More and more, top-end advisors are shifting their focus from the “mass affluent” to clients with investible assets in the $1-million to $5-million range, especially at investment dealers.

Historically, many successful advisors focused on the mass affluent — which today we define as clients with investible assets of $100,000-$1 million. (In the early 1990s, the assets would have been less than half that.) But now the focus is on high net-worth clients. And, if you are making that shift, you should be aware of how these HNW clients’ needs are different from those of the mass affluent.

Recently, I had the opportunity to conduct in-depth conversations with some HNW investors with investible assets in the $2-million to $5-million range, giving me the chance to compare their concerns and issues with those of investors with less than $1 million in investible assets.

In many instances, the differences were in degree. Many HNW investors have the same issues as higher-end mass-affluent clients — say, those with $500,000-$1 million — except more so. In other cases, there were some very real distinctions between these two groups.

The concerns of HNW clients tend to fall into seven areas:

1. Confidentiality.

Many clients are concerned about the confidentiality of their financial affairs, but HNW investors seem especially worried. As a general rule, the more money people have, the bigger an issue privacy is.

That’s why some people in small towns choose to work with a financial advisor in a larger community. I recently talked to an advisor in Winnipeg who spends four days a month in two communities in northern Manitoba; many of the northern area’s most affluent citizens prefer to work with someone who they won’t run into in the normal course of their business and social life. That’s also part of the reason why ultra-HNW inves-tors — those with investible assets of $20 million or more — often choose to work with representatives of U.S.-based firms such as Goldman Sachs Group Inc., Northern Trust Corp. or J.P. Morgan Chase & Co.

As an example of how concerned some clients are about confidentiality, I recently talked to an investment counsellor who put on a highly successful morning workshop for affluent clients. The only fly in the ointment was that some of the advisor’s biggest clients didn’t attend; they were concerned that they would run into people they knew who would then become aware of how much money they had or who was managing their money.

2. Complexity.

As a guiding principle, the complexity of clients’ financial needs increases as their assets grow.

In conversations with HNW clients, I have heard references to family foundations and strategies for charitable giving, which I haven’t seen in research with smaller clients. HNW clients also talk about trusts for children and grandchildren, and tax strategies for two cottages or vacation properties — again, something unlikely to come up when talking to someone with investible assets of $250,000. Research from the U.S. indicates that ownership of real estate investment properties and investments in businesses goes up with net worth, raising both tax and liquidity issues.

Finally, more sophisticated financial products such as hedge funds came up in conversation with HNW clients; again, this is a topic smaller investors will not typically raise.

3. Comprehensive Advice.

In large part because HNW clients’ affairs are more complex, those HNW clients to whom I talked were generally interested in more than just investment advice. While the performance of their portfolio is critical, many are looking for an advisor who can provide a comprehensive and integrated view of their finances. At the ultra-HNW end ($10 million-plus), there are advisory teams that generally include accountants and lawyers to give advice.

This is not always the case in the $2-million to $5-million space, so clients look to their financial advisors to provide perspective on these issues and direct them to outside professionals when needed.

In fact, a number of speakers at the Top Advisor Summit held in Toronto in June talked about their shift toward offering comprehensive financial advice. (You can read more about this in my July column at
www.investmentexecutive.com.)

4. Costs.

Historically, investors in managed products (mutual funds, wrap programs, managed money) have not been hugely concerned about or even aware of costs. One explanation is the lack of a clearly visible, low-cost alternative for easy comparison. For example, the reason for the sensitivity to commissions on stock trades is the focus discount brokers have put on promoting their trading costs as an alternative to full-service brokers.

@page_break@At the top of the market, competition from investment counsellors — whose fees are typically in the range of 1%-1.5%, with some even lower — has created much greater awareness of and sensitivity to costs. While there are some exceptions of performance fees taking costs well north of 2%, as a general rule advisors hoping to operate in the HNW space need to figure out how to deliver their services for an all-in cost of 1%-1.5%.

