Working With The Affluent Retiree Market

IT'S A GREAT TIME TO WORK WITH THE WEALTHY. HERE'S WHAT ADVISORS NEED TO KNOW TO EXCEL IN THIS HIGHLY COMPETITIVE DEMOGRAPHIC.

YOU'VE DECIDED TO GO UPSCALE. Your goal for 2015 is to add fewer, but wealthier, retirement planning clients. It's a good time to make the move. According to Lake Forest, Illinois-based research firm Spectrem Group, the ranks of wealthy U.S. households continues to grow. The number of households with a net worth over $1 million, exclusive of residence, reached a record high of 9.63 million in 2013. The $5 million-plus count increased to 1.24 million households; the $25 million-plus club–the ultra rich–welcomed 15,000 new members to reach a still-exclusive 132,000.

The good news is that wealthy near-retirees and retirees often share the same financial concerns as their less affluent peers. "You know, everybody wants to make sure they don't run out of money when they get older," says Roy Janse, CFP with DeHollander & Janse Financial Group in Greenville, South Carolina. "Everybody wants to have their investments or their money grow in the most tax-efficient manner. Everybody wants to be able to give to charities in a way that maximizes the benefit for both them and the charity. And, so, there's a lot of similarities."

Working in the affluent market can make business sense, because it allows you to leverage your time and staff more efficiently by serving a smaller number of clients. Before you start transforming your business, though, first consider the pros and cons of working with high net worth (HNW) clients and whether you're ready to serve this market.

Pick your sweet spot

A first step is to decide which HNW-market segment you'll serve. Do you want to work with the millionaire next door or the newly minted IPO billionaire? The wealth categories are arbitrary, but target-market selection matters for several reasons. As the Spectrem results show, the pool of available prospects shrinks as you move up the wealth scale. The number of HNW prospects is also location-sensitive. In parts of the U.S., a $1 million net worth qualifies someone as top-tier wealthy for that area. In other parts of the country, $1 million isn't considered wealthy, but the number of HNW prospects is much larger.

That means competition is an important factor to consider. Every local, regional and national organization with a wealth management or private banking division wants the high-end client. Advisors have told me of cases in which they were one of a half dozen wealth managers pitching their services to HNWs who were shopping for new advisors. The playing field gets crowded when there are more competitors chasing fewer qualified prospects.

An advisor's business offering and expertise, both current and anticipated, also should match the segment's needs. This is the "sweet spot": the advisor understands the market and can deliver what those clients want because many of them fit the same profiles. From a broad perspective, retirees in the $1 million to roughly $3 million wealth range often don't consider themselves wealthy. This group shares many of the same financial and lifestyle concerns as the mass affluent market, generally considered to be between $500,000 and $1 million. As a result, the products and services an advisor has successfully provided to mass affluent clients should continue to work with clients up to roughly a $3 million level.

At some point, though, the degree of complexity in a client's finances can start to strain an advisor's capacities. The challenges could include a lack of direct access to investments such as hedge funds, private equity offerings or banking and credit facilities. Other HNW clients want family office-type services, such as paying bills, coordinating philanthropy programs and multiple trusts, overseeing property and staff management, among others. Even if an advisor can outsource these duties, staying on top of everything still requires staff time.

The source of a HNW client's wealth, not just the amount, also influences attitudes and expectations, says Cindy Richey, CFP with Prosperity Planning Inc. in Kansas City, Missouri. Consider a woman who's newly and suddenly financially independent because of a divorce settlement, she says. If the couple divided $3 million to $4 million in assets, the client didn't suddenly become wealthy–it was just suddenly put in her hands and now she's the decision-maker. "A business owner who built their wealth from selling a business is going to be very different from, say, a corporate executive who builds it through a compensation package, maybe some deferred compensation plans and traditional types of retirement plans. And, then an inheritor, someone who has inherited money, again, is very, very different," she adds.

Ramp up your technical skills

Some HNWs' finances are uncomplicated relative to their wealth. They have a workable number of bank, investment and retirement accounts, own one or two homes and their philanthropy consists of writing checks to their preferred charities. But at the risk of oversimplifying, higher wealth and increased financial complexity usually go hand-in-hand. HNWs often have taxable estates, highly diversified, complex investment portfolios and holding structures like trusts. They may have banking and investment accounts, and residences and properties in multiple countries.

This complexity can require more advanced planning strategies, Janse notes, citing charitable giving as an example. For less affluent clients, his recommended giving strategy often is to fit the contributions into the budget and keep receipts. "However, for higher net worth people, we can start looking at donor-advised funds or even setting up endowments," he says. "(We can use) a whole range of other more sophisticated planning strategies that will help them achieve those goals even if it's the same broad category of charitable giving."

