Only ~5% of the world’s population has over US $2 million household net worth, a rough definition of high net worth individuals. Its really only these people that are the focus of every bank, fund manager and financial advisor on the planet.
Hunted Not Farmed
These high net worth individuals (HNWI) are hunted diligently by the financial services industry. Its misguided to spend time and effort farming and growing less affluent clients into wealthy ones. A McKinsey report back in 2013 overwhelmingly demonstrated that the probability of a average household growing into a wealthy one was minimal.
A substantial majority (75%) of advisor relationships with $2M+ households began when the household already was holding $2 million or more in assets. Another 18% began the relationship holding $1 million to less than $2 million or more in assets. Only a very small proportion of households began with less than $1 million in assets (7%), and fewer still began with less than $500,000 in assets (3%).
In fact, focusing on small clients is detrimental to the financial advisory business. Clients with $100,000 or less in investable assets are 108 times more likely to leave their advisor than to become truly wealthy while with the same advisor!
The Investment And Advising Difference
Wealthy people invest differently than other. Wealthy households invest their assets directly in equities, rather than funds, and hold more fixed income investments than others.
Wealthy people are advised differently also. For direct equity and fixed income investments, wealthy households use advisors with a hybrid approach to charging, with both a transactional and fee based element.
Surprising to most small client advisors, these large households use both fee and transactional accounts almost equally. As household net worth increases, fee only accounts actually decrease in popularity while transactional accounts increase. Wealthy clients will pay trading fees for access to more sophisticated investment instruments.
Too Much Is Not Enough
In the service industry of financial advising, everyone wants more of less: more time to spend working on the complex needs of only a few high net worth individual clients. If wealthy clients are difficult to acquire yet willing to pay for competent advice, at some point all advisors ask themselves “Are my few wealthy current clients enough?”.
Not all advisors have an honest, easy answer.
The number of households with $2 million or more in assets across advisors is highly unequal: the majority of advisors have only a few high net worth individual households as clients. An advisor with four households with $2+ million is at the median for all advisors. A top-quartile (75th percentile) advisor has ten $2M+ households while a top-decile (90th percentile) advisor has 20.
Experience Correlates
As expected, an advisor’s experience is positively correlated with both the number of high net worth households clients served and production from high net worth households.
However, there is a wide band around those median numbers of HNWI clients per advisor. An advisor with only 5 years of experience usually has between 1 and 5 wealthy clients, while someone with 30 years experience, could have anywhere from 3 to 15 on average.
Therefore, the importance of the relationship between HNWI clients and the advisor’s experience should not be overstated. Other factors, much more in your control, are also very important.
Whales Fear Minnows
One of the most important factors in developing a HNWI advisor practice is the number of small clients you keep. Advisors who have the highest median number of high net worth households (and furthermore,
the most productive relationships with their high net worth households) have the smallest proportion of small households in their books. It seems an obvious observation, but its profound in its simplicity.
Any advisor with more than 40% of their clients consisting of households of less than $250,000 suffers greatly both in terms of the sheer number of clients with more than $2M in assets that they serve and the revenue that those clients produce. In other words, when dealing with schools of minnows, you are unlikely to see any whales.
Hunting Whales
A common viewpoint, and one we hear often, is that HNWI clients are more price sensitive than less wealthy clients. Advisors often want to offer discount pricing for their high net worth clients. This will supposedly attract new clients, retain existing clients, and even help get referrals. However, discounting does more harm than good as it erodes your perceived of value in the client’s eyes.
For fee accounts, an analysis of market wide data shows that Revenue on Assets (RoA) is optimized if pricing is neither too high nor to low. A fee of 1% of assets under management provides for a optimal amount of wealthy clients and highest revenues overall.
For transactional accounts, the relationship between the level of discounting and the number of high net worth households served by an advisor is indiscernible. The revenue from those clients also does not change much regardless of the level of discounting.
All this shows that discounting is not the way to attract high net worth individual clients. In fact, its likely to scare away whales because they feel they are being approached by ordinary fisherman.
Growing Your Advisory Business
With only 5% of the world’s population as your target, you must do things right. High net worth households differ from less wealthy clients in three major ways:
- They invest in equities and fixed income products rather than in funds.
- They want both transactional and fee based accounts, not one or the other.
- They will divide assets between the transactional and fee based accounts equally.
Remember, you have to hunt for whales, you cannot grow them from minnows. Find clients that already have substantial wealth. Ignore leads that don’t.
Although having a long history and extensive experience attracts clients, focus on reducing the number of small account relationships you maintain. Focus on developing deeper relationships with the few wealthy clients you have.
Do not discount excessively. The price of your service reflects your reputation. Lowering you fees will not increase your wealthy client numbers or your revenues.