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Full Service Carries the Day

Daniel Yasharel learned his most important lesson about the financial advisory business even before he became a full-fledged member of it. It was 1992, and Yasharel was working as an insurance agent. He'd sold a policy to a client who called him up months later wondering whether Yasharel had disappeared. He said to me, What happened to you? I haven't heard from you. he recalls. I came up with an excuse,

Daniel Yasharel learned his most important lesson about the financial advisory business even before he became a full-fledged member of it.

It was 1992, and Yasharel was working as an insurance agent. He'd sold a policy to a client who called him up months later wondering whether Yasharel had disappeared.

“He said to me, ‘What happened to you? I haven't heard from you.’” he recalls. “I came up with an excuse, but he wanted to hear from me every month.”

After becoming a financial advisor a year later, he noticed insurance customers were not alone in demanding such hands-on treatment. He also noted that the most successful advisors were those giving those clients what they wanted — quarterly reviews and frequent base-touching phone calls.

In short, “I realized, there's a difference between a sales rep and an advisor,” he says. “You want to be the person who, as soon as a money matter comes up, your name flashes in the client's head.”

Embracing a consultative, wealth management approach paid off especially well during the dark days of 2001 and 2002. Yasharel, who works for AFP Group/Royal Alliance in Los Angeles, found investors were desperate for high-touch advice at that time. The fact that he specialized in precisely that type of service garnered him a slew of referrals, and by the time the markets started to straighten out in 2003, Yasharel was on his way to doubling his production and to having his best year as a financial advisor.

(He declined to furnish his exact production totals, but the Million Dollar Round Table, a professional association made up of 28,000 advisors and insurance agents, recently voted him to the “Top of the Table” group. This honor is bestowed on advisors “who have demonstrated exceptional professional knowledge, client service and ethical conduct.”)

Wide Angle View

Yasharel is hardly alone in his dedication to a consultative approach, and it turns out that there's good reason for the stock jockeys of the world to expand their horizons: Consultative wealth management is a more profitable approach.

According to a survey by wealth management consultants Prince & Assoc., commissioned by Registered Rep., wealth managers showed the greatest production improvement from 2002 to 2003, increasing their business by more than 50 percent.

By comparison, investment generalists saw a 30 percent increase and product specialists saw just a 3 percent uptick, on average.

“In a booming market, the floodgates opened” for those advisors who were fully involved in their clients' financial lives, says Russ Alan Prince, president of Prince & Assoc. Such advisors “have a better understanding of their clients, and they were able to identify opportunities to provide additional services, and, in turn, capture more of the clients' assets.”

The bad news, according to Prince's survey, is there still aren't many true wealth managers out there. Though many believe what they're doing is wealth management, just over 10 percent of the 818 financial advisors surveyed were classified as wealth managers by Prince.

What separates the pretenders from the true believers is a commitment to reducing their client load and slowly converting the chosen clients to a wealth management approach. This can be painful in the short term — for advisor and client alike — and it takes a certain amount of guts to make the leap.

As a result, “we're not even close to saturation level” in the business of wealth management, Prince says. “Everybody says it and everybody talks about it…but in the last few years we've been getting a 10 percent figure [for wealth managers]. What it's telling me is in most of the industry it's a lot more talk than reality.”

In general, 2003 was the first consistent, strong year for the financial advisory business since 2000. Advisors of all stripes benefited, according to Prince. The average wirehouse rep saw production increase to $530,000, a 29 percent increase from 2002. Interestingly, the average regional rep and independent rep also saw average production rises of around 30 percent, to $440,000 and $290,000, respectively.

Though wirehouse reps continue to produce more than those at regionals and independents, the rebound in the markets in 2003 did not increase their business in an outsized way.

“This wasn't a wirehouse vs. regional thing,” Prince says. “The business model made all the difference.”

Mike Curry, the branch manager at AFP Group where Yasharel works, noticed that commission-based models suffered in 2001 and 2002. By contrast, among more comprehensive planners, “a few of my people had record years, even in 2002,” he says. “What benefited those people is that they were out there, talking to customers.”

The national presences of the wirehouses appear to have gifted their advisors with one or two advantages. For instance, average assets were highest for wirehouse-based reps — $62 million, compared with $53 million for the average regional rep and $34 million for the average independent rep.

The Way to the Top

When looking at differing business models, however, Prince found that the wealth managers consistently came out on top. Average production for wealth managers in 2003 was $680,000, a 51 percent increase from the previous year. By contrast, the investment generalist saw a 30 percent increase to $430,000, and product specialists showed average production of $320,000, an increase of just 3.2 percent.

