You Say Theyb Say

If you are reading this magazine, you've probably been on the hunt for high-net-worth clients for years. Indeed, most financial advisors - from the independent working out of his home office to the Merrill Lynch veep in a downtown skyscraper - have been convinced of the wisdom of building a practice around fewer, but richer clients. Wirehouses have pushed, prodded, cajoled and bribed advisors into focusing on the big accounts. The result: These days, everybody's a wealth manager. In a recent survey (see a related story on page 162), 75 percent of reps identified themselves as such. The trouble is, well-heeled clients have seen few signs that reps have actually mastered the intricacies of advanced planning - or any of the other services that they expect when they hire a wealth manager. You may think you're a wealth advisor, offering solutions to the complex investing and tax-planning needs of high-net-worth clients, but they say you're a product pusher. You say you're giving them the information they need to make smart investing choices, but they say you're talking about products they don't want. Only a few wealthy clients (14 percent) are happy enough with your work to consider sending you more assets or to give you a referral. Working with a list of wealthy clients from among subscribers to The New Yorker, we asked industry consultant Prince & Associates, to find out what the high-net-worth set really thinks about their financial advisors. A total of 1,417 retail clients with investable assets of more than $500,000 responded (nearly 50 percent of our sample have liquid assets of between $1 million and $2 million; 20 percent have $2 million to $6 million). Prince & Associates also surveyed 512 financial advisors, asking them how well they thought they were serving their high-net-worth clients and how those clients viewed them and their professional services. Across a range of issues, from estate planning to choice of investment products, the responses by clients and advisors showed a striking disconnect about the needs of highnet-worth individuals. While the top-line data doesn't look too bad - the majority of respondents say they are "satisfied" or "moderately satisfied" - these clients are clearly not your fans. They are not about to recommend you to their friends - but they may be about to reduce their positions with you or leave you altogether: Nearly half of those who said they are "moderately satisfied" said they are likely to take $100,000 in assets from their primary financial advisors in the next 12 months. Nearly a quarter of the "satisfied" said they were "very" or "extremely" likely to remove assets from their primary advisor over the coming year. Nearly a third of the combined "moderately satisfied" and the "satisfied" said they were "very" or "extremely" likely to leave their primary advisor in the coming 12 months. So much for satisfaction. "Advisors have no clue about how their high-net-worth clients regard them," says Russ Alan Prince, of Prince & Associates. "Most financial advisors are advisor-centric. We learned from our research that advisors tend to think their clients are interested in the things that the advisors themselves are interested in, such as learning about mutual funds," Prince says. Not so. While reps continue to yak about mutual funds, the survey found, what wealthy clients really want to learn about are hedge funds and private money management (i.e., customized portfolios). And, all the money and effort that wirehouses have spent to create armies of assetgathering wealth managers, clients are not impressed. Affluent clients, according to the survey, still regard traditional reps as "salespeople" with hidden, "vested interests," who push the product of the day. Despite all those ad campaigns, these clients do not view such reps as multifaceted investment managers, who can be trusted with the family

fortune. Indeed, nearly 60 percent of those surveyed said they used two or more advisors. An overwhelming majority (nearly 80 percent) says they are still seeking a true "wealth manager" - an advisor who can deliver a full range of financial services and products in a consultative way. The survey of advisors revealed that only one in 10 fits the bill. Affluent Clients Are Just Like Us: Worried What the survey revealed about those well-heeled New Yorker readers could be very instructive for advisors who want to do better with such clients. F. Scott Fitzgerald famously said in the 1920s that the rich "are different from you and me" - to which Ernest Hemingway famously quipped: "Yes, they have more money." Today, Hemingway is more correct than he could have predicted. The Registered Rep. survey found that although most of the respondents are technically millionaires, virtually all described themselves as middle- or upper middle-class, including those whose net worth approach $10 million. "To them, the rich wear Patek Philippe watches, own expensive yachts and garages full of exotic sports cars," Prince says. "Those are rich people. Middle-class millionaires do not feel comfortable buying such luxurious goods casually and, therefore, are not 'rich.'" In fact, while two-thirds of respondents had more than $1 million in liquid assets, most are stressed about the same issues that keep your typical middle-class couple up at night - how to pay for college, save for retirement and pay the mortgage this month. To be sure, the middle-class millionaires do live comfortably, but many live (large) paycheck to paycheck. Or they feel that they do. And they are hyper aware that wealth can vanish - as it did when the market bubble of the 1990s collapsed. Also keeping these affluent clients "real," is the fact that few of the respondents were wealthy by birth. Less than one in 10 (9.4 percent) inherited wealth. Nearly half (44.9 percent) said they became affluent by working hard, climbing the corporate ladder and being well compensated for their efforts. About one in five (21.3 percent) owns his own company, and many of those still have most of their net worth tied up in their companies. About 8 percent say they are wealthy today because they sold companies. For 16.4 percent of our survey, high-net-worth status has come in the form of retirement account rollovers. These affluent individuals are older and have the most liquid assets. Regardless of their wealth and how they acquired it, the survey group expressed anxiety about holding onto what they have. Nearly nine out of 10 say they are very concerned about losing their wealth. Interestingly, those who consider themselves "upper-middle class" (generally those worth $3 million and more in liquid assets) are more concerned than those who only see themselves as middle class (92.7 percent compared to 82.9 percent), perhaps because they have more at stake. The Disconnect Do advisors recognize these people? Many financial advisors themselves are undoubtedly members of the middle-class millionaire set and probably have their own worries about getting the kids through school, building an adequate retirement or just holding onto their wealth. But they don't seem to make that connection when they're dealing with clients. Only about 15 percent of advisors polled said they figured a majority of their high-networth clients were worried about losing their wealth.

