It's a wonder that any brokers are dragging their feet when it comes to adopting wealth management strategies.
After all, wealth managers reported a 9.3 percent increase in revenue in this diffiult past year, according to our recent study of 4,106 brokers. That compares with declines of 51.8 percent for investment generalists and 9.4 percent for product specialists. On average, brokers reported a 34.9 percent drop in revenue.
While the evidence for a shift to wealth management is compelling, only 12.3 percent of the respondents, or 505 brokers, fit that category, by combining investment management with advanced planning services. So the message, while oft-documented on the pages of this magazine, has not been heard by all.
Investment generalists accounted for 65.5 percent of the sample. Product specialists, who focus on such individual investment products as managed accounts or exchange-traded funds, represented 22 percent.
When we narrowed the group to the 391 brokers at the highest end — those making $400,000 or more — the success of wealth managers was even more pronounced. Production was up 36.9 percent, compared with product specialists, who were up 1.6 percent, and generalists, whose revenue dropped 51.1 percent.
Additional research showed that the broader, more consultative approach that benefited the wealth managers was having the same positive impact in other industries. We found that a comprehensive wealth management strategy for banks, for example, was more than twice as profitable as offering basic banking services. Similarly, life insurance agents that offered wealth transfer planning as well as life insurance increased their average annual income over a two-year period from $87,000 to $139,000.
Wealth managers cover wealth enhancement (tax management strategies to improve overall investment performance), wealth transfer (personalized and tax efficient estate planning), asset protection (risk management strategies to protect assets from litigants, creditors and even family members) and charitable giving (meeting personal philanthropic inclinations with opportunities for wealth enhancement and transfer).
Their No. 1 challenge, not surprisingly, is finding wealthy clients. Our research among affluent clients has consistently shown that they are more interested in finding problem solvers than product pushers. The wealth management model fully fits the bill, and it's not only more attractive to prospects, but it can also generate additional revenue from existing clients and lead to referrals. The second key challenge is generating significant asset growth. Again, this is no shocker. What is important, though, is that the wealth management model generates revenues beyond the stock market; revenues for such services as life insurance or estate planning that are not affected by the Dow or the Nasdaq.
That's particularly relevant now because investor confidence is increasingly fragile, and those reps who can move their business model away from being totally dependent on the stock market will insulate themselves from further declines.
The wealth management model can also lead to increased profitability from existing clients. A client might have valuable and highly appreciated artwork, for instance, but be short on cash. Selling the artwork outright would result in punishing capital gains, but adopting a wealth management approach such as selling the art in a charitable remainder trust would not. As a result, a hard asset would be transformed into liquid assets that the wealth manager would invest — and potentially profit from.
The third key challenge is competition. While there are far fewer wealth managers than investment generalists or product specialists, competition is heating up. More firms and brokers are beefing up their expertise and adding services through acquisitions, expansion and alliances.
Still, it's a big step. The advanced planning component, in particular, can be hard to understand and properly integrate. Training in client management may be required, and wealth managers will have to build a network of resources that can deliver the full slate of services. But for those reps taking a long-term perspective, the same perspective they often encourage their clients to adopt, it may also be the best way to get more affluent clients and significantly increase profitability.
Hannah Shaw Grove is a managing director at Merrill Lynch Investment Managers.
Russ Alan Prince is president of Prince & Associates.
Yet More Evidence it Pays To Cater to the Rich
Wealth managers' revenues rise over past year.
|Business Model||Revenue Change|
|Source: Prince & Associates|
Brokers Cite Key Challenges
|Finding Wealthy Clients||92.9%|
|Generating Significant Asset Growth||90.7%|
|Competition for Clients||78.8%|
|Source: Prince & Associates|