"Too many advisors try to develop business models that provide all things to all people."

The Right Stuff

By John Bowen

To be successful in the financial advisory business, you must choose a business model that helps you attract, serve, and retain high-net-worth clients. It's becoming more obvious that your business model of choice should be wealth management. Our research at CEG shows that today's top advisors are already using wealth management, and they believe it will dominate our business even more in the future.

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In this three-part series, I'll take a close look at the wealth management business model. We'll discuss why you should implement wealth management in your own practice, how you can transition your clients from a traditional investment generalist model to wealth management, and how you can offer wealth management most effectively by building a virtual team of experts.

Too many advisors try to develop business models that provide all things to all people. Unable to meet all needs well, however, these models leave clients disappointed and advisors with less profitable businesses.

Instead, your business model should be guided by two simple tenets:

1. What do affluent investors actually want from their financial advisors?
2. What can you actually make any money doing?

Fortunately, determining what affluent clients want isn't hard to do. By voting with their money, wealthy investors are telling us all the time what they really want. Free markets work—you just need to listen to what they tell you and respond appropriately to them.

Above all else, affluent clients want help making smarter decisions about their money. As more products and services have been developed for the affluent client market, the job of making smart decisions has become more complicated. Being wealthy has itself, in effect, become more complicated.

As a result, the affluent are interested in streamlining their finances through a single wealth manager who can address the many disparate elements of their finances. Having a single wealth manager who takes a comprehensive, consultative approach to generate integrated solutions for the full range of their financial challenges is more preferable to them than having to work with a separate provider for every specific need.

One piece of research highlights the desire of the affluent to obtain multiple services from a single advisor. A study of 778 investors with a net worth of at least $5 million found that those who were sold three or more services were significantly more satisfied than those sold only one service.

Investors who obtained multiple services from their advisors also acted on their satisfaction by making more referrals than those who received fewer services. The study found that 48 percent of those getting three or more services offered their advisors two or more referrals over the previous year. Of those who received just one service, only 17.2 percent offered two or more referrals.

Affluent investors are also looking for trusted relationships with those advisors who can help them streamline their finances. In fact, this desire for a trusted relationship goes beyond the desire for investment performance. According to one study by CEG Worldwide principal Russ Alan Prince, clients are more likely to change advisors due to a poor service relationship than because of investment performance. Just 13 percent of affluent clients left their advisors because they were dissatisfied with investment performance. The overwhelming majority—87 percent—left because they were unhappy with their relationships with their advisors.

All of this adds up to serious demand for competent wealth managers and big opportunities for advisors who can successfully and profitably deliver wealth management. Although they recognize the need to implement a wealth management strategy, many advisors struggle with how to design a profitable business model.

As an independent financial advisor, you must be profitable from the beginning. Yet offering a complete suite of wealth management services is not something that you'll be able to begin doing overnight. So how can you earn a profit and at the same time meet your clients' most important needs?

Let's go back to what free markets have to say about this. There are two main economic drivers in the financial services industry—insurance and investments. To ensure profitability, you must design your plan so that you are delivering one or both of these core services.

Unfortunately, many advisors get bogged down in the belief they must have a complete financial plan for any client before they can move ahead with any investment or insurance solution. So instead of offering a needed service profitably, they end up pushing one that may not be required (and is rarely profitable). The result? Clients don't get the help they need making smart financial decisions, and advisors don't generate the profits they need.

While some in the industry advocate creating a comprehensive financial plan as a first step, I don't believe this is necessary in most cases. Most of the time, it can overwhelm the client to a point that he or she is unable to take any action. Remember, affluent investors are already overwhelmed. A detailed, comprehensive financial plan is almost by definition overwhelming.

So how can you serve your clients well as a wealth manager and make a profit in your business? One way is to lead with a core service that you know will generate a profit. For many advisors, this service is investment planning. Develop the investment plan using a methodical, consultative process that uncovers the information you need to create a sound investment strategy and that also provides you with all of the information you need to address other elements of the client's financial life.

Once the investment plan is in place, it's time to consider additional services. Using what you have learned about the client's overall financial picture during the consulting process, you can recommend bringing in other experts to deal with specific challenges. These experts might specialize in financial planning, estate planning, retirement planning, life insurance, property and casualty insurance, or cash flow management.

Over time, you and your team of experts will implement a total wealth management solution for your affluent clients. Along the way, you will be able to position yourself as the "personal chief financial officer"—a wealth manager—for them. You will be the trusted financial advisor your wealthy clients are looking for, and they will have the wealth management solutions they need to help them make wise decisions about their money. And you will earn a healthy profit in your practice.