But the disconnect doesn't stop there: Advisors seem out of step with their clients' interest in taxes, investment management and, indeed, personal financial goals. The majority of our middle-class millionaire respondents (84.7 percent) are most interested in reducing income taxes. But, only a small number of advisors (just 8.2 percent) viewed that as a top priority for clients. And that's a big opportunity lost. Quite simply, advisors who offer complete financial and estate-planning services (which, of course, include some tax planning) earn their clients' respect and loyalty - and more of their assets. In another recent study of affluent clients (with $1 million or more in liquid assets), The Phoenix Affluent Marketing Service (not affiliated with The Phoenix Companies) found that the top "key drivers" for customer satisfaction and loyalty are investment planning skill and overall knowledge. Phoenix found that advisors who offered financial or estate-planning services garnered more of the high-net-worth client assets than those who did not (67 percent on average, versus 59 percent). "Clearly the data say it's all about the relationship with the client," says David Thompson of Phoenix. "And part and parcel to that is sitting down with clients and creating a financial plan. It's still not a universally practiced service. The data have been showing that those advisors that are doing a better job are retaining more assets and creating more satisfied and loyal clients." Independents are doing the better job of offering full-service financial/estate planning to high-net-worth clients, Thompson says. According to Phoenix data, 75 percent of all independent advisors are offering proper financial planning, compared to about 58 percent for full-service brokers and about 50 percent of bank advisors. Planning Issues In the Registered Rep./Prince Associates survey, the importance of estate planning stood out: Nearly four out of five middle-class millionaires said that making sure their heirs are taken care of is a major concern (see table on page 41). Again the urgency grows along with the client's wealth: Nearly all of the respondents with financial assets in the $3 million to $10 million range say their heirs are a top priority. Yet, the survey revealed that most wealthy clients do not have an up-to-date estate plan. While two-thirds of the respondents said they have an estate plan of some kind, only a fraction (11 percent) said theirs were current (less than two years old); 35 percent were three to five years old and nearly 40 percent were six to 10 years old, which experts consider to be dangerously out of date. When it comes to asset-protection plans, the need for professional help is even greater. Only 12.9 percent of the affluent surveyed say they had insurance or other plans to keep their assets out of the reach of litigants and creditors. Yet almost half of the respondents said fear of being sued is a concern. For the wealthier, it is even more of an issue (58.8 percent compared to 37.4 percent). Do advisors see this opportunity? Apparently not. Only 27.5 percent of all advisor respondents said asset protection is necessary; 20.9 percent believe that their high-networth clients should consider asset-protection planning. The rest of the advisors surveyed (51.6 percent) reckoned that the affluent clients were already taken care of. Says Prince:

"One reason for financial advisors downplaying asset-protection planning is because they have limited knowledge of the field." One reason for the client/advisor disconnect, the research shows, is that advisors clearly like to stick to their comfort zone - selling the products and services that they know and understand, even if the clients are hankering for something else. For example, while many reps pride themselves on knowing all the details of a range of mutual funds and are eager to share that knowledge, it is largely wasted on the high-net-worth clientele. Just 1.3 percent of middle-class millionaires said they were "very" or "extremely" interested in learning about mutual funds. Advisors said that 32 percent of their high-net-worth clients were. What the middle-class millionaire wants is what the really rich have - access to the private money managers, where the elite fish for returns beyond those that the hoi polloi get from their grubby mutual funds. Some 53 percent of respondents said they want their advisors to connect them with "private money management." Advisors? Just 12 percent. The clients also want to learn about managed accounts (38.1 percent), yet only 17.8 percent of responding advisors rated that as a high priority for high-net-worth investors. Charitable giving is another area of disconnect. While substantially all of our high-networth respondents give to charity, it's best described as "checkbook" philanthropy, unplanned gifts given when the charity comes calling. Just 27.8 percent of the survey participants said they are interested in making planned contributions, yet more than 45 percent of advisors pegged planned giving as an important topic for their clients. Another giant gap is will bequests: 45.5 percent of advisors thought this was at the top of the list for their high-net-worth clients, when in fact, none of the clients surveyed said they have a burning interest in the topic. It's worth pointing out that, in some cases, the advisors and the clients may be overlooking what really is in the best interest of the customer. Take long-term care insurance and life insurance. This was one place in which client and advisor opinions coincided - both groups see these products as low priorities. But both products are necessary and are appropriate tools for high-end financial planning. Indeed, says Prince, in surveying advisory practices over the years, he has found that the most successful advisors have the ability to show clients that they need products and strategies that they don't understand and don't care to learn about. Good advisors, Prince says, have to have the ability to explain why clients need certain "boring" products. The problem, says Dave Ogan, a 53-year-old car dealer near Columbus, Ohio, worth around $3 million (who didn't take part in the survey), is that "too many advisors merely gather assets and lack expertise." Ogan, who recently switched brokers, says he wants "objective advice" on his financial plan. So, he turns to his business' lawyer for his personal estate-planning needs. "He's got nothing to sell but his advice," Ogan says. Brokers, on the other hand, "are pitching ideas because they've got inventory to sell." Oh, and if you intend to call him, don't bother; he receives rep solicitations every day. "Coldcalling stockbrokers are like getting hammered by my lot lizards." This story was adapted from the book, Cultivating the Middle-Class Millionaire: Why Financial Advisors Are Failing Their Wealthy Clients And What Advisors Can Do About It. The book, published by Wealth Management Press, is available by calling 877531-1452, or by email at [email protected].

