As the newly wealthy have begun to dominate the high-net-worth classes, old truths are fading.
Auto mechanics, escorts and lawyers charge by the hour, so it's not surprising that private bankers and wealth managers have eschewed the practice. But according to David Irwin, director of the VIP Forum, the financial-services practice of the Corporate Executive Board of Washington, a number of financial planners and managed account divisions of fund firms have already begun hourly billing, and others are considering it.
"The Future of Advice, Revisited: Best Practices in Delivering Profitable Advisory Services" used a 2000 survey by PricewaterhouseCoopers of New York as a point of departure. Personal relationships and service quality were at the top of the private bankers' list at the time of the survey, but both of those differentiators paled in comparison to "valued advice" as to what they expect will differentiate their services in 2003.
"As everyone now sells essentially the same product, the only differentiator is how you advise," Irwin said. Certainly, "putting up good [performance] numbers is a critical factor in establishing the quality of your advice."
But another important factor, often overlooked, is how an adviser manages the illiquid portions of a client's wealth.
"Advisers tend to only concentrate on securities," Irwin explained. "Clients don't do that. They look at their net worth all together, including their home and other real estate, companies they own, even the art they collect. How many private banks and wealth managers have the capability to advise on that level? The leading-edge companies are trying to gain the primary relationship.
"So, if a client has a question on real estate, he calls his private banker first," Irwin said.
Citigroup of New York, for example, has a cadre of art specialists on call to advise bankers and their clients. Other big players, including Wells Fargo and Bank of America, both of which have a strong presence in the South and West, have built in-house expertise on managing timberland, oil fields, farms and ranches.
But that does not mean only the national banks can hope to compete. Indeed, the growth of new money and self-made millionaires has thrown the once-exclusive cloister of the private bank open to many competitors - fund companies included.
"Most people who have self-generated wealth don't have a pre-existing wealth environment around them. They don't have family legacies, and they probably don't even have wealthy friends. So, image is less important and brand becomes more important. Advertising, surprisingly, drives a large percentage of new money."
The question, then, becomes how fund companies and private bankers can make money on the new assets they gather. Billing by the hour is hardly a new idea, but surprisingly, for banks and many wealth managers, it is a major breakthrough, Irwin said.
"The banks that have begun to charge for advice have taken those fees out of the closet," Irwin noted. "They have unbundled them from the products or the management charges. And clients tend to agree. This could be a massive change for the industry."