In Name Only

Financial advisors who fancy themselves wealth managers are having trouble walking the talk. This is the most significant finding of our recent research into the business of wealth management. In past columns, we've argued that adopting a wealth management business model can make a big difference for financial advisors on two important fronts: satisfying affluent clients and increasing profitability.

Financial advisors who fancy themselves “wealth managers” are having trouble walking the talk.

This is the most significant finding of our recent research into the business of wealth management. In past columns, we've argued that adopting a wealth management business model can make a big difference for financial advisors on two important fronts: satisfying affluent clients and increasing profitability. Trouble is, too many advisors have changed their titles but not their approach. Intentionally or not, they are selling the same old thing in a new (misleading) package.

This raises a number of issues. First, it means that the would-be wealth managers are not attracting or impressing more affluent clients and probably are not making any more money. Worse still for the financial services industry as a whole, they are further diluting the idea of wealth management — a term already so overused that it's in danger of becoming meaningless. When you can earn, or simply buy, a degree in wealth management on the Internet, something's amiss.

What Is Wealth Management?

Simply stated, wealth management means addressing every aspect of each client's financial life in a consultative and highly individualized way with a range of products, services and strategies. A wealth manager has to gather enough financial and personal information from his client to make the products, services and strategies feel tailored, rather than off-the-shelf. This requires connecting with clients on an interpersonal level that's well beyond the industry norm.

Since no single person has the expertise to address every client need, being a wealth manager also means finding and running a team of financial specialists who can help. What wealth management means for clients — and why it's so appealing to them — is that each client is seen as unique. That's the way the affluent like to think of themselves, and it is why they are put off when treated as if though they are less than special.

Furthermore, it is worth noting, the definition of wealth management is shifting — and with good reason. Part of the promise of wealth management is that it keeps up with the needs and expectations of the wealthy, and whether it's a matter of products, services or relationships, those needs and expectations evolve. Nonetheless, the core definition in the preceding paragraph remains unchanged.

How does that definition jibe with the way aspiring wealth managers think? For some time, we've begun meetings and seminars on wealth management by asking the participants to define it. Typically, we've found that most people think of wealth management as another name for investment management — perhaps more tax-efficient investment management.

That may explain why, out of the more than 5,000 financial professionals we surveyed who called themselves “wealth managers,” only one in 10 actually fit the profile. That means that 90 percent were off the mark and, assuming their intentions are good, that would qualify as a major disconnect.

What's the Matter Here?

First, as we've noted in the past, making the move to wealth management is arduous. It calls for a different way of thinking, bringing in other advisors on your client's behalf and connecting with clients on a highly personal level. So, even if advisors wanted to become wealth managers, regardless of whether or not they had the definition right, they might not have the capability, mindset, resources or commitment to get there.

They're falling short. This can be traced back to the task of information gathering. In the financial services industry, the norm is fact-finders who do not go too far beyond investable assets: The goal is to find the money, not get to know the investor as a person. Wealth management, however, is premised on an in-depth understanding of each client. Without that understanding, wealth managers can't uncover and address true needs and can't identify real opportunities. Worse still, they can make recommendations that are ill conceived and uninformed.

Our research backs this up. In a 2003 study of 105 clients with at least $5 million in investable assets, better than four out of five said their advisors didn't understand them; a similar percentage said they didn't like their advisors' recommendations. One solution, we've found, is the Whole Client Model, an in-depth client-profiling tool that is based on the information-gathering techniques of very successful wealth managers. It has seven categories, including client vitals, goals, relationships, advisors, process, interests and, yes, assets. Each category has a corresponding subset of questions. Successfully used, it can set the stage for effective wealth management.

We've also found that many advisors who want to become wealth managers suffer from a lack of product knowledge and implementation skills, in large part because of their reluctance to call in specialists to help out. Even if they can identify a problem, like a highly concentrated stock position, they are unable to lay out all the options, decide which option might be best for a particular client (and why) and explain how it works.

Why Bother?

If wealth management is hard to understand and harder to get right, why would anyone want to become a wealth manager? Here's the answer: For financial advisors who were coached on a one-to-one basis to become wealth managers, their profits rose by at least 35 percent in the first year — after expenses and including the cost of the coaching. That's not all. Their existing clients were more satisfied. Their businesses were less susceptible to what the stock market was doing. And they got high-end referrals, most often from accountants and private client lawyers who worked with the affluent. But, importantly, a successful wealth management practice is not dependent on new clients; wealth managers often get more assets to manage from existing clients assuming, of course, that they have established why their being a wealth manager makes a difference to the client. To do that, they need to have a clear working definition of what wealth management is, what it entails and how to get there. For now, anyway, that seems to be the rub.

Writers' BIOS: Russ Alan Prince is president of Prince & Associates.

Hannah Shaw Grove is managing director at Merrill Lynch Investment Managers.

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