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Editor's Letter: October 2014

Editor's Letter: October 2014

Serving the Stagnating Mass Affluent

At last month’s Financial Planning Association conference in Seattle, advisor Marc Freedman held a well-received panel appealing to advisors to court mass affluent clients. Defined as those who have total assets of anywhere from $500,000 to $2.5 million, including the value of their real estate, and planning to spend anywhere from $4,000 to $10,000 a month in retirement, Freedman makes a convincing case that this population—a demographic numbered at 22.5 million—is “underserved and oversold” by financial advisors instructed and inclined to build a roster of richer clients. The mass affluent get the attention of advisors who want to sell them annuities or roll them over into IRAs and favored stocks and mutual funds, but afterwards those same advisors pull away because the client doesn’t warrant more attention. The mass affluent are, he says, like the “B” level students at school—not precious enough to get special attention, but not so bad off that they need extra help. 

Freedman, an advisor just outside of Boston, argued that they do need help, but not necessarily when it comes to investing their money. Advisors approaching the mass affluent with an investment advisory pitch are doomed to failure, he says. 

Investment management is increasingly a commodity service, costing on average 35 basis points. Advisors who tout their investment management savvy and believe they can do better than the market should find another line of work, Freedman says. “If you think you are so good at managing money, what are you doing in this business?” he asked the attendees. “You’d be paid a hell of a lot more managing portfolios for the fund companies.” Advisors, who typically charge 1 percent of client's assets, need to prove they are worth the additional 65 basis points by being the person clients will trust to give them the best advice around the big decisions they make. “Take an elderly client to buy a car, and they’ll love you for life.” 

This is certainly true, and almost all advisors I spoke to at the FPA conference were convinced that clients would always prefer the human element of a flesh-and-blood advisor when handling their financial affairs. I’m just not as convinced those clients will continue to pay 1 percent of their assets for the privilege—not just because of the commoditization of financial planning and investment management, but also the broader shifts in the equality of wealth in the U.S.

The wealth inequality gap is not between rich and poor, it’s between the high-net-worth households and everyone else, including the middle class, who have not seen a significant increase in their middling net worth in over a decade. 

It makes sense that there too will be a growing split in wealth management between services for the top households and everyone else. The top households will get white-glove service and pay for it. The rest will gravitate toward cheaper, more commoditized services, enabled by algorithm-based planning platforms and programs like Personal Capital or Vanguard’s Personal Advisor Services, which charges a flat fee of 0.3 percent—and there clients do get to talk to a real human advisor. According to Jason Zweig of The Wall Street Journal, Vanguard ranked sixth among all firms by the number of advisors who took the Certified Financial Planner exam in June, and has grown from $755 million in assets at the end of 2013 to $3.6 billion today. Schwab is working on a “ground-breaking” online advisory solution. Fidelity too is in the game.  

When it comes to retirement planning, Morningstar research suggests the benefits of good financial planning (i.e. optimal asset allocation, dynamic withdrawal strategy, annuities, etc.) are equal to an additional 1.59 percent return a year. The mass affluent demographic may desperately need financial planning. But given cheaper options, it’s harder to make the case they will give up two-third’s of that (before trading and fund management fees) to get it.

David Armstrong


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