Why Advisors Don't Have More High Net Worth Clients
By Hal M. Bundrick
NEW YORK (
)--Here's a test. How many households with $2 million or more in investable assets do you have in your book of business? If your answer is four, you're at the median of all financial advisors. You might want to lay low during the next round of FA cutbacks. A top-quartile (75th percentile) advisor carries at least 10 high net worth households. And at the top of the food chain, a top-decile (90th percentile) producer has 20, according to research conducted by PriceMetrix from aggregated data representing 7 million retail investors.
Want to become a top producer? Cut your book, you'll build your business. It's the secret to building a profitable practice of high net worth clients. The households with $250,000 or less in assets have to go.
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"We see it time and time again. Small clients directly and negatively affect a financial advisor's growth rate," says Patrick Kennedy, Vice-President of the Product and Client Group of PriceMetrix. "The higher the proportion of small clients, the slower an advisor will grow. The data also shows us that having too many small clients makes it more difficult for an advisor to attract large clients. What high net worth clients don't like, is when their advisor has a lot of small relationships. High net worth clients warrant a lot of attention from their financial advisor, and are discerning enough to ensure that a prospective advisor has the capacity to service them."
Advisors defend the accumulation of smaller clients with the reasoning that the household will eventually grow into a high net worth client. PriceMetrix research says otherwise. Only 3% of high net worth households ($2 million or more in assets) became clients with an original stake of less than $500,000. Only 7% grew from beginning balances under $1 million.
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The report indicates that keeping the percentage of small households in your book to less than 40% is a key metric: the number of high net worth households and the production derived from them decline significantly above this point.
"This is one of the most interesting things that our data has shown us," says Kennedy. "Not only do small clients make it difficult for an advisor to attract large clients, they also make it more difficult to keep large clients. The more small clients an advisor has, the higher the attrition rate of their largest clients. HNW clients who don't get their fair share of an advisors time and attention will leave. Advisors who think that small clients lie dormant in their book are mistaken. They affect an advisor's ability to deliver a full service proposition to their best clients."
And don't think that discounting fees is necessarily required to land that whale.
"Lowering price significantly does not increase an advisor's chances of attracting high net worth households," Kennedy says. "HNW clients are much more 'value sensitive' than 'price sensitive'. They want to understand what they are paying and what they are paying for. They don't buy the cheapest cars, and they don't unilaterally seek out the cheapest financial advice. They are attracted to quality, and are willing to pay for it."
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The median fee for a household with $2 million or more in assets is 76 basis points and 29% of high net worth households pay 1% or more.
--Written by Hal M. Bundrick