Large-case insurance sales, in which the embedded commissions can still be very substantial, are an exception, although you might ask whether greater transparency on commissions will put advisor compensation on these large case sales under pressure.

The good news, however, is that while HNW clients are generally value-oriented and savvy, most will pay up for clear value and performance.

5. Tax Savings.

When HNW clients talk about a comprehensive view of their finances, they are often thinking of strategies for minimizing taxes. Almost all Canadians hate paying taxes. The difference for the HNW clients is that the tax hit is often larger — and they are more likely to have the ability to put in place strategies to reduce that hit. This is especially the case for those who have built their wealth through business ownership. It’s essential that financial advisors work closely with tax professionals to develop and implement an integrated strategy.

6. Assurance.

Many investors are risk-averse, but this characteristic seems particularly pronounced in the HNW market. HNW investors can’t easily replace the wealth they’ve accumulated over their lives, often by building and selling family businesses. Risk aversion also arises from conversations with investment counsellors about past returns. One HNW investor who had interviewed a number of money managers told me: “When you listen to them, [it seems] they all blew the lights out for their clients. After a while, you don’t know what to believe.”

This attitude has led, at the very top of the market (say, $10 million-plus), to the rise of consultants who, for a fee, select and monitor money managers. Investors with a mere $2 million-$5 million often seek assurance through referrals (far and away the dominant method used to select financial advisors) and the “safety in numbers” principle: if everyone they know uses a firm, then it must be OK.

This, in turn, creates “home-market advantage” for investment managers who have achieved critical mass in the market in which they started. Examples of this include Phillips Hager & North Investment Management Ltd. in Vancouver, Bissett Investment Man-agement in Calgary and Jarislowsky Fraser Ltd. in Montreal, as well as firms that dominate ethnic and cultural communities in which the founders are rooted.

7. Positioning.

The final attribute of HNW clients is related to this need for assurance: they want to see their advisor as someone who understands and is focused on their needs and the needs of people like themselves.

At the top of the market, anything that smacks even slightly of hucksterism, mass marketing, high pressure or a hard sell is the kiss of death. It’s essential that advisors position and present themselves as low-key, conservative professionals, as would be the case for the accountants and lawyers who serve top-end clients.

However, to be successful at the top of the market, an advisor’s positioning must go beyond being professional and conservative. Many HNW clients feel they’ve graduated from dealing with advisors who serve clients with only a few hundred thousand dollars. In many cases, to work at the top of the market, advisors need to establish the top-tier image clients in this category look for.

That image is reflected in every aspect of how advisors present themselves. They have to offer top-end solutions, for example. Fairly or not, many top-tier clients feel they’ve graduated from mass retail products such as mutual funds and are drawn to what they see as more sophisticated offerings.

Other factors that determine how you’re seen are: your personal style, your office, the car you drive, how you and your staff dress, and the communication materials you use.

This desire to deal with someone who is perceived to be operating at the peak of the market is another of the factors driving the success of large U.S. competitors in the $10 million- and $20 million-plus spaces. In some cases, it applies just as much to investors with $2 million as it does to those with $20 million.

One multimillion-dollar business owner put it this way: “Compared with my typical employee, I live in a different area, drive a different car, play golf at a different club, go on different holidays and eat in different restaurants. So, when it comes to financial advice, why would I want to work with the same advi-sor as my employees do?”

Key to success in the HNW space is positioning yourself as someone who is dedicated to working with those clients.

If you aspire to operate effectively in the brave new world of multimillion-dollar investors, you need to step back and fundamentally think through how to retool your approach. IE

Dan Richards is president of Toronto-based Strategic Imperatives Ltd. For more business-building ideas and commentaries, go to www.getkeepclients.com. New ideas are posted every Monday and Thursday, You can also see Dan on IE:TV at
www.investmentexecutive.com.