The Changing Face of Wealth Management

By James J. Green

April 02, 2015 at 08:00 PM

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If you want to be a wealth manager, Pershing's Mark Tibergien likes to say, it helps to have wealthy clients. And as all advisors know, their primary goal is to find, attract and retain the best clients, with "best" understood to mean the wealthier the better.

So how can we define wealth management in 2015?

The research suggests that independent advisors—read non-wirehouse advisors—are gaining market share as measured by number of wealthy clients and the amount of assets they bring to independent advisors. Yet the wirehouses continue to provide the bulk of "wealth management" as measured by assets (it doesn't hurt that the wirehouses' brokers are now called wealth managers instead). It's true that some tried-and-true approaches to finding and serving the HNW will remain legitimate, since by definition wealthy people have complicated financial lives, and many are rightfully leery of those who want to serve them, since many have been preyed upon.

However, the traditional image of a wealthy client as an older person whose wealth came from an inheritance and is served by similarly hidebound firms that boast mahogany-paneled offices where wealth is managed through hushed in-person meetings over a leather desk is changing. Better technology has allowed independent advisors to offer more products to their HNW clients, which along with access to aggregated data gives advisors a better view of clients' financial situations and allows them to provide better advice in the most appropriate portfolios. But technology is also leveling the playing field among advisors in terms of how they prospect for and communicate with clients, while the rise of robo-advisors represents both a threat and an opportunity to human advisors. Then there is the concept of "the wealthy" itself, which is also changing. As the country becomes more diverse, the wealthy—especially the emerging affluent millennials who will constitute wealth managers' client base for decades to come—is changing.

Advisors who count on their personal charm and referrals from clients who are, like them, baby boomers will be hard-pressed to continue their growth if they don't embrace technology and have specific marketing plans to attract that next generation of wealth. The "new wealthy" are not only younger, they include more women and are more racially and ethnically diverse. Most important, their expectations of their wealth managers are changing.

And when you want to sell or merge your practice, your firm will be much more valuable if your current client list, prospecting process and compensation model exhibits an appreciation for these changes.

A review of the latest research on the attributes of the wealthy, and many interviews with those who know the psychology and metrics of the wealthy and the advisors who serve them, suggest that wealth management in 2015 and beyond is and will be quite different.

Let's begin with the numbers.

Who Are the Wealthy Now? Who Will the Wealthy Be?

According to the "Wealth-X and UBS World Ultra Wealth Report 2014," the worldwide number of ultra-high-net-worth people—with assets of $30 million or more—is slightly more than 200,000, which the report said accounts for $29.7 trillion, or 12.8%, of total world wealth.

The U.S.-domiciled UHNW population comprises 69,560 individuals who hold $29.7 billion of wealth; the population increased by 6.2% over 2013, while the amount of wealth increased 6% (Wealth-X said it uses a proprietary database of wealthy individuals for its numbers). The report said the UHNW are holding 25% of their portfolios in cash and warns that "inflation may well be eroding the wealth of UHNW individuals at a faster pace than prevalent in the broader community."

In addition, Wealth-X reported that there are wide changes in how the ultra-wealthy got that way: 91% of China's UHNW population is self-made, "compared to only 43% in Switzerland." One of Wealth-X's conclusions: "Entrepreneurship continues to be one of the key cornerstones of financial success." Another observation from the report: "UHNW individuals are well-connected. On average, their immediate social network includes seven other UHNW individuals, at least one of whom is a billionaire."

Are there gender differences among the UHNW? "Female UHNW individuals globally tend to invest more in real estate and luxury assets, holding almost 16% of their average net worth in such goods." (See "Women and Wealth.")

Tiburon Strategic Advisors' recent report, "Consumer Wealth," reported that in the U.S.:

Moderate and high-net-worth consumers control over half of all investable assets.
More than half of consumer discretionary assets are controlled by consumers with $1 million or more in investable assets.
Nearly half of consumer financial assets are controlled by consumers with $1 million or more in investable assets.
Less than one-quarter of baby boomers have received an inheritance, but more surprisingly, only 15% of baby boomers expect to receive an inheritance in the future, which may shatter the myth that baby boomers are going to inherit trillions of dollars.

In its "High-Net-Worth and Ultra-High-Net-Worth Markets 2014" report, Cerulli Associates found that nearly 30% of U.S. HNW investors (with minimum investable assets of $5 million) consider themselves self-directed investors. More than half of those HNW investors, Cerulli found, have direct or online trading account balances between $500,000 and $1 million.

