Mass-market investors, with their relatively tiny net worth but big growth potential, are attracting increased attention from the financial planning industry. Two major companies have announced forays into this market sector.
United Capital Private Wealth Counseling, the national RIA partnership, is currently finishing a 20,000-square-foot facility in Dallas to dispense financial planning advice. The idea is to employ a small army of registered investment advisors who will book over-the-phone sessions with mass-market investors - those with $25,000 to $250,000 in investable assets.
United Capital, based in Newport Beach, Calif., has a team of experts that includes CFAs and Ph.D.s, who formulate its investing philosophy and create a menu of portfolio options for entry-level investors. Almost every investing strategy is covered, such as active and passive approaches, ETFs and fixed-income options. About 80 to 100 professionals will staff the facility, says Joe Duran, CEO of United Capital.
"We want to improve our clients' lives, first and foremost," says Jason Del Col, senior vice president of advisory services for United Capital. "It leads to making informed decisions."
Firms like Charles Schwab, Fidelity, TD Ameritrade and, more recently, Merrill Lynch have dominated the list of firms delivering advice to mass-market investors. But United Capital is not the only longtime specialist in providing holistic, goals-based planning that sees value in serving mass-market investors.
LPL Financial has also decided to take on the challenge. In April, the firm created a business unit called LPL New Venture to attract financial advisors who serve mass-market clients and offer them support to grow their practices. Esther Stearns, LPL Financial's longtime president and COO, is CEO of the new business.
LPL Financial has released few details about how its new business unit will operate. In an interview in April, Stearns said: "We are focused on fee-based planning advisors. We feel they have the tools to help consumers focus on the full picture of financial well-being over time."
Industry observers say the initiatives of United Capital and LPL seem ambitious and will be difficult. In a profession that prides itself on spending quality time with clients, how do these firms deliver the same quality of advice to the masses? And how will they do it profitably and consistently?
Mass-market investors have never been prized clients of advisory firms because it is not economical for them or experienced professionals to service their small portfolios.
Indeed, even mass-affluent clients, who typically have investable assets up to $1 million, have often been out of the running for personal financial advice since 2006, when the shift to fee-based from commission-based pricing models started taking hold, research firm Cerulli Associates found.
Call centers supported by a firm's proprietary research filled the advice vacuum for a lot of consumers, driving many of them to discount brokers.
In delivering planning advice to mass-market investors, industry professionals say the best approach is to focus on simple issues. People in this demographic typically need to focus on insurance, estate planning and taxes. The advisors who will eventually work the phones at United Capital's Dallas facility, for instance, can educate investors about the basics of money management and investing, then guide them through the process of setting up their portfolios.
"There is only so much you can do on risk management or the insurance side," Del Col says.
While United Capital is busy pulling independent firms onto its client and practice management platform, it also aims to reel in investors whose portfolios have growth potential and who might become ideal client prospects for the practices that join the network. As investors tap into United Capital's expertise, those callers could be referred to the independent RIA firms under the United Capital umbrella.
THE ADVISOR EXPERIENCE
Both LPL and United Capital appear to be using their new ventures to service advisors as much as they do clients. United Capital's Dallas facility, Duran says, has another important task: to produce and distribute practice management guidebooks to the partner firms within its network. United Capital wants all of its partner firms to deliver the same customer experience to clients, regardless of their local markets or the history of a practice before it joined the network, he adds.
As for LPL New Venture, market professionals say it could turn out to be a clever way to keep advisors coming in the door. They say the new unit will use employees to serve the lower-net-worth market, most likely making it an effective lure for advisors entering the fee-based planning channel and the advisory profession outright.
The industry lacks a training ground for new advisors, especially because the wirehouses and insurance companies no longer support those programs, says Chip Roame, managing partner of research firm Tiburon Strategic Advisors.
The new unit is also a big part of LPL's play to ensure that the number of its advisors stays steady, says Scott Smith, an associate director at Cerulli. "They have a force of 12,000 advisors to maintain," Smith says. "If they have a certain number retiring every year, where are the new advisors going to come from?"
United Capital believes some mass-market clients will become mass-affluent and even high-net-worth over the long term, so it is using behavioral finance concepts to make the journey more meaningful.
The firm created an assessment system called Honest Conversations, which helps investors understand how they arrive at financial decisions and how they can use that knowledge. Money Mind is the initial step in the process; it takes users through an interactive online questionnaire. After users complete the questionnaire, they get an individualized report.
They also receive sample questions that they can use in speaking with financial advisors, including:
* How does an advisor tell if clients are making financial decisions they cannot afford?
* Are advisors paid to sell some investments over others?
* Do advisors create a unique strategy for each of their clients?
The idea is to create an experience that is both scalable and technology-enabled, and then to get the word out and market it to generate new clients, Duran says.
"I do believe that we will see more innovation in how to service smaller clients in the future," says Alois Pirker, research director at Aite Group. "They don't get enough attention from advisors that have a fully built book, nor are they profitable relationships in the short term."
In the long term, however, United Capital and LPL and appear to be playing for keeps.
Donna Mitchell is a senior editor of Financial Planning.
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