cultivating the affluent client

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Cultivatingthe Affluent Client

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Business-Building Insights into the Personalities of the Wealthy

BY PATRICIA J. ABRAM, JOH N J. BOWEN JR . AN D RUSS ALAN PRI NCE

EXECUTIVE SUMMARY

The financial needs of the wealthy rangefar beyond the traditional investment man-agement that is the primary offering of mostfinancial advisors. From estate planning,insurance and asset protection services tocharitable gifting, credit services and cashflow management, each affluent client has adiverseand uniqueset of requirements.

In order to successfully address theseneeds, its plain that advisors must first fully

comprehend them. High-net-worth psychology provides advisors with a clearframework for understanding what the wealthy want from their finances, aswell as what they want from their financial advisors.

At the center of this framework are nine personality types:

Family Stewards Dominant focus on taking care of their families Conservative in personal and professional life Not very knowledgeable about investing

Independents Seek the personal freedom money makes possible Feel investing is a necessary means to an end Not interested in the processes of investing or wealth management

Phobics Are confused and frustrated by the responsibility of wealth Dislike managing finances and avoid technical discussion of it Choose advisors based on level of personal trust they feel

CULTIVATING THE AFFLUENT CLIENT

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The High-Net-WorthPersonalities

Cultivating the Affluent Client: Business-Building Insights into the Personalities of the Wealthy

By Patricia J. Abram, John J. Bowen Jr. and Russ Alan Prince

Copyright 2006 CEG Worldwide, LLC. All rights reserved.

No part of this publication may be reproduced or retransmitted in any form or by any means, including, but notlimited to, electronic, mechanical, photocopying, recording or any information storage retrieval system, withoutthe prior written permission of the publisher. Unauthorized copying may subject violators to criminal penalties aswell as liabilities for substantial monetary damages up to $100,000 per infringement, costs and attorneys fees.

The information contained herein is accurate to the best of the publishers knowledge; however, the publishercan accept no responsibility for the accuracy or completeness of such information or for loss or damage causedby any use thereof.

CEG Worldwide, LLC 1954 Hayes Lane San Martin, CA 95046(888) 551-3824 www.cegworldwide.com [email protected]

Anonymous Confidentiality a prominent concern Prize privacy in their financial affairs Likely to concentrate assets with an advisor who protects them

Moguls Control a primary concern Investments another way of extending personal power Decisive in decisions; rarely look back

VIPs Invest to be able to purchase status possessions Prestige important Like to affiliate with institutions and advisors with top-notch reputations

Accumulators Focused on making their portfolios bigger Investments are performance-oriented Tend to live below their means and spend frugally

Gamblers Enjoy investing for the excitement of it Tend to be very knowledgeable and involved Exhibit a high risk tolerance

Innovators Focused on leading-edge products and services Sophisticated investors who like complex products Tend to be technically savvy and highly educated

Source: Russ Alan Prince and Brett Van Bortel, The Millionaires Advisor, 2003.

An industry study of 1,417 individuals, each with between $500,000 and $5million of liquid assets, found that Family Stewards make up the largest groupof the affluent, at 34.1 percent of those surveyed. The second-largest group isthe Independents, at 16.8 percent of those surveyed, while Phobics rank third,at 11.4 percent. All the remaining personalities account for less than 10 per-cent. (See Exhibit 1.)

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BUSINESS-BUILDING INSIGHTS INTO THE PERSONALITIES OF THE WEALTHY

To serve their affluent clients well, advisorsshould know their wealthy clients high-net-worth personalities. But this is only a start-ing point. They should also understand thekey financial concerns that each personalityis likely to have.

The study of the high-net-worth personali-ties pinpointed each personalitys level ofconcern on a range of personal matters. AsExhibit 2 shows, issues that are of great

concern to some personalities barely register with others. A look at just threeof these issues highlights the disparities:

Taking care of heirs. The Family Stewardsas would be expectedareoverwhelmingly concerned about ensuring that their heirs are taken care of.In sharp contrast, just one out of seven Accumulators (14.0 percent) sharesthis concern. The concern of the remaining personalities on this issuesranges between these two extremes.

Paying for education. The Family Stewardsagain as would be expectedare generally concerned about paying for their childrens or grandchildrenseducation, with 75.8 percent naming this as an important interest. But


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EXHIBIT 1 DISTRIBUTION OF THE HIGH-NET-WORTH PERSONALITIES

N = 1,417 affluent clients. Source: Russ Alan Prince and David A. Geracioti, Cultivating the Middle-Class Millionaire, 2005.