So there are many wealthy people in the world and the U.S., they hang out with other wealthy people, they control a high percentage of consumer investable assets, there may not be trillions of dollars in a soon-to-happen big wealth transfer and the ultra-high-net-worth may be over-invested in cash. But closer to home, who are these wealthy people? Perhaps more important, who are the emerging wealthy, and what do they want from their advisors?

According to Fidelity's seventh annual "Millionaire Outlook" study, released in early March, the makeup of the nation's wealthy is changing. While some wealth managers are ahead of that shift, many more haven't realized the change or built their practices to attract the emerging and mass affluent wealthy.

"Advisors historically have gone up market," said Fidelity's Bob Oros, who now heads the RIA segment for Fidelity Clearing and Custody, raising their minimums and looking for wealthier clients. However, said Oros, "we've seen a drastic pivot looking back down market," with "progressive" advisors using that new focus as part of a client segmentation strategy. Oros said the latest study shows "it can be a good business decision to serve this segment since they share so many of the attributes" of the higher-net-worth client. Progressive advisors "see where the puck is going" and realize that if they want to grow their business "in a more predictable way," they need to serve the emerging affluent, which in the Fidelity study includes those investors age 21-49 with investable assets between $50,000 and $250,000, and annual income of at least $100,000.

The findings of the Fidelity study, Oros said, represent a "call to action" in which advisors must decide if they are "ready to serve this segment." However, Oros noted that in many ways, the emerging and mass affluent group "is different" in terms of gender and ethnicity—two-thirds are female and one-third are non-white—and they are also a "much more collaborative group" who are "well-positioned to attain, or even exceed, millionaire status." That's due to the fact that they have been responsible themselves for achieving their current assets and income levels; that they tend to cluster in higher-paying professions; that they have many years ahead of them to continue to grow their assets; and they tend to exhibit higher risk tolerances in their investing.

The emerging affluent is self-directed, Oros pointed out, with only 48% of those in the Fidelity survey reporting they have an advisor. A different survey by the Center for Talent Innovation—"Harnessing the Power of the Purse"—focused on high-net-worth women worldwide and found that they are vastly underserved by advisors as well. Only 47% of the American HNW women surveyed said they had an advisor, and a whopping 75% of those under the age of 40 said they didn't have an advisor.

What Do You Need to Be a Wealth Manager?

The Investment Management Consultants Association has a unique view into the changing wealth management landscape and what it takes to be a wealth manager now and in the future. IMCA is known for awarding the respected CIMA certification, but it also launched the Certified Private Wealth Advisor (CPWA) designation in 2007.

Executive Director Sean Walters said that for high-net-worth clients, "value" will become an increasingly important factor: "What's the cost and what do I get in return" for wealth management advice?

CIMA saw a big increase in applications for its CPWA education classes in 2014—"up 34% over 2013," Walters said, with 54% already being CFPs—for "a wealth credential covering all those topics related to a high-net-worth individual."

Jim Dobbs, director of education at IMCA, said the CPWA coursework at the University of Chicago is "a natural extension of the CFP curriculum," though not as broad, since CPWAs likely won't be helping clients "pay off their credit cards." For HNW clients "with $5 million to $10 million," said Dobbs, who holds the CIMA, CPWA and CFP certifications, the more important issues tend to revolve around family dynamics and legacy planning, "moving from one generation to another." While tax and estate planning issues are covered, so are "psychological issues," Dobbs said. Then there's behavioral finance—"for most of us as practitioners, it helps us help clients"—and alternative investments. "Wealth managers need to be competent in alternative investments," Dobbs said. "It will come up with all their clients," though alts may not be appropriate for all those clients.

Walters argued that the CIMA program also reflects the changing face of wealth management. "The core of investment management is becoming broader and more sophisticated," and what CIMA has heard from its holders is that they want more education on alternative investing, behavioral finance and risk management. Advisors, said Walters, "are being paid to protect clients from all sorts of risks these days."

So why are already experienced and certified advisors looking to get the CPWA certification? "Our chairman, John Nersesian [of Nuveen], would say that client expectations are rising and client sophistication is expanding," Walters said. Advisors are seeking "more in-depth professional development" as well. Dobbs said, "You're getting the tools to deal with what the high-net-worth client needs: unique situations [including] finances and family dynamics; asset protection issues will also be important." Compared to lower-net-worth clients, "charitable giving will be very different." Having a CPWA also makes an advisor a more valued member of a multi-disciplinary team, which often serves the HNW client. "There are a number of CPAs who come into our program," Dobbs said, and having a CPWA allows an advisor to "talk to the attorneys and CPAs" on the wealth management team, "in addition to talking to the clients."

