Wealth managers increasingly see wealthy clients with $10 million or more in liquid assets as “ideal” clients. These clients require investment management expertise and will likely need other financial services and products. The good news is that the ranks of the wealthy and their aggregate net worth are growing, creating more demand.
The bad news is that a survey of 421 wealth managers found that nearly 70% were very or extremely concerned about intensified competition (Exhibit 1). At the same time, three-quarters are concerned about increasing their assets under management.
While it might be seen as paradoxical, as the number of competitors for the wealthy's business rises, the competition level for wealthy clients diminishes. There is a caveat. Competition only decreases for those wealth managers who are well attuned to the progressing seismic shift in the private wealth industry and take steps to capitalize on these changes.
Understanding The Private Wealth Reset
To begin with, the private wealth reset is a trend in which the wealthy are becoming more astute consumers of professional services. In increasing numbers, they are cautious of the intentions and quality of advice they receive from the professionals they engage, including wealth managers. There are many good reasons for this.
High-performing single-family offices catalyzed the private wealth reset. One way they have done so is through stress testing, which is a systematic way to evaluate whether the financial expertise they rely on aligns with their desired outcomes cost-effectively and whether they are not missing any significant opportunities. In a survey of 252 single-family office senior executives, four of five reported conducting stress tests within the last five years (Exhibit 2).
Increasingly, wealth managers benefit from the private wealth reset by providing second opinions. Critically, to benefit from the private wealth reset, wealth managers must recognize and ardently believe that most of the wealthy are being poorly served. They are not getting superior results, defined as being able to most efficaciously and cost-effectively achieve their financial and related goals, deal with their financial concerns, and ensure they’re not missing out on significant opportunities.
There are two categories of reasons so many of the wealthy are poorly served. One category is Professionals, which is mainly a function of the nature and structure of the private wealth industry. The other category is families. We will briefly consider why it is the norm for many wealth managers to serve wealthy clients poorly.
It all comes down to the private wealth industry favoring professionals. The power imbalance results in many wealthy clients not working with high-quality professionals.
A Typology Of ‘Bad’ Wealth Managers
Three types of wealth managers are not delivering superior results to their wealthy clients, creating opportunities for those who can. The most pervasive type is the less-than-leading wealth managers. These wealth managers make intense and concerted efforts to connect with and serve wealthy clients. The complication is that they are not very capable. They aim to do an excellent job for wealthy clients but are not knowledgeable or proficient enough to deliver exceptional value. Their intentions are good, but their capabilities are not.
An all-too-common example concerns handling the tax implications of investment portfolios. Many wealth managers use tax-loss harvesting as a pronounced way to address taxes. This is a fancy way of saying “losing money.” But what about mitigating or eliminating taxes on the growth of an investment portfolio? While leading wealth managers can make this happen, most do not know how. The bottom line is that many wealth managers aspire to do a good job but are just not up to the job.
Another common type of “bad” wealth managers are erudite wealth managers who are too focused on their technical expertise. To deliver superior results, wealth managers must be technically proficient. Wealth managers must be able to provide state-of-the-art investment expertise. The implication is that among those wealth managers who are extremely knowledgeable and highly adept in investing, only a tiny percentage are attending to their clients' needs, wants and limitations.
Then, there are the predatory wealth managers. What is worse than ineffectual wealth managers are wealth managers who see wealthy clients as “victims in waiting.” From selling them dubious financial strategies and products to out-and-out absconding with their monies, sadly, these predators permeate the private wealth industry.
There are two types of predatory professionals. One type is exploiters who are not doing anything illegal but are taking advantage of their clients by selling them questionable investments for which they usually severely overpay. The other type of predatory professional is the criminal. They are in business to deceive and steal.
All “bad” wealth managers sell, and not selling is central to benefiting from the private wealth reset.
Providing Value, Not Selling
With more professionals entering the private wealth industry, many focus on the wealthy, resulting in more bad wealth managers. As these wealth managers seek to build their practices, many take sales training, ensuring most will become less-than-leading wealth managers. Most sales training is about persuading, motivating, or convincing wealthy clients to buy particular financial products. When wealth managers are about delivering superior results, they are NOT selling. Moreover, they are putting wealthy clients in control of the process and using their expertise to help them achieve their agendas.
When wealthy clients are in control, they are much better able to avoid bad wealth managers and are more likely to get superior results. The private wealth reset is where the wealthy control their financial lives. But it is more than them making decisions. It is where the professionals they rely on are helping them make smart decisions, mainly by pulling back the curtain on the private wealth industry. It is about delivering value by helping the wealthy think through viable financial choices, including investments. Exhibit 3 is a comparison of providing value with selling.
While wealthy clients control the process, wealth managers must help them think through viable financial choices, including investments. And it is also the responsibility of the wealth managers to implement the selected options. For example, this doesn’t mean that wealthy clients are deciding the asset allocation or the specific products from ETFs and alternatives to individual securities to put into the portfolio. This means that wealthy clients clearly understand the projected outcomes and the advantages and disadvantages of their choices.
Wealth managers who choose this approach will, in the long term, be the ones who excel. And long term starts now. Being able to show the wealthy that the current wealth managers they are relying on are not that good or do not have their best interests at heart proves to be a very effective way to eliminate the competition. And it is essential to remember that the wealthy are currently working with wealth managers and other professionals. So, for a new wealth manager to work for the wealthy, current wealthy managers and possibly some other professionals must be displaced, which usually is not that hard, see “How To Displace The Wealthy Client’s Current Advisor.”
Jerry D. Prince is the director of Integrated Academy, part of Integrated Partners, a leading financial advisor firm. Russ Alan Prince is a strategist for family offices and the ultra-wealthy. He has co-authored 70 books in the field, including Making Smart Decisions: How Ultra-Wealthy Families Get Superior Wealth Planning Results.