In Practice January 7, 2009

More Money, More Profitability Problems?

Greater relationship size doesn’t necessarily mean greater profitability for high-net-worth (HNW) advisers, according to Cerulli Associates.
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That was one of the many findings from a recent Cerulli report about the state of private wealth practices in the HNW and ultra-HNW (UHNW) marketplace. The study looked at wirehouses and other full-service broker/dealers, large investment banks, bank trust departments, and family offices.

Cerulli said wealthier clients are more demanding, more price sensitive, and often require customized services that impact profitability.

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“The first asset threshold is $10 million in assets. At this level, clients’ wealth exceeds the IRS estate tax exemption, thus requiring more complicated (and customized) financial planning strategies. This may reverse expected economies of scale and cause profitability to decline. Between $20 million and $30 million, clients see themselves as “big fish.” They feel entitled to institutional pricing, further bringing down margins for the wealth manager. Above this level (more than $50 million), additional complexities are introduced by the family dynamic or issues regarding multiple countries of residency. Conflict management and international tax law can also become necessary,” said Robert Testa, Cerulli analyst and co-author of the report, in a press release.

Firms are employing strategies to combat declining profitability. A focus on referrals (90% strongly agree), becoming more selective with clients (85% strongly agree), adding new clients (84.2% strongly agree), making use of technology (73.7% strongly agree), and involving younger generations (73.7%) are all strategies HNW wealth management providers are using to improve their profitability.

That last initiative might make sense, as HNW advisers told Cerulli that one of the major reasons a family might switch advisers is when wealth is transferred to the next generation. The new generation might want to find their own adviser or manage assets differently than their parents. Overall, according to Cerulli, HNW families (with $5 million or more in investable assets) typically have a high degree of loyalty, staying with their primary adviser for more than 10 years on average.

Most HNW Firms Are Hiring

Human capital remains the number one challenge for firms in the expanding high-net-worth (HNW) market. Nearly three-quarters of firms surveyed by Cerulli indicated that they are hiring for positions within their firms. Most firms, or 88%, use bonuses as a method for retention. “Demand for employees has increased dramatically at firms and compensation packages seem to be the most salient differentiator,” the report said.

Cerulli said it is difficult to compare fees across all types of wealth management providers, but in general, most (69%) operate with asset-based fees. Nearly 92% of firms surveyed have raised fees in the past three years.

Growing Market

According to Cerulli, the number of households with more than $50 million net worth (note: not investable assets) has more than quadrupled in the last 20 years. Households with a net worth of more than $5 million now represent 1.5% of the overall U.S. population and control 39% of the nation’s overall wealth. HNW wealth management providers reported that on average, 27% of their clients had a total net worth of $50 or more, and about 39% reported client assets of between $10 million and $50 million.

In the private wealth management space, traditional private client groups (including regional and national banks and trust companies) hold the largest marketshare (58%) of HNW investors. Wirehouses saw a 16% growth and now hold a 39% marketshare. However, Cerulli’s report said signs point to a possible erosion in client confidence within this segment due to perceive risks and conflicts of interest related to subprime and auction-rate preferred securities.

Multi-family offices saw the largest growth rate at 35%, but still hold the smallest share of the HNW market (4%). Cerulli said the family office model—also being adopted at some broker/dealers and banks—is becoming increasingly popular with HNW and UHNW families for its independent advice and open architecture (see “Celent Examines Future of Servicing Nation’s Wealthiest’).

Another trend for servicing HNW and UHNW investors seems to be in alternatives. Wealthy individuals are increasingly comfortable with alternative investments, Cerulli said. Forty-one percent of firms surveyed said they expect to increase allocations to exchange-traded funds (ETFs) over the next year or two.

 

 

 

 

The report is Cerulli Quantitative Update: High-Net-Worth and Ultra-High-Net Worth.

In Practice January 7, 2009

Adviser Resolutions Focus on Growth

Despite a challenging 2008, independent advisers surveyed in an SEI Quick Poll are positive about success in the coming year.
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Independent advisers learned a lot last year—such as the importance of the adviser/client relationship and the truth about the risk tolerance of investors—and many are hoping to grow their business in 2009.

More than half of advisers (51%) surveyed predict the markets will rebound by the second quarter of 2009, according to a release of the results. In addition, advisers offered resolutions that suggest they are interested in growth, and not just survival. The resolutions included: “grow the business 20%,” “add $30 million in assets under management,” and “increase revenue by 15%.” But as one adviser illustrated with the goal “keep my head above water,” they recognize the challenges ahead.

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The biggest gripes about the previous years, according to the results, included pay cuts and the need to scale back business expansion. More than half (56%) of advisers said their biggest gripe was the nearly 40% pay cut they saw because of market depreciation. Thirty percent said it was scaling back on business expansion plans.

Many advisers saw opportunity amid the crisis. For example, 40% of advisers said that although volatile markets made clients anxious, it also created an opportunity for them to strengthen client relationships. Similarly, 28% of advisers said the past year “helped clients recognize the value of their strategic personal advice versus investment-only perspective,” according to SEI. When asked what advice they’d give new advisers entering the business, 57% of advisers recommended they position themselves as a trusted adviser by “providing advice and not just investments from the onset.”

The vast majority of advisers are planning some growth next year to replace any lost revenue. Almost half (45%) plan to explore ways to acquire new clients. About a quarter of advisers (24%) said they would increase their efforts with center of influence contacts such as accountants and estate attorneys, and the same number will strengthen existing referral processes. Only 7% plan to do nothing but focus on retaining existing clients.

Advisers also said that 2008’s market conditions taught clients a lot about risk tolerance. Almost half of advisers polled (49%) felt that clients realized they weren’t as risk-tolerant as they’d thought they were, while 33% said clients learned they could handle volatility if they focused on long-term goals, according to the release.

“Even in the face of the challenging conditions of 2008, advisers are determined to find ways to add value to their client relationships,” said Stephen Onofrio, senior managing director at SEI Advisor Network, in the release. “This past year was SEI’s biggest for new adviser recruitment, and we found that most advisers were focused on providing strategy that went above and beyond just investments.”

The top resolutions for 2009 included:

  1. Grow referrals.
  2. Conduct more marketing initiatives.
  3. Hire staff.
  4. Be more proactive with clients.
  5. Retain existing clients.
  6. Add services to practice.
  7. Truly focus on clients’ needs.
  8. Obtain larger clients.
  9. Manage expenses better.

The poll included feedback from 285 independent advisers.

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