"The market is speaking, if you take the time to listen to it, and affluent investors are choosing wealth management."

The Right Stuff (II)

By John Bowen

There's little doubt that the business model of wealth management has an extremely bright future in the financial advisory industry. Not only does it more effectively meet the complex needs of affluent investors than any other approach, it also enables the financial advisors who offer it to earn significantly higher incomes.

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To illustrate how much success wealth managers are enjoying, even in today's up-and-down market, let's look at one industry study that compared the production of wealth managers to that of two other major groups of advisors, product specialists and investment generalists. The study in 2001 by Russ Alan Prince, Sunny Patpatia, and Jordan S. Berlin, found stark differences between the three groups. While annual production dropped during the 12-month study period for the investment generalists (down 51.8 percent) and the product specialists (down 9.4 percent), the advisors using the wealth management model experienced an increase in their annual production of 9.3 percent.

For advisors, the benefits of changing your focus from transactions to consulting have never been clearer. The market is speaking, if you take the time to listen to it, and affluent investors are choosing wealth management.

But wealth management consists of a complex and often interrelated set of services, and simply telling your clients that you are now a wealth manager will persuade few of them to switch to your new approach. Nor is wealth management necessarily the right process for all of your clients.

How do you choose the right clients for wealth management services and move them forward? I recommend you adopt a methodical, four-part approach that leaves little to chance on your road to becoming a top wealth manager.

1. Focus on quality, not quantity. As a wealth manager, it's critical for you to be able to build long-term relationships effectively. Your affluent clients will demand and expect it. But it's impossible for you to cultivate the necessary high-quality relationships when you have hundreds of clients—you simply don't have enough hours in the day to get it done.

For many advisors who have spent years trying to acquire every client possible, this will require a fundamental shift in thinking. But there's abundant evidence that fewer, more profitable clients are one key to building a highly successful wealth management business. One CEG study found that advisors earning net incomes of more than $1 million have just 43 clients on average (see chart below). This is a mere one-fourth the number of clients of advisors earning between $150,000 and $1 million over the past two years. And advisors who earn less than $150,000 have even more clients.

2. Identify the right clients. Clearly, achieving this level of success with few clients requires you to have profitable clients—and only profitable clients. You simply don't have the luxury of keeping extra clients who are not right for your wealth management approach. So you must focus not only on having the right number of clients, but also on identifying the right clients for your services.

To do so, look deeper than the obvious and easy measure of client value—current assets under management. To uncover the true wealth management profit potential of each client, you'll also need to rate each client according to each of the following measures:

• Total investable assets. How much does each client have that is now being managed by any of their other advisors?
• Cross-selling opportunities. Are there other financial services that each client needs and you are not currently providing? Such services could include life insurance, estate planning, or cash flow management, for instance.
• Referral potential. What type of referral opportunities do your clients bring to the table? Do they know—and are they willing to refer—others to you who have challenges that you could solve with your wealth management approach?

Measuring client profit potential isn't foolproof, of course. You'll need to estimate in each of the areas above, but you will also need to use your judgment on a case-by-case basis.

Remember that you will be promising to deliver to them a high-quality, consultative experience that requires both time and resources to achieve, so be sure to choose your wealth management clients wisely. To the extent that you work with clients who are not ideal for wealth management, you are less able to focus on those who are. This will make it much more difficult for you to keep your promises of a high-quality experience to the latter.

3. Present your wealth management solution. Of course, simply telling current clients that you are now offering wealth management and deserve more of their business is not likely to get them on board. Instead, you need to be able to explain exactly what's in it for them. Let each of your clients know that you are making some changes in the way in which you work with them and that you believe that the changes will maximize the probability of them reaching their long-term financial goals.

Describe to them how your consultative wealth management process will work, beginning with a discovery meeting that will allow you to update your knowledge about their current financial situation and goals. Explain that, based on what you learn in this interview, you will prepare an investment plan that ensures that they are well-positioned to achieve their goals in today's complex market environment. In my experience, new clients typically won't turn down the chance to be able to work with your wealth management process when it is presented to them in this way.

4. Implement the consultative process. Once your chosen clients are squarely behind the idea of wealth management, it's time to bring them into your consultative process. I recommend that you use the following series of five meetings to do this smoothly:

• The discovery meeting. At this first meeting, you will define a client's financial needs, goals, and current position, gathering all of the information you will need to construct an investment plan tailored to his or her specific needs.
• The investment plan meeting. Now is the time for you to present the entire investment plan, a detailed document that describes the client's needs and risk tolerance, explains what he or she will receive and when, and defines the constructive benchmarks that track progress against life goals.
• The mutual commitment meeting. At this meeting, the client will begin to implement the recommendations from the investment plan. To prepare for this meeting, have all paperwork completed and ready for signing on the assumption the client will want to move ahead. Review and answer any remaining questions about the investment plan, and ask the client to execute the paperwork.
• The 45-day meeting. The purpose of this meeting is to help each client get organized with the new account paperwork that they have received from you. You will show the client how to read the various statements and provide a notebook where he or she can file them. After this, schedule quarterly meetings with the client as a matter of course.
• Quarterly meetings. At these meetings, ask about any changes to the client's personal or financial situation, review and explain portfolio performance, contrast actual performance to the expectations in the investment plan, and answer any new questions your client may have. These quarterly meetings are also an excellent opportunity to recommend additional wealth management services as appropriate. These services might include financial planning, estate planning, tax planning, and life or casualty insurance. Over a period of time, you will be able gradually to implement a complete wealth management solution for your affluent clients and to build long-term relationships with them in the process.

With a clear understanding of how to choose clients for wealth management and how to transition them to your new model, you are ready to begin refocusing your advisory practice to offer a diverse and comprehensive set of services. In my next column, I will turn to how you can offer wealth management most effectively by building a virtual team of experts.