The Financial Life Of Senior Executives

Part 3: Their advisors and how they find them.

This is the last of three articles based on our survey of 388 senior executives with at least $500,000 in investable assets. We have examined their key financial concerns, the financial products and services they use and are interested in and, in this installment, how they found their primary financial advisors.

Who do America's top executives favor as their primary financial advisor and how did they find that advisor?

Based on our research, the majority of senior executives use a broker as their primary investment advisor, with a bank or trust office the runner-up and independent financial advisors coming in a close third. When it came to the manner in which they found that advisor, co-workers were the best bet, closely followed by accountants and attorneys. Referrals by a friend, long a staple of the advisory world, barely made the cut, finishing behind such long-shot sources as seminars and published articles.

All of those surveyed have a position of vice president or higher at publicly traded, Fortune 1000 companies. They are all 45 or older, 81.2% are men, and they have been at their job for at least ten years. Each of them has at least one financial advisor (usually more than one). About half of the group, 49.2%, have $500,000 to $1 million in investable assets, 32.5% have from $1 million to $5 million, and the other 18.3% have over $5 million. The more assets they have, the higher the percentage they have in company stock, with the least affluent having 31.4% compared to 62.2% for the most affluent.

Key Concerns, Products And Services

In our first article, we found that the majority of the executives were, understandably, most concerned about their main holding-company stock-going down. They all wanted to diversify, but that could be problematic if the stock was in the form of options, restricted, or highly appreciated. Other issues of concern included losing their jobs, being sued and paying for their children's education.

Last month, we found that the wealthier the senior executives were, the more interested they were in products and services designed for the affluent such as hedge funds, managed accounts and private money managers. As they became wealthier, they were also less interested in the more common investment options such as mutual funds.

This time, as noted, we are focusing on who they use as their primary financial advisor and how they found that advisor.

Brokers Lead The Way

As you can see from Exhibit 1, brokers were most often the primary investment advisor regardless of how much money the senior executives had. This is partly a result of the numbers-there are more brokers out there than any of the other professionals. It is also because the executives perceived their financial profile and needs as highly complicated, their company stock holdings being a prime example, and thought that they were better off working with someone connected to a large financial services firms who could easily access other professionals and products. Lastly, the large financial services firms have name recognition, and they have been aggressive in marketing to and pursuing high-net-worth clients.

Until a few years ago banks, second on the list, were the key players because of the high level of personal attention they offered the wealthy and the fact that they could access a broader array of products and services compared to most brokers, who concentrated on stocks and bonds. More recently, of course, brokers have been broadening their job description to embrace wealth management, thus elbowing banks from the top of the charts.

Independent advisors were also well represented, though less so at the higher end, because of the perception that they did not have the same access as brokers and were not as adept with such complicated issues as restricted stock.

Accountants, working mightily in recent years to expand their service menu and attract more of their affluent clients' assets, were the only other group in double figures for the executives as a whole. Again, though, they were almost invisible at the higher end, because of the concerns about the depth and breath of their products, services and knowledge. Money managers, concentrated at the higher end, grabbed 12.7% of the wealthiest segment.

Referrals From Co-Workers

When it came to how the executives had found their primary advisor, co-workers and professionals commanded the field. Their fellow executives, of course, had to deal with many of the same issues related to their company stock and would gladly refer an advisor who had helped them out. But the more money the executives had, the less likely they were to rely on such referrals. Indeed, over two-thirds of the wealthiest executives found their primary advisor through a referral from the only other contenders of any consequence, accountants and attorneys.

Centers Of Influence

As we have observed in previous columns, these accountants and attorneys who work with the affluent-"centers of influence"-are an increasingly important source for client referrals. A series of surveys that we conducted in 1997, 2000 and 2003 underscore this trend (Exhibit 3). In each of those three years, we asked hundreds of financial advisors how they had landed their top 20 clients in the previous two-year period. Referrals from clients and from centers of influence dominated to the near exclusion of every other form of prospecting, which never added up to more than 5% of the total.

However, over that period client referrals precipitously declined while those from centers of influence nearly doubled. Part of this shift can be explained by the downturn that gripped the market from 2000 through early 2003. With almost every client having lost money during that time, they were unlikely to be recommending their advisors. Investors instead turned their ear to the attorneys and accountants with whom they worked on estate plans or tax management; in short, who offered them tangible services. Accountants and attorneys also had a better idea of a client's assets and financial needs than friends would-who tells friends their real net worth, after all-and the names they handed on would therefore be more qualified prospects. In addition, they tend to work more with the affluent and are also regularly in touch with those clients. Best of all, we found that they were on the lookout for top-notch advisors to recommend and work with.

Next Steps

Based on our research, financial advisors who want to connect with affluent executives (or who already have them as clients) must: 1) be able to demonstrate a thorough knowledge of strategies for diversifying and tax-efficiently managing stock options, as well as restricted or concentrated stock; 2) make sure they have ready access to a range of products, services and other experts, either through their firm or their professional network; and 3) actively cultivate contacts among attorneys and accountants.

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.