Understanding Today’s Affluent Investor: Managing Affluent Relationships By Matt Oechsli Introduction It can be said that we are now living in what many refer to as the ”new normal.” The effect of the linger- ing global financial crisis on affluent investors can be observed in their elevated levels of distrust and cynicism toward the world of financial services. With trust in short supply, the relationship between financial advisor and wealthy client has fundamentally changed. It’s important that financial advisors both recognize these changes and be aware of their origin. In essence, for advisors to have any success in acquiring and retaining affluent clients, they must under- stand today’s well-to-do investor. A quick look into how today’s affluent clients discovered their financial advisor illustrates these new levels of skepticism. According to our data, most wealthy clients discovered their financial advisor via an introduction by another professional, family member or friend, or by approaching them directly. The message is very clear: it’s all about relationships. The majority of affluent investors found their advisor through word-of-mouth-influence. The reliance on this type of personal introduction reflects the delicate nature of trust. The days of affluent investors finding advisors through less personal methods (phone book, cold-calling, public seminar, etc.) are winding down. In fact, not only are they not as popular, there may be a high probability that these marketing tactics can be harmful to an advisor’s reputation and stimulate negative word-of-mouth due to their ag- gressive, often annoying, sales tactics. The bottom line: affluent investors want the level of trust that comes along with a personal introduction. Methodology The data presented in this paper was collected through online surveys. Basic univariate results have been presented directly. When statements of significance are reported, they are based on the results of common statistical methods for the type of survey data and reflect a 95 percent confidence level. Any group comparisons presented reflect significant difference in group responses. The results reflect the responses of more than 400 investors, all of which have over $500,000 in investable assets (37 percent have investable assets between $500,000 and $1 million, 52 percent between $1 and $5 million, and 11 percent have investable assets over $5 million). 2 For use with financial professionals only. The Relationship Factor We frequently determine whether or not someone is truly trustworthy by getting to know that indi- vidual on a personal level. When trust is in the balance, as it so often is with today’s affluent wealth management services clientele, advisors who run a good business from a technical perspective are no longer good enough. Today’s wealthy investors are all too aware of horror stories of financial professionals who had stellar reputations from a business perspective, but were lacking in ethics. When these clients get to know their advisor personally—meeting their spouse, sharing a meal with them, or interacting with their team—they have a deeper understanding of his or her character. A key client demographic is women. The woman of the household plays an important role in this relationship factor, especially in regard to trust. The following are three key areas of importance from a woman’s perspective: Affluent Women 1 2 3 top 3 AreAs Fully understanding their Being trustworthy and Providing timely personal of ImportAnce family’s goals and needs having their family’s best communication Source: The Oechsli Institute interests at heart The Oechsli Institute found that having a business and personal relationship with both spouses of an affluent client family improves performance ratings in 14 key areas of importance. It also strengthens client loyalty and increases their willingness to provide personal introductions to family members, friends, and colleagues. We’ve labeled this phenomenon the “relationship factor.” In understanding today’s affluent and the relationship factor, our statistical analysis segmented relation- ships into two areas—relationship management and marketing. Here’s how we define them: ϩ relationshipmanagement – Meeting expectations by providing the right services to existing affluent clients. ϩ relationshipmarketing – Generating positive word-of-mouth influence and penetrating spheres of influence with affluent clients, referral-alliance partners, and other centers of influence. As you read through this report, you’ll see the connection between these two relationship factors and the growth of an advisor’s business. 