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The Danger of Targeting Only Ultra-wealthy Clients

Financial advisors have a lot of choices when it comes to building their practices, including whether or not to exclusively target high-net-worth clients. While these clients may provide the greatest payout over time, they may be more difficult to attract than lower net worth clients, which may mean less total revenue.

On the other hand, the rise of so-called robo-advisors and their lower fees has started to put pressure on the bottom end of the market.

Should financial advisors exclusively target high-net-worth individuals? Read on for some help in deciding whether or not to go after these wealthy prospects. (For more, see:Finding and Retaining High Net Worth Clients. )

Assessing Conversion Rates

The key to deciding whether or not to chase high-net-worth individuals is to calculate the lifetime value of each type of client as well as the conversion rate associating with landing them. By multiplying the conversion rate by the lifetime value, you can determine which clients are more profitable to target over the long run. Advisors well-versed in pitching high-net-worth individuals may benefit from targeting that demographic, while others may want to consider lower-end clients.

For example, suppose that a high-net-worth client is worth $10 million and a financial advisor can charge a 1% management fee. This means that the client is worth about $100,000 per year to the practice. Assuming the average client stays eight years, the lifetime value may be worth around $800,000. Now, assuming that only 1% of these clients convert when being pitched, each pitch is worth about $8,000 in revenue — a figure that can be compared with others. (For more, see:High-Net-Worth Clients Tips for Advisors. )

Commoditization of the Low End

The problem with only aiming for lower-end clients is the snowballing competition. Online financial advisors and so-called robo-advisors — automated services that provide online wealth management and portfolio advice — have been rapidly capturing market share. Over the past several years, millennials that don’t have enough money to qualify

for traditional advisors have become big users of these services as a way to access performance that’s somewhat comparable to traditional advisors, but comes a fraction of the overall cost.

According to consulting firm A.T. Kearney, robo-advisors will manage about $2 trillion and control 5.6% of American investment assets by 2020 compared to just 0.5% today. While the majority of the advisory market remains in the hands of traditional advisors, the number of clients signing up with online services is actually much more significant given that most of these clients have smaller portfolios, which means that smaller clients are being increasingly cannibalized.

Focus on a Niche

Financial advisors may want to focus on spreading out marketing across a variety of demographics and not just consider income levels or the dollar value of assets that a client owns. For example, a financial advisor that specializes in managing real estate assets may appeal to investors who are active in that sector, since their expertise would provide specific tax advice or industry insights. There are a number of niches that can set advisors apart from the competition. (For more, see:How to Manage a Client's Return Expectations. )

Some other areas of focus might include:

  • Professional athletes
  • Disabled clients
  • LGBT clients

By offering unique expertise or perspectives, advisors can differentiate themselves from the competition when targeting specific audiences. These efforts could be much more effective than simply targeting a wide swath of high-net-worth clients, since advisors here can offer a greater value proposition to the client.

The Bottom Line

When it comes to targeting potential high-net-worth clients, conversion success depends largely on the effectiveness of an advisor's marketing ability as well as what's going on trend-wise in the industry. Advisors should do a reality check on who they're best set to serve; they may want to narrow their scope so they can identify niches within the industry that are based on characteristics other than asset levels. (For more, see:Things That Keep Advisors Up at Night. )

Category: Advisor

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