Financial advisors sometimes misread the concerns of these clients.
That often proves essential in building a very
successful financial advisory practice is the extent to which advisors
understand their target market. Based on a study of 512 financial
advisors, for most of them (86.1%), the middle-class millionaire
-defined as someone with investable assets of between $500,000 to $5
million-is the "ideal client" (Exhibit 1).
The remaining 13.9% of financial advisors were defining their "ideal client" as having substantially more wealth. Even in this cohort, middle-class millionaires would rarely be turned away.
While everyone wants to work with wealthy clients who have significant liquid assets, a key factor in the determination of the "ideal client" is the financial issues and challenges they face. The need for a financial advisor to be able to deal with more complex financial and interpersonal situations generally increases with wealth. This proves to be problematic for many financial advisors, making an often less-involved client more attractive. And the middle-class millionaire is that client. Not only are most financial advisors proficient at adroitly addressing their financial needs, goals and concerns, these clients are highly profitable for them.
The financial institutions have similarly identified middle-class millionaires as the "ideal client." In surveying 269 senior executives at a variety of financial institutions, we found that 83.6% of them consider middle-class millionaires to be the high-net-worth "sweet spot" (Exhibit 2).
This was most pronounced among the brokerage firms (90.2%), somewhat less among the senior executives at independent broker-dealers (84.9%) and even proportionately less among the private banks (79.5%). Still, it is clear that the greater majority of senior executives at financial institutions are seeking to target middle-class millionaires.
While financial advisors need to look at each and every middle-class millionaire client as a unique individual, it's very worthwhile to be able to gain a solid perspective on them as a market segment.
Plagued By Financial Fragility
The idea of losing their wealth is a top concern of middle-class millionaires. Nearly nine out of ten of middle-class millionaires (88.6%) are very concerned about the potential to no longer be able to afford a lifestyle they have become accustomed to.
A substantial number of middle-class millionaires are engaging in a financial balancing act. Many of them are often only a few steps away from significant financial reversals. This places a great deal of pressure on them to maintain their lifestyles. And that is where high-quality financial advisors come in.
The complication is that most financial advisors fail to recognize that their middle-class millionaire clients are concerned about this issue. Only 15.4% of the financial advisors believed that 20% or more of their clients with these levels of investable assets are very concerned about losing their wealth.
Aside from not losing their wealth, middle-class millionaires confront a wide variety of issues. Another concern of there is taxes.
The majority of middle-class millionaires (84.7%) are most interested in mitigating income taxes (Exhibit 3) because of their strong immediate impact. For 49.2% of middle-class millionaires, mitigating estate taxes is very important. At the same time, 41.7% of middle-class millionaires are very interested in mitigating capital gains taxes.
The real problem is that most financial advisors do not understand these concerns. Financial advisors tend to project their own concerns onto their affluent clients. Financial advisors say that their affluent clients are most concerned with mitigating income taxes (77.9%) (Exhibit 4). Nearly the same percentage of financial advisors believe their affluent clients are very concerned about mitigating capital gains taxes (71.5%), which does not match the responses from the middle-class millionaires. More telling is that only 8.2% of the financial advisors believe their wealthy clients are concerned with estate taxes.
Middle-class millionaires are the "ideal clients" for most financial advisors. They are wealthy enough to require the services of high-quality financial advisors, yet not so wealthy that most financial advisors end up in over their heads.
At the same time, we see that the greater majority of financial advisors do not really understand this affluent market segment. For a financial advisor to be especially successful requires that he or she be very attuned to the needs and wants of middle-class millionaires.
Hannah Shaw Grove is the author of five books on private wealth and advisory practice management. Russ Alan Prince is president of the consulting firm Prince & Associates.