks online and want second opinions.

Don't stop there, though. "Many young investors see online trading as recreation," says Sandra Johnson, a CFP at Johnson Carriar Carlson/

Wallace & Associates in St. Cloud, Minn. "As the money grows, they may get serious and realize they now need a financial planner."

What They Know Emerging clients have acquired a lot of information. Brokers warn that since these prospects have not experienced a down market, many may think they're smarter than they really are.

"They are the most educated group but not the smartest," notes one rep.

What They Want "They want Internet access and appreciate constructive thinking and market discipline," says one 30-something broker. Another rep warns, "Trust and loyalty are nice but buying stocks that perform is more important to this crowd."

Emerging investors are results-oriented and they want to watch their portfolios grow. Try instilling patience by educating about risk levels and style shifts, as well as providing leadership and an experienced, historical perspective.

Where They Go Wrong Other than short-term thinking, younger investors may over-rely on self-help sources and online tools. And they may misuse these aids.

Kaine points out that while many financial Web sites have financial planning tools, entry-level clients will look only at the tools for investments and ignore areas like taxes and retirement.

"Their investments may do well but they don't realize that [successful investing] will have a significant implication on their taxes," Kaine says. "They chose not to get the entire financial package. So they didn't get the right advice."

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