Affluent investors go conservative

“High-net-worth investors were the most deeply impacted by the market losses of the last year if you really look at the raw numbers. We wanted to know how their attitudes [may have] changed, and how their priorities [may] have changed, and whether financial advisors, in fact, recognize that,” says Paul Allan, senior vice-president, private client group with Mackenzie Financial Services. “We decided to run a number of focus groups across the country that included financial advisors to discuss issues about wealthy investors and contrast those responses with one-on-one interview samples with high net worth investors.”

While the study finds there may not be a gap per se, it does outline that in order to continue to service this important group of clients, advisors will need to work harder for less.

Across the board, clients are becoming more conservative, but the shift in attitude amongst investors with more than $500,000 in assets to invest is likely to alter the revenue stream of the advisors that service them.

These clients are usually the backbone of an advisor’s book of business. The profit margins high net worth clients provide are likely to shrink with this group’s increasing preference for more conservative investment solutions, which tend to generate lower management fees.

“We knew this group, as a whole, represented 73% of total Canadian personal wealth. They had, in fact, lost around $290 billion as a community in 2008,” says Keith Sjogren, director of research and advisory services with Investor Economics.

Allan says the focus groups that were held clearly demonstrated that investors prefer a more conservative portfolios, and for the most part their advisors are trying to comply.

“The result is that we are seeing a material change in HNW portfolios to a much more conservative portfolio,” he says. “For advisors this has serious implications for how they make money. They just don’t get paid as much when a portfolio becomes much more biased towards fixed income and other conservative investment vehicles. This was something that was noted throughout the focus groups. It was certainly backed up by the comments we received from investors.”

Allan suspects that since most affluent investors are older, they were already heading down the road to more conservative portfolios. The market turmoil seems to have accelerated this trend.

“There still is a demographic trend that advisors are noticing with regards to the capital accumulation part of retirement. The baby boomers are getting older — we all know that,” he says. “What happened last year, to a large degree, was a catalyst that accelerated this transition. You see a good chunk of the wealthier population getting older and as a result, income and capital preservation are becoming much more important goals than capital accumulation.”

Adding to the advisor workload is a demand by wealthier clients for time and complex planning strategies from their advisors. Sjogren says the study found advisors are spending about an extra hour to 90 minutes in their face-to-face meetings with their top tier clients.

“The results from Keith’s study suggest these investors are trying to get closer to their money. They are listening to multiple sources of information beyond a financial advisor. As a result of that, advisors are spending far more time, not only preparing for meetings but addressing different viewpoints,” Allan explains. “Three years ago, clients would sort of just agree with what the advisor would say. Now they want the advisor to explain exactly why they are recommending the products and strategies that they do.”

Positioning your business to new HNW attitudes

Sjogren says demands on the time of advisors are “not going to let up. Focus groups suggest advisors are going to have to spend more time with high net worth clients and integrate their investment planning as part of larger forensic wealth planning.”

“Conservative relationships generate less revenue, and yet those conservative investors are demanding more time. The equation is not the same as it used to be. It’s going to take more care to manage the business of the advisor than maybe it did before,” Sjogren says. “Advisors are going to have to be more strategic in how they generate money and who they generate it from. It could be that advisors are going to start to cull their client bases and look at spending more time with clients who are valuable in terms of revenue, profitability or assets.”

Sjogren also points out that wealthier clients are looking to consolidate their planning needs with one source. This is giving rise to the need for advisors to focus much more intently on comprehensive wealth planning versus investment planning. If a single advisor can’t do this on their own, he says a team approach may become necessary to serve these clients.

“There is a gradual trend both in terms of suppliers and users in moving from investment to wealth management. More and more wealthy Canadian households are trying to consolidate their plan and the implementation of that plan with fewer advisors,” he says. “Quite often, you’re not going to get a single advisor who is going to be the supplier of advice in all those areas. They will have access to either an internal or external team that will provide access to that expertise. If you look at what’s happening in the brokerage industry there are an increasing number of advisors who are working as part of a team rather than on their own.”

“This has been happening for long time now, this idea of the advisor as a chief financial officer who endeavors to serve the high net worth investor and direct them to the areas of expertise available,” Allan says.

(12/10/09)