[EDITOR'S NOTE: In their new book, The Middle-Class Millionaire: The Rise of the New Rich and How They Are Transforming America (Doubleday/Currency), the authors Russ Alan Prince and Lewis Schiff explain that this group is the fastest-growing segment of the wealthy population and has the ability to transform our nation based on their social and professional networking talents and a suite of unique personality traits. This article focuses on that cohort's impact on the advisory business, and how the affect of middle-class millionaires will be as profound and a possible key to enhanced growth and profitability.]
What Is A Middle-class millionaire? A middle-class millionaire is someone with a net worth between $1 million and $10 million that firmly identifies with their middle-class upbringing and values, and does not perceive him or herself to be rich. Instead, they see themselves as, you guessed it, middle-class. Today, these people represent 7.6% of all U.S. households, a figure that translates to a total of 8.4 million middle-class millionaires. Due to a confluence of environmental and behavioral factors, it is reasonable to project that the number of U.S. middle-class millionaire households will reach a total of 20 million over the next ten years.
The Ideal Client
Most advisors and financial institutions have already identified the middle-class millionaire as an ideal client; 86% of advisors, 90% of brokerages, 85% of independent advisory firms and 80% of private banks all say these individuals are a "sweet spot" for their business. The age, investable assets and financial challenges of the typical middle-class millionaire fits well with the strategic shift occurring at many firms to focus on higher net worth clients and suits both the structure and costs of the product and service platform needed to attract and retain that kind of business.
That platform can best be described as an evolved wealth management offering; a range of high-quality products and services delivered by a team of experts to meet the complex and changing needs of the middle-class millionaire. In other words, middle-class millionaires desire an experience that emulates the breadth, depth, customization and control of a family office.
Below are some key demographic and behavioral statistics on this important and influential part of the American culture:
Slightly more than half of middle-class millionaires have a net worth between
$1 million and $3 million and slightly less than half have total assets ranging between $3 million and $10 million.
The vast majority of middle-class millionaires, nine out of 10, have earned their wealth or amassed it through a retirement benefit associated with their employment.
Three-quarters of middle-class millionaires are under the age of 65, and many are still working which helps shed light on some of the issues that keep them up at night.
About 70% of middle-class millionaires are men, a figure that is consistent with other segments of the wealthy population.
Nearly all middle-class millionaires give money to charity, usually as one-time cash gifts. Just 20% of this group has established a planned gift as part of their philanthropic strategy.
Given the total assets at play, it's no surprise that 70% of middle-class millionaires have an estate plan. Unfortunately, nearly 90% of those plans were drafted more than 2 or 3 years ago meaning they are probably outdated and potentially useless.
The top three concerns of middle-class millionaires, by a wide margin, are taking care of their heirs, having adequate medical insurance and having enough money in retirement.
Most middle-class millionaires express a high degree of interest in hedge funds, hedge funds-of-funds, private money management and other types of exclusive investments, due in large part to their limited experience with and the overwhelming media coverage of such products.
The greater a middle-class millionaire's net worth, the more advisors enter the picture with 58% having two or more advisory relationships.
Similarly, a higher net worth is also indicative of compromised loyalty and satisfaction between the middle-class millionaire and his or her primary advisor. Just 14% characterized themselves as loyal to their advisor and 47% said they were just moderately satisfied.
Why Loyalty Matters
Despite dangerously low levels of loyalty between middle-class millionaires and their advisors, it is possible to salvage and improve the quality of these relationships-and the results are well worth the effort. Over the past few years we undertook a sizable research initiative to identify the advisor behaviors that result in client retention, asset retention, relationship expansion and client profitability enhancement. Based on direct feedback from wealthy individuals, we identified the six most influential, and essential, parts of the equation. Importantly, these component parts of loyalty cannot be introduced on a stand-alone basis or in a vacuum, but must work in concert during the course of an advisor-client relationship to be successful.
The six elements of success and their relative importance are:
1. Character - The integrity, honesty and trustworthiness of an advisor are paramount to a functional relationship with a client.
2. Chemistry - A connection between the advisor and the client will help engender confidence and satisfaction in the relationship.
3. Caring - An advisor that works in the best interest of a client, even if it means sacrificing a lucrative sale or transaction, is highly prized.
4. Competence - Clients have expectations about an advisor's capabilities, expertise, experience and professionalism that must be met and, ideally, exceeded.
5. Consultative - An advisor's ability to combine and deliver the multitude of strategic, product, service and behavioral aspects of wealth management to the client in a way that creates a "customized" solution and experience.
6. Cost-effective - Clients expect to pay for the expertise of an advice professional, but they want to pay a fair price for the right service.
Collectively, the first four components support and enhance the overall relationship-in effect, the sum of an advisor's character, chemistry, caring and competence is greater than the whole of its parts. For instance, a technically proficient advisor that is abreast of the latest regulations and state-of-the-art techniques can prompt a client to view the attention and expertise devoted to his or her account as evidence of caring. Similarly, clients may perceive sincere advisors with high moral standards as especially competent.
Those behaviors are the foundation on which client loyalty is built. But, by themselves, they can't create a healthy, productive and harmonious relationship between an advisor and a client. Being consultative is the nucleus of client satisfaction; doing your job in a way that assures a client that his or her needs have been fully vetted and that the right suite of products and services has been assembled to meet those needs. One advisor's competency in hedging concentrated stock positions will be useless to a retiree with a portfolio full of fixed-income vehicles, no matter how empathetic and talented the advisor is. An advisor must deliver the first four elements in a personalized and consultative way for maximum effect.
Cost-effectiveness has the lowest impact on the client loyalty equation. It probably won't win you any business, but it can be a deal-breaker. A fairly priced service that is delivered by a brusque and disinterested advisor with lapsed licenses is obviously a non-starter. On the flip side, a charismatic and capable advisor that delivers an exceptional service is on the path to success ... if the price is right. If the fee is considered unfair, is unjustified, unexpected or simply exorbitant it can color the client's perception of the advisor's integrity and eventually undermine the relationship.
The six parts of client loyalty play different roles, but have interdependencies that can and must be used for both the advisor and the client to benefit.
Putting A Value On Loyalty
It takes a deft and committed advisor to leverage the framework for loyalty described above but, as mentioned, it is an effort worth undertaking with middle-class millionaires. Securing the loyalty of this group pays real dividends to advisors. Loyal middle-class millionaires gave their advisors an average of $376,000 in new, incremental assets and 11.8 qualified referrals within the past year. Within their social milieu, middle-class millionaires often are sought out for advice and referrals, making them powerful centers of influence in their communities. Furthermore, loyal middle-class millionaires are open to receiving a broader range of products and services from their advisors and are highly unlikely to transfer all or a portion of their assets elsewhere.