The term, “wealth manager,” while seemingly vague, is specifically defined by Prince as “providing brokerage, investment management and advanced planning services…in a consultative manner based on what the client needs.”

“When you boil it all down and get rid of the noise around wealth management, what you really want as a customer is, something or someone capable of the advice needed to manage my affairs,” says Sunny Patpatia, a wealth management consultant in Oakland, Calif. “Financial planning, and the particular tool sets and different types of technology, are merely enablers for me as a producer to get more assets from a client.”

It's why the national broker/dealers are putting plans in place aimed at handling as much of the client's assets as he is willing to entrust to the firm. It's also why many of the largest firms have invested in training that emphasizes a wealth management process. (Merrill Lynch's Total Merrill program is one example of the industry's increasing obsession with clients' entire financial lives.)

For those willing to demonstrate their commitment to true wealth management, the spoils are there for the taking. One Smith Barney rep says he recently grabbed an account from a rival b/d because the client's advisors “weren't asking him penetrating questions.”

“They didn't know a lot about the client, about his family,” says the rep, who expects his production will rise 50 percent this year. “Their advice was just investment-based and performance-based, and it wasn't comprehensive in nature.”

This advisor has started putting together investment policy statements for older, existing clients. As a result, he has witnessed greater loyalty from them.

“It reaffirms that you know what they're about and what it is they're trying to accomplish,” he says.

Less is More

There are only so many clients a rep can find such large amounts of time for. For this reason, the most successful wealth managers pare down their client rolls as they intensify their focus on the most appealing customers. The Smith Barney rep, for instance, recently transferred 20 clients to a younger producer as part of his effort to refocus.

The wealth managers in the Prince survey have about 90 clients, compared with 310 for the investment generalist and 230 for the product specialist. However, the wealth managers make their clients count. On average each of their clients has $71 million under management, compared with $56 million for investment managers and $22 million for product specialists.

What many don't realize, Prince says, is that in the early going, wealth managers will probably be only providing comprehensive services to 10 or 20 clients. In the meantime, they slowly reduce the clients who aren't candidates for this type of approach.

“It's really hard,” the Smith Barney rep says. “I can't do it for that many people yet.”

Indeed, many don't do it at all. The major stumbling block is the same one that keeps more advisors from converting from a transactional to a fee-based approach: confusion.

“Most advisors don't know how to get there — they're looking for a sense of direction,” says John Bowen, president of CEG Worldwide, a consulting firm to the b/d industry. “Affluent clients want to do it, and advisors would like to deliver it — but they don't have the training or the tools.”

Recent research by Bowen shows the majority of experienced, successful wirehouse producers fit a certain profile. They're on the proverbial gerbil wheel, working with an overwhelming number of clients, finding they can only grow their business by adding more clients — which takes more time.

As a result, they're “miserable,” Bowen says. The process of converting to a wealth management approach, in order to work with fewer clients, though, is difficult. In addition to the hurdles mentioned above, converting reps can often experience a short-term production falloff. In addition, the migration often requires reps to assemble a team of financial professionals who can deal with various product areas in which the rep does not possess deep experience.

However, once those humps have been cleared, wealth managers seem a much more secure lot. According to the Prince survey, “competition for clients” was cited as a major concern by more than 90 percent of investment generalists and 87 percent of product specialists, but by just 61 percent of wealth managers. Increased fee pressure bothers wealth managers less, as well — just 42 percent cited this as a key concern, compared with 75 percent and 43 percent for investment generalists and product specialists.

On the Radar

The lucrative practices of wealth management professionals have not escaped the attention of the larger firms, evidenced by the diminished emphasis on transactional business and a focus on “process.”

Prince cautions, however, that while fees might play an integral role in wealth management, the two are not synonymous. A rep can still be an investment generalist or specialize in just a few products even if they're going with the annuitized approach. “Wealth managers are not defined based on how they're paid,” Prince says. “You can cheat a person with a fee just as you can with a transaction.”

Another sign of the wirehouses' embrace of wealth management is the rise of recruiting packages designed to attract those with diverse businesses that take a consultative approach. Often, these types of producers employ a model that Prince describes as a wealth manager — they work with a team and have fewer than 100 clients. Right now, these reps are among the hottest properties on Wall Street.

“If you're a top producer, you're going to get your pick of the litter,” says Eric Gallagher, a recruiter with the James Monroe Group in Sanford, Fla.

