While the emerging affluent may not meet an advisory firm’s investable minimum today, recent Fidelity research shows that this group of investors is well positioned to attain millionaire status down the road. What steps can advisors take to begin a relationship with these potential millionaires in the making as they build their asset base? To shed light on possible strategies for efficiently and profitably serving this segment, Fidelity spoke to a number of firms that are evolving their business models. The firm highlighted in this case study is Wescott Financial Advisory Group LLC, headquartered in Philadelphia, PA.
Founded in 1987, Wescott is a feeonly investment advisory and wealth management firm registered with the SEC. Wescott’s clients are highnet- worth individuals and families, trusts, foundations, pension plans, and institutions. Clients who are individuals or families typically have a range of financial planning matters that need to be addressed, which may include tax, estate, and insurance issues. They also have investable assets that exceed the firm’s minimum of $2 million, and they would like to have these assets professionally managed.
While working with its core wealth management clients, the Wescott team found instances when these clients requested assistance for other family members who didn’t meet the required minimum. Wanting to be accommodating, the firm would establish ad hoc accounts at a lower fee structure to help these individuals with their portfolios.
In 2010, Wescott opened an office in Miami. In many cases, the team was meeting with investors who were a strategic fit for the firm given the issues they were facing but, like some family members of clients, didn’t meet the firm’s minimum. Grant Rawdin, CEO of Wescott, wanted to find a more formalized way to work with these investors, including a growing Latino client base. After all, when he started the firm in his twenties, many of his clients weren’t millionaires, yet they represent some of the largest relationships for Wescott today.
Wescott’s “Entrada” program was launched in 2011 to provide investment management and associated financial planning services to clients with $250,000 to just under $2 million in assets. Entrada is Spanish for “entrance,” and Wescott views this as the entrée into working with the firm. Fidelity interviewed Rawdin to learn more about Wescott’s approach to serving what he describes as “younger accumulators,” and discussed four main components of the firm’s strategy:
- Identify investors who are a strategic fit
- Scale the product offering for smaller accounts
- Leverage technology to create efficiencies
- Align younger advisors with younger investors
1. Identify Investors Who Are a Strategic Fit
“Our goal was to find a way to build relationships with investors who have the potential to become significant clients for us in the future, so we launched Entrada,” said Rawdin. “We aren’t offering the program widely to the mass affluent segment, but to select investors we see as a strategic fit. We determine if there is a fit based on the types of services they may require. First, we assess if there will potentially be significant money to be managed at some point because they are accumulating assets, advancing in their careers, or growing a company. Then, we determine what kind of planning may be needed.”
“Many Entrada clients are younger, but they also include people who will be retiring in five to seven years, will be having a liquidity event, and are thinking hard about how to get ready for the future,” said Rawdin. The firm doesn’t want to lose focus on its typical high-networth client, however, and has limited the number of Entrada clients to fifteen percent of the business. “We felt that once we exceed fifteen percent, we are developing another core product line and need to modify our infrastructure,” added Rawdin. “In addition, the ratios of revenues to assets and revenues to the number of clients would drop, and margins would decline when we grow that line of business further.”
“People who become Entrada clients come in through Wescott and see their portfolios within the overall offering,” said Rawdin. “They aren’t positioned as junior clients of the firm, but clients who are accessing an investment and service model that is more appropriate for the size of their portfolio.”
“We now have our core wealth management clients and our Entrada clients,” he explained. “Those in the wealth management segment have an average account size of $5 million. On the first $2 million, they pay an investment management fee of 1.25 percent, which then declines in increments. There is an annual minimum of $25,000, which includes financial planning. Those in the Entrada segment have an average account size of $750,000. They also pay an investment management fee of 1.25 percent on assets under $2 million, but there is no annual minimum. There is a retainer fee for any financial planning that may be needed, which varies depending on the extent of the work.”
2. Scale the Product Offering for Smaller Accounts
“We use the same people and process for building the models for Entrada and our core wealth management clients,” said Rawdin. “The Entrada models are simply scaled to accommodate smaller accounts. For example, our larger clients have customized portfolios with access to a number of strategies that include separate accounts, which wouldn’t be appropriate for Entrada clients given the high minimum investment required to gain access. Entrada offers clients three models that utilize different combinations of cash, bonds, and equities: moderate, moderately conservative, and aggressive. We manage all portfolios for tax optimization, and harvest tax losses wherever possible, so Entrada clients can receive a lot of services that are generally reserved for larger accounts.”
“We handle financial planning for Entrada clients in the same way too,” explained Rawdin. “We have a conversation, gather data, and do a needs assessment to help develop a plan that can help keep Entrada clients focused on their goals. It normally doesn’t require as much in-depth work, however, as our larger clients tend to have broader and more sophisticated needs that can include extensive tax and estate planning.”
3. Leverage Technology to Help Create Efficiencies
The initial meeting with potential Entrada clients is done in person, but the ongoing flow of information is paperless. “We have a vault that houses all the various reports and commentary, and Entrada clients receive an email when the latest information is available,” said Rawdin. “Some wealth management clients use this as well, but it’s optional for them.”
“Ongoing rebalancing is also more efficient with Entrada as it’s less involved than it is for the wealth management clients, where a lot of things are customized,” says Rawdin. “We are also able to streamline investment reporting for Entrada clients. Since the asset allocation strategies are more straightforward, we have simpler reports that take less time to prepare. For example, we don’t need to provide extensive detail about each manager being used in order to assess the dynamics of the portfolio like we do for our core wealth management clients. Financial planning tends to be less complex for Entrada clients as well. The retainer approach ensures that our fees reflect the time required to prepare the plans.”
4. Align Younger Advisors with Younger Investors
In 2008, Wescott began a formal program to groom its next generation of staff by adding several younger team members each year. “We bring in recent graduates and teach them how we handle business at Wescott,” said Rawdin. “Our original intention was to train these advisors and bring them into our wealth management accounts so they could start to build relationships. However, we found that our younger associate advisors were bonding nicely with our Entrada clients, many of whom are younger themselves. We thought this was an ideal way to start an engagement that could last for many years, so have assigned them to this segment.”
“We have quarterly meetings with our wealth management clients depending on their preferences,” added Rawdin. “We typically meet in person with our Entrada clients once or twice a year, again because the issues are less complicated. Of course, staff members are available for discussions between visits.”
“About twenty-five percent of people in Entrada portfolios are the children of our wealth management clients— or even their parents,” said Rawdin. “Others we have uncovered through business development efforts to grow our core wealth management clients, or through our acquisitions.”
“Like many advisory groups, we have engaged in acquisitions of individual advisors and firms,” explained Rawdin. “When they have smaller accounts, we need to discuss who is going to Entrada and who is going to the wealth management program. For the acquisitions we have completed, this has worked quite well.”
Considerations for Your Business
Firms are evolving their business models in a variety of ways in response to new market opportunities. After reading about the changes this one RIA has made, you may want to think about how your firm is addressing the emerging affluent investor who may be tomorrow’s millionaire. Consider the following questions:
- The team at Wescott knew they wanted to find a way to build relationships with investors who have the potential to become significant clients in the future. Do we have a clear goal and understanding of how a strategy to target a new market segment fits into our business?
- Are there investors who may be a strategic fit for our business, although they don’t currently meet our asset minimum?
- Is there a model that could help us serve these investors efficiently and profitably?\
- Have we thoroughly investigated technologies that could potentially help us grow, as well as streamline and scale how we do business?
- Do we have a strategy for bringing on the next generation of advisors, who may be able to connect with younger investors and form long-lasting relationships?
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 The 2014 Fidelity Millionaire Outlook Study.