The fallout from the financial reform bill is still up in the air, but the wealth management industry expects compliance and service costs to rise.

This pressure on margins may force wire houses and the independent channel to abandon "emerging" high-net-worth investors, a class whose assets aren't quite high enough for the biggest wealth managers to give personal advice economically.

"Do you need to have the customer make a quarter to a half a million dollars in order to provide individualized service?" said Geoffrey Bobroff of Bobroff Consulting in East Greenwich, R.I., in a recent phone interview.

Yes seems to be the answer. In the wake of the legislation, "smaller balanced accounts or relationships may get less attention from the wire houses or indies," Bobroff said. Sacrificing the long view for the short will have its own costs for the big wealth managers, however. Emerging high-net-worth investors aren't likely to sit still. Instead, they will find "platforms such as Schwab or Fidelity or TD Ameritrade," Bobroff said.

Emerging high-net-worth investors — those who may make $50,000 or $100,000 today, but will be earning $500,000 or much more down the road — are considered the future of wealth management. While baby boomers and older investors are already attached to their wealth managers, those who are just starting to build their wealth are a vast, open market waiting to be recognized.

The problem is that wire houses with flashy brand names have left the emerging high-net-worth investor by the wayside, hoping that online tools and call-in centers will lead to a coveted "sticky" relationship. But even with such services, this pipeline of future clients has no one to help them put together a financial plan and make wise decisions about their money.

"It's the age-old struggle, like the mutual fund, going back 30 years," Bobroff said. "Putting $100 a month in a fund doesn't work economically anymore. It's just not cost-effective. We need to think through and figure out what is the model for the emerging high-net-worth client, whether Gen-X or the thirty-somethings."

For the biggest advisers, the Internet may hold the beginning of an answer. The future of financial planning may be in the direct channel, where individual investors use Internet tools to make their own investment decisions. The problem, though, studies have shown, is that when investors start accumulating more than $100,000, they start questioning their own judgment, Bobroff said, and want face time with an adviser. Without that human touch, it's difficult to get loyalty from customers, but the major asset managers have no time to spare to build up relationships in this fashion. With many wealth management clients having lost exorbitant amounts of money during the financial crisis, firms have to prove themselves to these clients all over again.

"The vast majority of advisers work with only 30% of their book of business on a good day," said Ileana van der Linde, principal at Capgemini Consulting, in a phone interview. "If an adviser only has time to work with a small percentage of their clients, it makes sense for them to work with those who can bring in the most money."

"I think all of us right now are analyzing what the cost structure of the business is going to look like over the next six to 12 months," said Adam Sherman, the CEO of First Trust Resources, in a recent phone interview. "Clearly each client will have to generate a certain amount of revenue to make it a viable business model to serve them. I can definitely see clients with assets under management south of $500,000 being pushed into the do-it-yourself camp."

That's because asset managers charge between 50 and 100 basis points for their services, meaning a client with $500,000 to invest will only equal $2,500 to $5,000 a year in fees. If wealth managers are spending more money on compliance and other services as a result of regulatory reform, that leaves even less for them and to keep their businesses going. Sherman projects that the cost of added compliance and fiduciary care will be about 10 to 15 basis points of cost per client. From a profitability perspective, large institutions cannot deliver face-to-face service to someone with $250,000.

Still, while the profitability of emerging high-net-worth clients can be questioned, the opportunity cannot, said Greg Hogan, principal at Riotto-Jones & Co., in a phone interview last week. And "the irony is there isn't a single institution that has actually figured it out," Hogan said. Clients with $3 million are being sent to regional call centers, because large firms are focused so heavily on quarterly profitability that if each client doesn't pack a punch, they're not seen as an opportunity.

To be sure, some small boutique firms are picking up the slack, going after the fragmented emerging high-net-worth market and giving clients the face time they want and need. Smaller firms don't need to have 2% or 5% of the high-net-worth market, Hogan pointed out; they can make their business model work on much less.

The real opportunity for the large institutions, Hogan said, is to have a walk-in storefront where people can just ask basic questions and get educated. In time, a firm will hopefully evolve these clients through their own proprietary process and sell them other products and services.

"The corporation has lost sight of the client and where the revenues are derived from," Hogan said. "The model should be more like the local, smaller community bank that has a full-service trust."

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