<p> Scott Edelman with Edelman Wealth Management Group Inc. in Yardley, Pennsylvania agrees that HNWs' finances and goals can pose additional challenges. "The clients want to be able to utilize their income and enjoy it," he says. "But, at the same time, they also want to set strategies up so that they can leave the amount of money they desire to their children and grandchildren. So you have to set up a strategy so that they can enjoy their assets but at the same time, make sure that they're leaving exactly what they want to leave to their children and grandchildren. It may not be a technical estate plan but it's going to be the ability to leave money behind and have taxes paid as well."

Sources cited a range of available resources for developing the skills and capacities needed to serve HNW clients. Numerous organizations offer advanced training in technical topics like estate planning, income tax strategies and portfolio management. Mike Ross with Cornerstone Financial Group in Burlington, Massachusetts points to his attendance at Million Dollar Roundtable (MDRT) con-ferences as having helped him "tremendously." Janse credits his affiliation with Commonwealth Financial Network for providing access to in-house planning expertise that allows him to address wealthier clients' planning needs.

Get comfortable working with families

HNWs' family dynamics add another dimension of complexity to their finances. The 2014 U.S. Trust Insights on Wealth and Worth[R] study found that 20 percent of its survey respondents had remarried following divorce or widowhood and a "… similar number are in a blended family with children from previous relationships. Ten percent live in a multigenerational household including children, parents and grandparents."

These changes from the previous traditional family can create stress for clients, the report notes: "In general, people in blended families are more likely to say that increased wealth makes life more complex and that disagreements about the use of money, when they occur, represent a significant risk to wealth."

Family meetings can be helpful in facilitating cross-generational wealth management conversations. Successful meetings require much more preparation than getting everyone into a conference room, however. Kelly MacRae, CFP with Beacon Pointe Advisors in Newport Beach, California says her firm usually starts the process by first meeting with just the parents to discuss how much information they want to share with their children. The desire to disclose varies, in her experience, but one common factor is that arranging the meetings is time-intensive. "Each meeting can be one to two hours and then you have the meeting before that, (which) goes over everything with the parents and then, of course, all of our prep time. But, it's been very beneficial and the clients value it."

Focus your marketing efforts

Advisors frequently build their business by starting with mass-affluent clients. They subsequently add HNWs to their book but continue to work with new and current less-wealthy clients. That's not the best way to move upscale, according to a report from PriceMetrix, a wealth management market research and consulting firm in Toronto, Ontario. In its May 2013 report, "Big Fish: The Behaviors And Characteristics Of The High Net Worth Client," the firm points out that statistically, "the probability of a small household growing into a large one was minimal."

PriceMetrix considered the initial account balance for households with $2 million or more in assets that had started an advisory relationship within one to five years of the study date. The results showed that 75 percent of the households started the new relationship with $2 million or more; 18 percent had between $1 million and $2 million.

Importantly, the research showed that the hope of smaller clients' accounts eventually growing to the $2 million-plus category doesn't work out very often: "Only a very small proportion of households began with less than $1 million in assets (7 percent), and fewer still began with less than $500,000 in assets (3 percent)." The firm concluded that the widely held practice of taking on small clients with the hope they would eventually becoming HNW clients is usually misguided: "Such occurrences are too uncommon to merit an advisor's attention and resources." In other words, if you're going after the big fish, stop chasing minnows.

LIFE INSURERS BROADENING PORTFOLIOS TO REACH THE AFFLUENT

Ownership of cash value life insurance is on a downward trajectory among the affluent. And a key reason why is the declining need for life insurance to pay for estate taxes, according to a recent Conning report, "High Industry Affluent and High-Net-Worth Strategies: Focus on Investments, not Protection."

Affluent: Individuals with $100,000 to $999,999 of financial assets; High-Net-Worth: Those with $1,000,000-plus in assets

Among the report's key findings:

* At year-end 2013, 44% of financial assets for mass affluent investors were held in retirement accounts. The next largest holders of financial assets, at 25%, were brokerage/investment accounts. Life insurance and annuities accounted for 11% of mass affluent financial assets.

* At the close of 2014, insurers accounted for 18 of the 50 largest mutual fund families based on assets under management. Collectively, these 18 companies managed 33% of the top 50's total assets.

* Direct sales of life insurance and annuities account for a "miniscule portion" of production. The top 75 insurance companies, based on sales, generated 90% of the total sales in 2013. Of these 75 insurers, 11 use captive/career distribution channels, 52 use the broker/independent agent channel, four use other channels (e.g., direct), and eight use a combination of the other three channels.

* Among the 25 largest insurers, based on assets at the end of 2013, 21 had retail broker-dealers and 18 had RIAs. These channels enable the companies to offer consumers a "broad range of financial advice, products and services."

* Competition for the business of affluent and high-net-worth investors has led some insurers to broaden their portfolios to incorporate more investment products. Among the world's top 100 asset managers, insurers (life, property-casualty, or reinsurance) account for 33.

* Affluent and high-net-worth-focused insurers averaged a 6.1% return on sales between 2003 and 2013. This compared to 5.7% for the "affluent and high-net-worth opportunistic" insurers (i.e., companies whose product portfolio are less likely to appeal to affluent and high-net-worth investors).