Advisers are missing opportunities to expand existing relationships and attract wealthy clients, according to a survey by ByAllAccounts, an account aggregator in Woburn, Mass.
The survey found that 75% of wealthy investors' advisers haven't asked them for a referral in at least a year, and only 38% of investors say their adviser proactively reaches out to them when changes in the market could impact their portfolios.
Communication, or lack of it, is a leading cause of client defection, the survey says, and one-third of investors have changed advisers since 2008. Another 25% of wealthy investors are either neutral or dissatisfied with their current adviser.
"The one thing that came out of this is that the high net worth want advisers to be more proactive and communicate more," said Cynthia Stephens, director of marketing at ByAllAccounts. "Advisers need to think about client relationships from a marketing perspective, focusing on keeping their existing clients. The need to over-communicate came out loud and clear. You build loyalty by over-servicing your clients."
It's a common enough message, and yet investors consistently complain that their advisers are ignoring them. In fact, a separate study by Barclays Wealth in New York, the 11th of its Insights series, says investors are starting to take things into their own hands. At 44%, almost half of wealthy investors are now reviewing their accounts more frequently, and almost one-fourth of investors spend as much as five hours per week directing their own trades. At 60%, most of these wealthy investors are primarily concerned with wealth preservation, and around half of investors have cut their exposure to high risk/high reward investments. Only 31% believe the U.S. economy is stabilizing.
On a positive note, amid all the turmoil, advisers still have an important role to play, said Matt Brady, Barclays Wealth's head of wealth advisery for the Americas. "High-net-worth investors can't be certain of returns so they feel they have to be more attentive," he says. "But at the same time they haven't rejected their advisers. They're less likely to trust blindly now, but they're still open to advice."
Two thirds of Canadian high-net-worth investors in the 2010 iSharesHigh-Net-Worth Investors Survey are acting similarly. Uncertainty has created opportunity, and three-quarters of wealthy Canadian investors see a market ripe with opportunity. They're just not sure how to tap it, which is where advisers come in-more than three-fourths of wealthy Canadians say they turned to financial advisers for at least some help in the decision-making process.
"It's good news for advisers," said Mary Anne Wiley, managing director and head of iShares distribution in Canada. "Clients are seeing opportunity, but what also came out of the study is that they don't know where or how to take advantage of it."
Investors specifically want guidance on risk management plus new investment management ideas. "Coming out of the recession they're definitely more cautious," Wiley said. "But they also have a thirst for new ideas."
What is Your Advisory Firm Worth?
Most registered reps spend decades building a practice based on a solid reputation with a core clientele. But principals of RIA and wealth management firms who hope to eventually sell their businesses and retire comfortably are in for a rude awakening.
Despite those client relationships, the firms still lack the enterprise value to make a deal worthwhile to the owner, according to Mark Hurley, president and chief executive officer of Dallas-based Fiduciary Network.
In a report, Creating, Measuring and Unlocking Enterprise Value in a Wealth Manager, released Monday, Hurley gives advisers a wake-up call about their real prospects for a payoff after years of working on their businesses.
One illustration indicates, hypothetically, what would happen if a roll-up firm did an initial public offering to monetize its investment in a wealth management practice. Out of a potential $450 million in enterprise value, the principal ends up with just $98 million from the deal.
A lot of wealth management firms are unprofitable so-called lifestyle practices, Hurley said. After covering the firm's expenses, the owner's earnings fall short of the prevailing market salary he or she would earn as an employee at a larger firm. They end up subsidizing the practice with their labor.
"In terms of finding someone to replace you and make less, they won't step into your shoes for the pleasure of doing that," he said.
Hurley, who has a reputation for generating controversy, points out what he says are specific shortcomings to the fee-based and fee-only business models that dominate the industry. Many firms that collect fees nevertheless have to sell products to remain profitable. Also, there is no empirical evidence that suggests that a fee-based firm's client list is transferable to successors. Therefore, the fee-based firms have no transferable goodwill, which is the intangible asset that carries enterprise value.
But the report did highlight an area where the fee-only model could redeem itself. It generates exceptionally stable revenue streams, with relatively low annual client turnover rates, between 1% and 3%. That suggests the average tenure of client relationships will start at 33 years, so they stand to generate a "staggeringly large" fee stream over a single client relationship.
The Seven Steps
Mark Hurley, president and chief executive officer of Fiduciary Network, said that to be sustainable and transferable, firms must create a consistently high level of service that does not rely on the founder or senior partners. There are seven critical steps.
First, recruit and retain successors, and give them clearly defined career paths. Second, institutionalize the firm's relationships so that clients associate the brand with the entire company and not just the founder.
Third, build a client base that is profitable-and demographically diverse.
Fourth, market the firm as a brand that has evolved from the founder's reputation; this way new clients will still be attracted to the firm.
Fifth, change the governance structure so that critical decisions get broader input from key stakeholders.
Sixth, create a robust culture of compliance, because a damaged reputation can sink a firm.
Seventh, reinvest in the business.