This is the last of three articles on how an advisory practice can be streamlined by 1) reviewing a client roster and reducing it to those clients who have the best current and future profit potential, 2) improving investment management oversight by cutting back the number of mutual funds and mutual fund families that an advisor manages, and 3) deciding how to update a generalist or specialist business model.
In the financial advisory world, there are two business models to choose from: generalist and specialist. To state the obvious, the generalist is the advisor who knows a little bit about everything, and the specialist is the advisor who knows a lot about one thing, such as estate planning or retirement planning. What they have in common is that they're both essential players in the world of wealth management. And as independent advisors and financial services firms try to move upscale and capture the higher-end affluent-those with $5 million or more in assets-the generalist and specialist business models are changing. Affluent clients are more sophisticated than less-wealthy investors are, and their needs are far more complicated. To be able to satisfy those clients, generalists and specialists have to change their business model.
That evolution does not entail a radical shift in focus, however. The odds are good that most financial advisors are already quite comfortably settled into whichever of the two business models best suits their temperament, their talents and their knowledge base. But the model needs to be tweaked to keep pace with those clients who are very wealthy, demanding and, potentially, far more profitable.
The New Generalist
Being a generalist is not as rudimentary as offering mutual funds and stocks. In fact, the short list of attributes for the new generalist would include the following:
Establish and maintain a high-touch, consultative relationship with each affluent client.
Serve as the affluent client's general contractor for the full menu of wealth management products and services.
Assemble and manage a team of specialists that can provide those products and services.
Be familiar enough with each client's situation to know when to bring in specialists.
This checklist raises a number of challenges for generalists. We're going to assume that most generalists have reached a certain comfort level when it comes to interpersonal relationships. The resulting degree of intimacy makes it possible to know which client needs what products and services, and when. The next question, then, is how to become the "go-to" advisor, the general contractor, the traffic cop, the CFO of the advisory team. This is a subject we've touched on before in this column, and the answer is twofold: First, continue to maintain a high level of client interaction-be the most familiar face. Second, make sure to have all of the necessary wealth management resources in place.
What are those resources and where does one find them? The list of resources would include brokerage, investment management, estate planning, accounting, credit (such as mortgages and business loans), life insurance, property and casualty insurance, philanthropy and private-client legal services. As for finding them, most specialists will only be a phone extension away for those advisors who work for a financial services firm. The situation is obviously somewhat more complicated for independent advisors, who not only have to find specialists for themselves but also have to build relationships with them and create compensation agreements. Those specialists may be found at conferences or seminars, or they may crop up as authors of magazine articles. The best bet may be referrals from fellow advisors and clients. Indeed, in many cases, the client may already have resources on board and be looking for someone to take charge of the team.
A generalist also has to know how to put together and manage a team of specialists. In most cases, that shouldn't be an issue because the specialist is being compensated and he or she is not likely to be a rival for the client's affection-the specialist only wants the piece of the business that relates to his or her specialty. Additionally, if generalists partner well with specialists, those specialists may introduce them to their own clients. In sum, everyone involved has an incentive for doing the job well and getting along.
All of this begs the question: Is it worth it to change the generalist business model to reach more affluent clients? Does it make sense for an advisor to cede a measure of control and possibly split commissions and fees? Based on research we conducted in 1998 among 778 affluent investors with a net worth of at least $5 million, the answer is definitive: The more resources an advisor provided, the better and more profitable the client relationship would be. When it came to the number of services provided by the advisor, the level of client satisfaction soared from just 39.9% for those clients getting only on e service to an impressive 96.1% for those getting three or more such services. And the increase in the number of referrals relative to the number of services offered was similarly steep, with those advisors who provided three or more services being nearly three times as likely to have received two or more referrals from those clients in the preceding year.
The New Specialist
Naturally enough, the new specialist has a very different list of qualifications to cultivate to become part of the wealth management picture. The list includes:
A thorough and up-to-date knowledge of a particular field.
Working relationships with a number of generalists.
A willingness to be part of the advisory team.
Like generalists, specialists looking to improve their wealth management capabilities also must understand that the issues facing more-affluent clients are highly complicated and their disciplines are becoming narrower to more precisely address those issues. Being a specialist may once have been a matter of knowing about life insurance in general. But it now has evolved to where a specialist must be an authority on a subject-for example, knowing about private-placement variable life insurance. Given specialists' strictly defined role, it is fundamental for them to have the highest and most current level of technical knowledge; in other words, they have plenty of homework to do. If they're not fully up on the latest issues-and the tax and legal landscapes are constantly changing in the realm of the very affluent-they risk being booted off the team. That means that specialists should scour trade magazines, attend industry conferences and seminars, and exchange notes with fellow specialists to stay updated.
Those specialists who are within financial services firms have ready-made relationships with generalists. Those who are independent, however, will have to develop their own contacts, working through clients or through fellow specialists who aren't direct competitors.
Finally, where the generalist has to be a field general, the specialist has to be very much a team player and accept that he or she is one step removed from direct contact with the client. They also need to have interpersonal skills, but they will be using those skills to guide their interactions with fellow advisors, not clients. Again, being part of the team shouldn't be an issue if the roles are clearly defined in advance and the compensation is worked out to everyone's satisfaction.
Whether specialists or generalists, financial advisors must understand the two cardinal rules of successful wealth management: Their business model must keep evolving, and they can't go it alone. One advisor simply is not enough to handle the job for wealthy clients today. As our research has shown, the more assets investors have, the more advisors they are going to have on board. So, whether they're at the helm or one of the crew, advisors have to be ready and willing to be part of a team if they want to reach those affluent clients.
Hannah Shaw Grove is managing director and chief marketing officer of Merrill Lynch Investment Managers. Russ Alan Prince is president of the consulting firm Prince & Associates.