The reason for that, as Prince cited, is wealth management models are still rare across the financial services industry, but that's not for lack of clients. According to Prince, there are 671,000 U.S. families with $10 million or more in assets. “You can't tell me that those clients are all getting the wealth management services in this way,” he says.

Bowen adds, “We've been talking about this as an industry for the last 10 years or longer, but we now have evidence that the affluent clients are taking us up on what we said we're going to do. It's now time to do it.”

If the prospect of higher compensation and a standing pool of potential clients isn't enough incentive to make the leap, then perhaps this will be: Wealth managers are better insulated from the whims of the markets.

Just 18 percent of wealth managers worry whether “the market goes down or sideways,” according to Prince, compared with 79 percent of investment generalists and 68 percent of product specialists.

“If you're fee-based with a consultative approach, you're more tolerant of the market fluctuations,” says Patrick Gainer, a CIMA designee who runs Granite Bay Capital Management, affiliated with Wachovia, in Granite Bay, Calif. “The market is the market — if it's up, you're up, and if it's down, you're going to be down. You can't avoid those two sides of the coin. But I've sold my clients on the idea that we're not just in this for performance.”

That's particularly important in light of the market's poor performance in the last few months. The recent decline of the Dow Jones Industrial Average below 10,000 has some concerned about the market's fortunes. But recent experience tells AFP's Curry that the commission-based reps have more to be concerned about. Meantime, wealth managers are calmly walking their clients through it, confident that the market's performance is just one part of their relationship.

“A lot of the money on commission models just stopped coming in,” says Curry. “On the advisory models, clients saw the advisor on their side.”

Who's Got the Most?

Firm Type Average Production Average Assets Average Fee-Based Assets Average Number of Clients
Wirehouses: $530,000 $62 million $22 million 280
Regionals: $440,000 $53 million $18 million 240
Independents: $290,000 $34 million $8 million 290
Source: Prince & Assoc., March 2004. 818 advisors surveyed.

Differing Business Models, Differing Production

Production Percentage Increased AUM AUM Number of Clients
Wealth Manager $680,000 51.1 $71 million $34 million 90
Investment Generalist $430,000 30.2 $56 million $18 million 310
Product Specialist $320,000 3.2 $22 million $7 million 230

Different Strokes for Different Folks

Top concerns for advisors by differing business models.

Percentage of advisors who answered "Yes" to certain key concerns.
CONCERN Wealth Manager Investment Generalist Product Specialist
Competition for Clients 60.7% 91.6% 87.7%
Obtaining Firm Resources 83.1 76.9 67.8
Market Direction 18 79.2 68.4
Increased Fee Pressure 23.6 74.7 42.7
Delivering Advisory Services 91 73.7 0.6
Losing Important Clients 13.5 62.4 41.5
Client Suing Because of "Bad" Advice 2.2 36.9 19.3
Managing Growth of the Practice 64 71.9 70.2
Source: Prince & Assoc., March 2004

Calling the Help Desk

Desired technical support for advisors, based on differing business models.

Percentage of advisors who answered “Yes.”
TYPE OF SUPPORT Wealth Manager Investment Generalist Product Specialist
Advanced Product Training 85.4% 71.5% 70.8%
Investment Management Proposals 66.3 85.3 34.5
Concentrated Positions/Restricted Stock Positions 83.1 65.2 46.2
Estate Planning 87.6 70.1 9.9
Retirement Distribution Planning 42.7 52.7 5.3
Charitable Giving/Philanthropic Planning 81.3 40.1 11.1
Retirement Planning 34.8 45.7 6.4
Deferred Compensation 40.4 32.4 0.6
Asset Protection Planning 76.4 20.8 0.6
Tax Planning 38.2 18.1 9.4
Source: Prince & Assoc., March 2004

Tale Of The Tape

Key Figures For the Largest Full-Service Broker/Dealers

FIRM NAME Number of Reps Client Assets ($ billions) 2002-2003 increase in client assets (% increase) Assets Per Rep ($ millions) Asset-Based Accounts (%)
Merrill Lynch 13,500 $1,262 13.7% $86.30 17.9%
Smith Barney 12,207 912 19.6 74.71 22.9
Morgan Stanley 11,806 565 9 47.86 23
Edward Jones 9,426 305 25 32.36 0
Wachovia Securities 8,192 603 6 74.14 n/a
UBS Securities 7,766 511 12 65.80 n/a
A.G. Edwards 6,980 300 19 42.98 8
Raymond James 4,800 96 20 20 30
Source: Company reports, Registered Rep. estimates; all data as of end 2003
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