It’s been repeatedly shown that wealth management is the most profitable business model for financial advisors, one economically superior to investment management. And it’s possible that investment advisors who convert to a well-managed wealth management practice could increase their incomes by 40% or more without adding any new clients.
What’s critical to any definition of high-quality wealth management is that it is consultative, and the processes involved are essential for success. There are three operational necessities for such a practice. They are:
1. A comprehensive platform of services and products,
2. A process to maximize client relationships, and
3. A process that generates a meaningful number of new wealthy clients.
A Comprehensive Platform
Wealth management includes a broad array of services and expertise. The platform is conceptual in nature, comprising both financial products and access to experts capable of addressing the needs and wants of affluent clients beyond the wealth manager’s expertise.
Access to financial products is fairly straightforward and relatively easy to achieve, though it’s important that less common financial products, such as private equity funds, can be made available for wealthy clients. Products like private placement life insurance and private placement variable annuities are also in growing demand, and high-caliber wealth managers must be able to offer them.
But you must also have access to expertise outside of financial products—to professionals such as lawyers and accountants who can provide integral non-product services. Such people come with expertise in asset protection planning or international tax planning, for example.
There are often a lot of moving pieces in a comprehensive platform. Sometimes the wealth manager’s employer has the platform. Other times, he or she has to go outside the firm.
Nonetheless, the platform is the easiest of the operational necessities. It is the other two things many advisors have serious trouble with.
Maximizing Client Relationships
A wealth manager with a comprehensive platform is in a better position to maximize relationships. But it rarely happens. What is required is a systematic process that connects affluent clients to products and services. One such process is the “whole client model.”
The model is based on the best practices of leading professionals, buttressed by the insights and actions of self-made millionaires and aligned with the psychology of the wealthy. It allows wealth managers to do two things:
• Recognize opportunities: With extensive intelligence on his or her affluent clients, the wealth manager can now discern and evaluate patterns and create opportunities to provide new services and products in alignment with what clients want.
• Effectively position solutions: Once the wealth manager has learned how to be more responsive, it will be possible for him or her to more effectively position products and services. That means knowing who has to be present during the presentations and how to be responsive to influential people in the background.
It can be easier to recognize opportunities. Very often, a wealth management issue arises more than once. For example, entrepreneurs looking to sell their businesses in the not-too-distant future often use a trust to freeze the value of these businesses for estate planning purposes. This presents a big opportunity for wealth managers.
It’s much more difficult to position solutions, which is more art form than science. It helps to know high-net-worth personalities. (See “Affluent Psychology 101” in the October 2014 issue of Financial Advisor for more on this topic.)
Having a comprehensive platform and a process such as the whole client model can enable wealth managers to be more client-centered and dramatically increase their incomes. Still, to truly reach the economic heights, most wealth managers have to cultivate new wealthy clients.
Cultivating The New High-Net-Worth Clients
There are many ways to connect with the wealthy. Without question, referrals are the most effective means.
Most advisors get the majority of their referrals from satisfied clients. But their most lucrative referrals come from other (non-competing) professionals. There are inherent structural reasons for this: Such profesionals tend to know more wealthy individuals. Their opinions are more influential and can be very persuasive. And there are ways to develop relationships with them that motivate them to actively refer.
There are processes that have proved very successful in identifying and working with such centers of influence. One such process is street-smart networking. When done well, this methodology converts other professionals into advocates who:
• Will introduce the wealth manager to their affluent clients and lobby on behalf of the wealth manager;
• Will do everything in their power to limit their referrals to one wealth manager; and
• Will be vigorously looking to make affluent client referrals to that one wealth manager.
The core to street-smart networking is understanding the nature of other professionals’ businesses, the quality of their client bases, the resources at their disposal and their critical concerns. To make sure such a referral source is worthwhile, the wealth manager has to ensure there is an alignment of agendas.
Central to that alignment is the “economic glue” between the parties—the financial incentives. There are direct incentives such as trading affluent clients, sharing revenues, and paying introduction fees. There are also indirect incentives—such as insights into the world of the affluent, best practices and business development support.
Although direct financial incentives are more powerful, they are often inappropriate or non-workable. Thus, the astute use of indirect financial incentives tends to produce the best outcomes.
Implementation Not Information
Building a very prosperous high-net-worth wealth management process takes a considerable amount of know-how and commitment. What is important to realize is that there are no secrets, no magic to creating the practice. For example, in our writings and presentations, we have shared the methodologies for maximizing affluent client relationships and creating a steady stream of new wealthy clients from centers of influence. We have also provided detailed guidelines for constructing a comprehensive platform, including how to identify and negotiate with various types of professionals to build a high-caliber, responsive expert team.
What is clear is that the know-how to build a high-net-worth wealth management practice is available to any financial advisor. What is very telling is that the accomplished wealth managers have taken the know-how and astutely converted it into action. This translation is what produces a very profitable wealth management practice focused on the wealthy.
Implementation, not information, is the significant difference. The ability to develop a deep understanding of another professional’s business model and goals—and consequently discern the most appropriate form of economic glue—is all implementation.
Russ Alan Prince is president of R.A. Prince & Associates.
Brett Van Bortel is director of consulting services for Invesco Consulting.