"New research is reinforcing what many advisors are learning firsthand: Wealth management generates a much higher level of success than the other two business models. "

Behind the Buzz

By John Bowen

The term "wealth management" has become one of the biggest buzzwords in the advisory industry in recent years. The reason for all the hype is simple: Wealth management is, without a doubt, the most effective and profitable way to attract and serve affluent investors.

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Unfortunately, too many advisors call themselves wealth managers without really offering wealth management services. These advisors aren't just deluding themselves-they're deluding their clients and they risk losing business as a result. The fact is, to deliver wealth management successfully, you've got to do more than change your title on your business card. You've got to deliver the services and value that clients expect from a true wealth management offering.

MORE SUCCESS

To start, it's important to understand that there are three business models that advisors use.

Investment generalists offer a broad range of products but don't specialize in one single offering. Their approach with clients tends to be transactional and they don't make consulting a main focus. Product specialists focus on a single investment product niche (managed accounts, fixed income, etc.) and are also transactional. Wealth managers, by contrast, use a highly consultative and comprehensive approach to build integrated solutions to clients' needs.

New research is reinforcing what many advisors are learning firsthand: Wealth management generates a much higher level of success than the other two business models. Consider that wealth managers' gross incomes are, on average, 92.2 percent higher than those of product specialists and 100 percent higher than those of investment generalists. And wealth managers achieve those results while working with fewer clients.

These statistics are consistent with our previous independent broker-dealer findings. A CEG Worldwide study found that more than 25 percent of wealth managers earned more than $500,000 in 2004, while only 2.1 percent of investment generalists earned that amount.

A WIN FOR ADVISORS AND CLIENTS

Why is a wealth management business model more successful for advisors? For one, affluent investors are increasingly choosing to work with wealth managers for several reasons:

Streamlined financial management. Many affluent investors want to work with a wealth manager who acts as the single point of contact, providing access to multiple financial services.

Specialized expertise. The affluent want to work with the best and expect their advisors to bring to bear all the necessary specialized expertise to solve their unique problems. True wealth management provides expertise, services and products that are tailored to the affluent market.

Insulation against market downturns. If you provide only investment products, your fortunes are largely tied to the whims of the market. Wealth management offerings aren't directly tied to the market, which allows wealth managers to somewhat protect their clients from volatility. Clients thus see wealth managers as adding value to their financial lives, even when their investments hit a speed bump.

In addition, the wealth management business model offers numerous advantages to advisors. The biggest are:

Greater income. Higher income results from wealth managers' ability to offer many different yet interrelated services to each client. Plus, wealth managers often employ multiple types of compensation arrangements depending on the product or service (from project- or hourly-based fees to commissions, asset-based fees and performance-based fees). Such pricing flexibility can help boost income.

Greater ability to attract wealthy clients. If you're a wealth manager, the affluent want to work with you. Consider a recent study by Russ Alan Prince, CEG's managing principal, which found that 77 percent of affluent investors expressed a preference for working with wealth managers. By contrast, just 18.8 percent prefer to work with financial advisors or planners and only 4.1 percent want to work with investment advisors or planners.

Greater client loyalty. Three-quarters of extremely satisfied affluent clients consider their advisors to be wealth managers. Meanwhile, only 18.2 percent of satisfied clients—and a mere 7.4 percent of moderately satisfied clients—see their advisors as wealth managers, according to a study by Russ Alan Prince and David Geracioti. Loyal clients are much less likely to take their business elsewhere, enabling you to maintain a more consistent revenue stream and avoid having to constantly win new clients. Plus, loyal clients are more likely to give you referrals and additional assets.

Greater opportunities. By providing offerings from across the entire spectrum of financial services, wealth managers have distinct advantages. They're well positioned to uncover the broad range of needs that an affluent client has and, by working with a network of professional advisors, to arrange for products and services that meet those needs. As clients' needs change and evolve, a wealth manager is uniquely able to tackle those new opportunities and add value.

Down-market protection. Wealth management also helps advisors when the market drops. What's more, the strong client service and relationships that wealth managers build create satisfied clients who tend to remain loyal even during extended periods of poor market performance. According to our research, the average wealth manager increased production by 9.3 percent during the difficult market environment of 200—a year when the typical advisor's production fell by 34.9 percent.

WHAT IT TAKES

Given all these benefits, it's little wonder that the vast majority of financial advisors—77.9 percent, according to the Prince/Geracioti study—are calling themselves wealth managers. The problem? Identifying yourself as a wealth manager doesn't make you one.

From what I've seen, a lot of so-called wealth managers don't do anything materially different from when they were financial planners. Prince and Geracioti examined the businesses of 1,117 advisors and determined that just 8.4 percent were true wealth managers. The rest still acted as investment generalists or product specialists.

You might be able to get away with calling yourself a wealth manager for a while. But investors—especially affluent ones—aren't stupid. Eventually they'll realize you're a wealth manager in name only and they'll head out the door in search of the real deal.

How do you become a genuine wealth manager so both you and your clients enjoy the many benefits wealth management offers? You must deliver a full range of financial products and services in a consultative way throughout all three phases of your clients' financial lives: wealth accumulation, wealth preservation and wealth transfer. You must excel in three main areas:

Using a consultative process. This will allow you to establish close relationships with clients in order to understand their goals and their most important financial wants and needs.

Offering customized choices and solutions. This select range of inter-related financial services and products might include, for example, investment management, insurance, estate planning and retirement planning.

Providing these customized solutions in close consultation with clients. The wealth manager works closely with clients on an ongoing basis to identify their needs and design custom solutions to meet those needs.

In general, every wealth management service and product falls into one of three categories: investments (i.e., brokerage services, asset management); insurance (i.e., wealth transfer services, asset-protection strategies); and credit (i.e., loans, mortgages). If you have focused only on investment management in the past, wealth management opens up new revenue streams.

That said, you don't need to be an expert in all of these financial services to be a successful wealth manager. In fact, it would be a disservice to your clients even to attempt to become an expert in every field. Doing so would only distract you from your primary responsibilities as a wealth manager and send you on an impossible quest.

Instead, you should establish a close interpersonal and consultative relationship with your clients, serving as their primary financial advisor—their personal chief financial officer—for the entire range of wealth management services and products you choose to provide. Then, you need to identify, assemble and manage a network of highly qualified outside experts to deliver the wealth management services and products your clients require.