Independents

FamilyStewards

34.1%

16.8% Phobics11.4%

Anonymous8.3%

Moguls7.6%

VIPs6.6%

Accumulators6.1%

Gamblers5.0%

Innovators4.1%

Key Concerns of the High-Net-WorthPersonalities

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Interest orResponsibility

Ensuring thatheirs are takencare of

Havingadequatemedicalinsurance

Having enoughmoney inretirement

Paying forchildrens orgrandchildrenseducation

Being sued

Losing job orbusiness

Havinghigh-qualitypersonalsecurity

Taking careof parents

Makingmeaningfulgifts to charity

Family

Stew

ards

Independents

Phobics

Anonym

ous

Moguls

VIP

s

Accum

ulators

Gam

blers

Innovators

Weighted

Average

97.3%

74.6%

71.5%

75.8%

34.9%

52.9%

21.1%

47.5%

12.0%

89.5%

95.4%

96.2%

16.4%

24.8%

65.5%

6.7%

28.2%

29.8%

83.2%

77.0%

73.9%

52.2%

19.3%

13.7%

1.9%

8.1%

21.1%

66.7%

80.3%

71.8%

60.7%

80.3%

17.1%

88.0%

16.2%

41.9%

63.6%

73.8%

43.9%

22.4%

83.2%

13.1%

78.5%

13.1%

76.6%

78.7%

86.2%

55.3%

64.9%

87.2%

19.1%

75.5%

17.0%

75.5%

14.0%

24.4%

59.3%

14.0%

89.5%

76.7%

20.9%

19.8%

2.3%

54.9%

81.7%

62.0%

22.5%

53.5%

11.3%

2.8%

18.3%

21.1%

55.9%

86.4%

69.5%

18.6%

52.5%

11.9%

1.7%

15.3%

20.3%

79.2%

77.3%

71.5%

48.3%

47.3%

40.0%

28.2%

28.1%

27.8%

EXHIBIT 2 PERSONAL CONCERNS AND INTERESTS OF

THE HIGH-NET-WORTH PERSONALITIES

N = 1,417 affluent individuals. Source: Russ Alan Prince, 2006.


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Clients who arevery concernedabout losingtheir wealth

91.5% 93.7% 93.8% 86.3% 85.0% 91.5% 45.3% 91.5% 94.9% 88.6%

EXHIBIT 3 CONCERN ABOUT LOSING WEALTH AMONG

THE HIGH-NET-WORTH PERSONALITIES

N = 1,417 affluent individuals. Source: Russ Alan Prince, 2006.

Family

Stew

ards

Independents

Phobics

Anonym

ous

Moguls

VIP

s

Accum

ulators

Gam

blers

Innovators

Weighted

Average

relatively few Gamblers (22.5 percent), Moguls (22.4 percent), Innovators(18.6 percent), Independents (16.4 percent) and Accumulators (14.0 per-cent) consider this to be an issue of major concern.

Possibility of being sued. This is a chief concern for several personalities,including the Accumulators (89.5 percent), the VIPs (87.2 percent) and theMoguls (83.2 percent). In contrast, its a fairly minor concern for thePhobics and the Independents.

The study also asked survey participants about the most fundamental of finan-cial issues: fear of losing ones wealth. All but one of the high-net-worth per-sonalities ranked this as a very important concern. The notable exception isthe Accumulators, who see their fervent focus on amassing wealth as an effec-tive buffer against losing significant amounts of money. (See Exhibit 3.)

While the wealthy are clear about their issues of greatest concern, additionalresearch shows that most advisors fail to fully grasp what these issues are. A parallelstudy of 512 advisors asked these advisors about their wealthy clients attitudestoward the same set of key issues. (As with the client study, affluence wasdefined as having between $500,000 and $5 million in liquid assets.)

The data reveals significant disparities on most concerns. For instance, whileensuring that heirs are taken care of ranks very high with wealthy clients over-all (79.2 percent of those surveyed), just 40.8 percent of advisors reported thatthis was of critical importance to their affluent clients. (See Exhibit 4.)

EXHIBIT 4THE GAP: CLIENTS INTERESTS AND ADVISORS PERCEPTIONS

Interest or Affluent Individuals Advisors to Responsibility (All High-Net-Worth Personalities) Affluent Clients

Ensuring that heirs 79.2% 40.8%are taken care of

Having adequate 77.3% 79.3%medical insurance

Having enough money 71.5% 52.1%in retirement

Paying for childrens or 48.3% 28.5%grandchildrens education

Being sued 47.3% 9.4%

Losing job or business 40.0% 8.4%

Having high-quality 28.2% 2.5%personal security

Taking care of parents 28.1% 2.5%

Making meaningful 27.8% 1.8%gifts to charity

N = 1,417 affluent individuals and 512 financial advisors. Source: Russ Alan Prince and David A. Geracioti, Cultivating the Middle-Class Millionaire, 2005.

Advisors underestimated their clients level of concern on nearly every otherissue, as well. Major differences are found on the issue of being sued (of con-cern to nearly half of surveyed affluent clients, but cited as a concern by just9.4 percent of advisors) and losing a job or business (40.0 percent versus 8.4percent). Only on the issue of medical insurance did advisors perceptionsmatch their clients concerns.

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Perhaps the biggest gap of all can be seen on the issue that trumps all others forthe affluent: concern about losing their wealth. Overall, they rated this as theirtop concern, cited by nearly nine out of ten (88.6 percent) of those surveyed.