A CPWA certification won't necessarily "give you all the skills" of a CPA or a tax attorney, Dobbs said, "but you can acknowledge the challenges." Further, if you "know there are some tax codes that affect a client selling a $20 million business and can raise those issues," then the client will perceive your value more clearly. That may come in handy, Dobbs said, "when the robos start offering" services like advanced tax or estate planning, "when, and if, they start making money."

Wirehouses, already heavily represented in the ranks of CIMA holders, are also embracing the CPWA designation, Walters pointed out. And as for the team approach to wealth management, Walters said, "Merrill Lynch is a firm that gets this. They've launched a client experience system incenting people to be part of a team around a variety of metrics," with team members required to hold at least one of several advanced designations, including the CIMA, CPWA, CFP or ChFC .

How to Succeed in Wealth Management

Fidelity's Oros said that in the new wealth management landscape, advisors "need to have a real business strategy, and to understand the unique requirements" of the evolving wealthy in particular. To reach the emerging affluent, he said, some advisors will need "help in effectively deploying their strategy," and will need to develop a clear marketing approach, which might involve a "separate staff with a separate brand," though it "won't be the same answer for every firm." (See "Getting New Clients.") However, since the emerging affluent share so many of the same attitudes and behaviors of their older and wealthier counterparts, as the Fidelity study found, it may not be as difficult to serve this population. After all, he said, "They show a capacity to build wealth: 80% said they have 'earned or increased assets on their own,' so their self-made wealth suggests they will work hard and invest consistently."

However, there is one big hurdle to overcome, Oros said. "They don't necessarily believe advisors want them," because they perceive advisors work with higher-net-worth people. "They're sensitive to fees" as well, Oros pointed out, "so for advisors who want to work with this group, "you need to be willing to think differently" about your fee structure.

Is this a segment ripe for poaching by robo-advisors? "We found a pretty high recognition of digital advice" offerings among the emerging affluent, Oros said, noting "29% have some familiarity with robo-advisors and 7% are currently using them." But investors in this group "still want contact with someone; access to a human," he reported. That desire "is a big opportunity" for advisors, and Oros suggested "having a digital advice delivery be part of your segmentation."

The leader of Schwab Advisor Services, Bernie Clark, in discussing the Q2 launch of SAS' Institutional Intelligent Portfolios robo-advisor platform in mid-March, argued that having "an automated investment management offering will help existing firms to expand, serve existing clients, and will be transformative for the industry." Moreover, he said that for advisors, having a digital advice offering will become the "price of entry for Generation Now and generations to come." (See "Technology and Wealth.")

Discussing asset management firms, Cerulli's "High-Net-Worth and Ultra-High-Net-Worth Markets 2014" report argued, in Associate Director Donnie Ethier's words, that while "the direct channel's surge in the high-net-worth market share gains have stemmed in more recent years, providers continue to boost their high-net-worth capabilities and presence among younger, tech-savvy wealth creators. For wealth managers, they represent increasingly worthy competitors that will likely test traditional managers' willingness, and aptitude, to adapt to next-generation investors."

Jonathan Beatty, senior vice president of sales and relationship management at Schwab Advisor Services, said that "firms that rely on investment management" and seek to "differentiate by performance—well, that's a challenging business proposition."

He said that "over the last 10 years, advisors' value proposition has evolved beyond investment management with additional services that the advisor provides to clients," such as estate and tax planning, "providing services that are unable to be automated at the moment," and "wrapping them around their investing capabilities."

Successful wealth managers realize they "need to modernize the client experience" and emulate technology providers to "create more and more efficiency around portfolio management; robos are another step on that curve."

Beatty recalled an advisor telling him he was concerned about how clients would feel about automated processes such as account openings that "take the paperwork out of" the client onboarding process. Beatty said he responded by asking the advisor if "operations was the right place to make relationships?"

"As affluency grows, complexity comes with it," Beatty said. So when asked whether a solo practitioner could be a wealth manager, he said, "It really depends on how you define wealth." But if you're talking about "super affluent investors" who need everything from "property management to airplane management, you'll need a team environment."

"If you can create scale and efficiency around the processes every day to run your business, that frees up more of your human capital to focus on the client relationship," Beatty said. As an industry, "we went first to operations. Now we're looking at other ways to automate the relationship. The market will decide whether my version" of wealth management "is better than another."

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