3 For use with financial professionals only. Relationship Management: Figure 1 | Classification of Relationship Type of Relationship with Financial Professional From an affluent client’s perspective, the vast majority (70 percent) have a Source: The Oechsli Institute purely business relationship with their financial advisor. This highlights what can be both an opportunity and a challenge for advisors: to broaden their current business relationship to something more personal—which can require a lot of thought and effort on the advisor’s part. Primary Financial Professional With 84 percent of our respondents saying that they consider their financial advisor as their primary financial professional, the wind is truly at the backs of quality advisors. But to fully capitalize on this positioning as their go-to professional, advisors must deliver the services that are important to today’s affluent client with the highest level of professionalism—while also expanding the relationship. Figure 2 | Primary Financial Professional Source: The Oechsli Institute 70% purelybusiness 28% businessandsocial 2% other 84% 6% 5% 3% 1% Note: Percentages in this paper may financial cpa other attorney insurance advisor agent not add to 100% due to rounding 4 For use with financial professionals only. Percentage of Assets with Advisor Even though 84 percent of our affluent investor respondents view their financial advisor as their primary financial professional, only 30 percent have entrusted them with three-quarters or more of their family’s investable assets. This indicates a window of opportunity for financial advisors to consolidate all of their clients’ investable assets under their management, or risk that these assets will be consolidated somewhere else. Figure 3 | Percentage of Assets with Advisor Source: The Oechsli Institute 11% 21% 38% 30% lessthan25% 25%to49% 50%to74% 75%to100% ofmytotal ofmytotal ofmytotal ofmytotal investableassets investableassets investableassets investableassets Face-to-Face Meetings with Advisor Although the majority of affluent clients view their relationship with their advisor as purely business, 41 percent of advisors are meeting with their affluent clients three or more times a year. With the majority of these meetings being mostly business-oriented, advisors should consider not only increas- ing their face-to-face interaction with affluent clients, but also work towards making a portion of those meetings social in nature. It is also important to involve both members of a couple in both business and social face-to-face interactions. When affluent clients socialize with their advisors, they get to know them on a personal level, which builds trust and improves performance rankings. Figure 4 | Meetings with Financial Advisors Over Past 12 Months Source: The Oechsli Institute 15% 43% 25% 16% 2% 0 1-2 3-4 5+ other 5 For use with financial professionals only. Satisfaction with Frequency of Contact Whether it’s purely business, or business and social, only 42 percent of our affluent respondents claimed to be “very satisfied” with the frequency of contact they’re getting from their financial advisor. Considering the significance of the relationship factor, this is an area that needs to be a priority. It is also important that advisors strive to make contact with their affluent clients personally. Figure 5 | Satisfaction with Frequency of Contact Source: The Oechsli Institute 3% 2% 14% 40% 42% verydissatisfied dissatisfied neutral satisfied verysatisfied 14 Affluent Commandments Our research highlighted 14 criteria that today’s affluent considered “very important” with regards to their financial advisor. We have labeled them as the 14 Affluent Commandments because of the important role they play in the advisor-client relationship. As Figure 6 illustrates, financial advisors are finding themselves challenged in meeting affluent expectations in these 14 areas of importance. Two trends are prevalent among today’s affluent and they are having a direct impact on the 14 Affluent Commandments: the increasing importance of meeting the expectations of the woman of the house- hold, and the importance of expanding the client relationship to a more personal level. As you can see on the next page, affluent women place a much higher level of importance on each of these areas than do their affluent male counterparts, which translates into higher expectations among female clients. This can create a new set of challenges for financial advisors. 6 For use with financial professionals only. Figure 6 | 14 Affluent Commandments Source: The Oechsli Institute performed extremely extremely performed extremely well important important extremely well purely business to women to men business/social 1 trulyunderstandingtheirfamilyneeds 77% 65% 61% 37% 2 havingtheirbestinterestsatheart 75% 65% 61% 38% 19% 14% 12% 3 providingtimelycommunication 72% 52% 61% 42% 4 possessingabreadthanddepthofknowledge 71% 54% 61% 45% 5 meetinginvestmentperformanceexpectations 68% 53% 45% 30% 6 beingaproblemsolver 68% 56% 59% 47% 7 protectingtheirfamily’sinvestments 63% 47% 46% 31% 8 overseeingtheirfinances,notmarketing 62% 53% 58% 42% 9 creatingafinancialplanandkeepingitcurrent 60% 38% 50% 32% 10deliveringhigh-levelpersonalservice 59% 45% 63% 41% 11 makingthemfullyawareoffees 57% 47% 50% 37% 12usingcurrenttechnology 41% 33% 47% 40% 13coordinatingtheirfinancialdocuments 39% 29% 41% 28% 14providinginsurancesolutions 29% 16% 17% 12% 7 For use with financial professionals