While affluent clients clearly are anxious about this issue, their advisorsgravely misjudge their unease. As Exhibit 5 demonstrates, just 15.4 percent ofsurveyed advisors reported that 20 percent of their wealthy clients are worriedabout losing their wealth.

EXHIBIT 5THE GAP: CLIENTS CONCERN ABOUT LOSING THEIR WEALTH

AND ADVISORS PERCEPTIONS

Affluent Individuals Who Are Very Concerned About Losing Their Wealth 88.6%

Advisors Who Believe 20 Percent of Their Affluent Clients Are Very Concerned About Losing Their Wealth 15.4%

N = 1,417 affluent individuals and 512 financial advisors. SSoouurrccee: Russ Alan Prince and David A. Geracioti, Cultivating the Middle-Class Millionaire, 2005.

The failure of so many advisors to understand their affluent clients well carriesserious consequences. By assuming that they know what is important to theirclientsbut not verifying their assumptionsserving their clients becomes ahit-and-miss affair. They may offer their clients products and services thataddress their key concernsor they may not. In the best case, they meet theirclients needssome of the time. In the worst case, they alienate their wealthyclients by consistently missing the mark.


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To ensure that advisors serve theirclients well, they need a framework forbuilding the advisor-client relationshipand for systematically meeting a rangeof disparate client needs over time.There is a single business modelwealth managementthat providesprecisely this framework.

For context, consider that financialadvisors generally fall into one of threegroups, depending on their use of busi-ness model:

Investment generalists offer a broad range of investment products (withoutspecializing in a single type of product) but do not generally do so within aconsultative framework.

Product specialists focus exclusively on an investment-oriented productniche, such as stocks, managed accounts or fixed-income alternatives.These advisors are product driven and typically do not make consulting alarge part of their businesses.

Wealth managers use a consultative process to establish close relationshipswith affluent clients in order to gain a detailed understanding of their goalsand highest financial needs. They then offer customized choices and solu-tions designed to fit each individuals needs. Over time, they continue to fos-ter the client relationship to uncover and address new financial challenges asthey arise.

Of the three business models, wealth management is clearly the most useful forensuring that advisors fully comprehend their clients most important concernsand needs. In addition, because they move beyond simply providing investmentadvice and products, wealth managers are also prepared to address the entirerange of diverse financial challenges that affluent clients face.

Client Contact: The Cornerstone of Wealth ManagementClient relationships are built through client contact, and successful wealthmanagement hinges on contact thats appropriate for each affluent client. Justas each high-net-worth personality has unique concerns, so does each prefer aparticular frequency and type of contact.

The research finds that most of the other personalities cluster near the averagefor all28 contacts per yearthough the frequency ranges from a low of 12 forthe Anonymous up to 48 for Gamblers.


Cultivating theAffluent Clientwith WealthManagement

The study defined contact as any personalized communication between advi-sor and client. This could mean a phone call, an email, a letter or a face-to-facemeetingany encounter in which the advisor personalizes his or her messageto suit the client. This contact excludes any type of mass communicationeven if its customizedsuch as brokerage statements or form letters.

An average of 28 personalized contacts per client per yearmore than twoeach monthmay seem like a daunting level of communication for any advisorto take on. Its useful to keep in mind that these contacts need not be long con-versations or exhaustive account reviews.

Instead, these contacts canand most ought to bebrief phone calls or quickemails to clients on issues of importance or interest to them. These issuesneed notand should notbe restricted to financial matters. Its wise if theyextend to personal topicsa clients upcoming vacation, for exampleor areasof mutual interest to advisor and client, such as current events or hobbies.

The Success of Wealth ManagementThat wealth management is the most effective business model for meeting theneeds of the affluent is borne out by evidence of the success of todays wealthmanagers.

One industry study compared wealth managers to advisors using the other twobusiness models and found substantial differences between each model.Wealth managers took a commanding lead not only in gross production, butalso in assets under managementall while working with fewer clients. (SeeExhibit 6.)


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EXHIBIT 6THE THREE BUSINESS MODELS COMPARED

BUSINESS MODEL

Investment Product WealthGeneralist Specialist Manager

Average gross $670,000 $510,000 $1,360,000production

Average assets $31 million $83 million $301 millionunder management

Average fee-based $16 million $6 million $184 millionassets

Average number 220 380 70of clients

N = 1,281 financial advisors. Source: Prince & Associates, 2006.

The shift to wealth management can be challenging. Successful wealth man-agement demands broad financial skills and deep insight into client needsinsight that can be provided in large part by high-net-worth psychology. It alsorequires relationship-building skills, including the ability to provide ongoing,customized client contact. For those advisors who successfully make this shift,serving the affluent with wealth management can be exceptionally rewarding,both personally and financially.

[12]

CEG Worldwide, LLC

1954 Hayes Lane

San Martin, CA 95046

(888) 551-3824

www.cegworldwide.com

[email protected]

CALL YOUR DOW JONES NEWSWIRES ACCOUNTRESPRESENTATIVE FOR THE FULL VERSION OF THIS STUDY

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