On Registered Rep.'s behalf, market researcher and consultant Russ Alan Prince of Prince & Associates, surveyed by phone 1,417 wealthy retail clients - defined as having $500,000 to $5 million in liquid assets. To get a reliable and representative sample, Prince polled a database of wealthy readers of The New Yorker magazine. We asked the affluent respondents a wide range of questions on financial issues, everything from their biggest financial concerns to their interest in various investment vehicles, such as hedge funds. In addition, Prince polled 512 financial advisors about their attitudes and perceptions about their wealthy clients. Private bankers represented 15.4 percent of the respondents, registered representatives 54.9 percent and independent financial advisors 29.7 percent. SOURCE OF WEALTH A job 47.9% Equity in a privately held company 21.3 Retirement account rollover 16.4 Inheritance 9.4 Sale of a company 8.1 Source: Prince & Associates' survey of 1,417 affluent clients. HIGHLY SATISFIED CLIENTS ARE GOOD FOR BUSINESS. SATISFIED CLIENTS, LESS SO. Moderately Highly Future Actions Satisfied Satisfied Satisfied Give advisor more money to invest 13.4% 33.50% 94.4% Refer friends and colleagues 2.9 0.9 81.6 Obtain other types of financial 12.2 21.3 86.2 products Source: Prince & Associates' survey of 1,417 affluent clients. ADVISORS' RANKING OF HNW CLIENTS' CONCERNS DOESN'T MATCH Making sure heirs are taken care of 40.8% Having adequate medical insurance 79.3 Having enough money in retirement 52.1 Paying for children's or grandchildren's education 28.5 Being sued 9.4 Losing your job or business 8.4 Having high-quality personal security 2.5 Taking care of parents 2.5 Making meaningful gift to charity 1.8 Source: Prince & Associates' survey of 512 financial advisors. THE WEALTHY HAVE SIMILAR FINANCIAL GOALS (AND WORRIES) AS THE TRULY MIDDLE CLASS. $1M to $3M in net $3M to $10M in Personal Financial Goals and Worries Total worth net worth Making sure heirs are taken care of 66.9% 93.6% 79.2% Having adequate medical insurance 78.1 76.4 77.3 Having enough money in retirement 87.3 53.0 71.5 Paying for children's or 65.2 28.6 48.3 grandchildren's education Being sued 37.4 58.8 47.3

THE WEALTHY HAVE SIMILAR FINANCIAL GOALS (AND WORRIES) AS THE TRULY MIDDLE CLASS. $1M to $3M in net $3M to $10M in Personal Financial Goals and Worries Total worth net worth Loosing your job or business 48.4 30.5 40.0 Having high-quality personal security 17.8 40.4 28.2 Taking care of parents 38.4 16.1 28.1 Making meaningful gift to charity 21.9 34.8 27.8 Source: Prince & Associates' survey of 1,417 affluent clients. MIDDLE-CLASS MILLIONAIRES ARE "VERY" OR "EXTREMELY" INTERESTED IN LEARNING ABOUT: Mutual funds 1.3% Managed accounts 38.1 Individual securities 50.7 Hedge funds 40.3 Credit 8.2 Hedge fund of funds 50.4 Life insurance 1.7 Private equity/private equity funds 22.2 Long-term care insurance 11.9 529 funds 23.2 Annuities 27.5 Private money managers 53.2 Passive real estate 13.8 Collectibles/precious metals 15.0 Derivatives 3.2 Source: Prince & Associates survey of 512 financial advisors. FINANCIAL ADVISORS SAY THESE ARE VERY IMPORTANT TO CLIENTS WITH $500,000 TO $5 MILLION IN INVESTABLE ASSETS. Individual securities 47.7% Annuities 44.7 Mutual funds 31.6 Hedge funds 20.7 Hedge fund of funds 19.1 Managed accounts 17.8 Private money managers 12.3 Long-term care insurance 2.0 Life insurance 1.6 Derivatives 0.6 N= 512 Financial Advisors