only. Although every one of these expectation gaps are statistically significant, the gaps between the importance placed on the criteria by the affluent woman of the household and the performance rank- ing of an advisor with only a business relationship presents an advisor-client relationship that many advisors need to correct. For example, here’s what we found to be the five largest expectation gaps among affluent client relationships: ϩ Truly understands their family’s needs ϩ Meeting investment performance expectations ϩ Having their best interests at heart ϩ Protecting their family’s investments ϩ Providing timely communication Financial advisors must make a concerted effort to not only involve the women of their affluent households in review meetings, but to make certain both spouses have a complete understanding of the inner-workings of their family’s portfolio, and that both spouses’ expectations are being met. Interacting on a personal level requires more face-to-face interaction and non-business personal phone calls. This interaction should involve the advisor and support personnel and be directed towards both spouses. This level of personal contact will also provide advisors and their team with the information they need to please today’s discerning affluent investors. These statistics should be a warning signal to advisors that there is much work to be done to strengthen these relationships. Without the foundation of a strong relationship with existing affluent clients, success in relationship marketing (expanding into your clients’ spheres of influence) will be extremely difficult, if not impossible. Advisor Involve the affluent woman of the household Make a concerted effort to involve both takeaways in both business and social face-to-face spouses in review meetings and make interactions certain they each have a complete under- standing of the inner-workings of their Strive to make contact with affluent clients in family’s portfolio a personal way 8 For use with financial professionals only. Relationship Marketing: How Financial Professional Was Discovered The power of word-of-mouth influence within affluent spheres continues to grow in importance. The number one method today’s affluent investor used to find their current financial advisor was a personal introduction. Whether from a friend, a colleague, a family member, or another professional, word- of-mouth influence was at work. With 84 percent of our affluent respondents viewing their financial advisor as their primary financial professional, it is worth noting that 56 percent of our respondents found their primary financial professional through being personally introduced. Figure 7 | How Financial Professional Was Discovered Source: The Oechsli Institute financial cpa attorney insurance advisor agent introducedbyanotherprofessional 19% 14% 17% 12% introducedbyafamilymember 16% 11% 14% 15% iapproachedher/himdirectly 16% 12% 16% 26% introducedbyafriend 14% 12% 14% 13% other 14% 6% 7% 10% she/heapproacedmedirectly 9% 4% 2% 3% introducedbyacolleague 7% 8% 5% 6% 9 For use with financial professionals only. Most Important Factor in Selecting Figure 8 | Most Important Factor in Selecting Financial Financial Professional Professional As previously mentioned, the reputation of the individual financial profes- Source: The Oechsli Institute sional is paramount in the final selection process for an affluent investor. As demonstrated in Figure 8, 70 percent of their decision resulted from either a 31% strong “strong recommendation from someone I trust,” “reputation of the individu- recommendation al financial professional” or “reputation of the financial professional’s firm.” fromsomeone itrust What is also noteworthy is that the “quality of promotional materials 22% reputation ofthe (brochures, websites, etc.)” had absolutely no impact on today’s affluent individual investor selecting a financial professional. 17% reputation Referrals or Introductions Given ofthe individual’s Over Past 12 Months firm 14% proposal/ Although the majority of our respondents told us they met their primary recommendations financial advisor through a personal introduction, it appears that only a wereappealing few advisors are taking advantage of this type of word-of-mouth in afflu- ent spheres of influence. Only seven percent of our affluent respondents 13% firstimpression ofcompetency provided five or more referrals or introductions to their primary advisor in and professionalism the past 12 months. This fact indicates that financial advisors don’t capi- talize on relationship marketing. They should endeavor to be introduced 3% other into their affluent clients’ spheres of influence. It is also important that an advisor excel at relationship management (meeting affluent client expec- tations), as it is directly connected to success in relationship marketing. 0% qualityof thepromotional materials Figure 9 | Referrals or Introductions Given Over Past 12 Months Source: The Oechsli Institute 46% 36% 9% 7% 2% 0 1-2 3-4 5+ other 10 For use with financial professionals only.