Rich clients finally diversifying – starting with their advisers

Wealthy now working with at least five advisers; seeking second and third opinions since market crash

By Jeff Benjamin

Mar 24, 2011 @ 2:11 pm (Updated 2:33 pm) EST

The demands of wealthy clients are starting to pit financial advisers against one another — as investors spread their assets around in search of the best advisory relationship.

According to the latest research from Cerulli Associates Inc., 57% of U.S. households with at least $10 million in investible assets are now working with five or more financial advisers. Nearly 64% are working with at least four advisers.

That's a huge jump. In 2008, barely 16% of wealthy households had four or more advisers, according to Cerulli.

As an indication of how things have changed, only 18% of the wealthier households are working with just one adviser.

“During the financial crisis, we found that high-net-worth investors started to increase the number of financial advisers they were working with, even though there will often be one alpha adviser among the relationships,” said Robert Testa, a Cerulli senior analyst.

And a beta or two, it seems. One of the factors leading wealthier households to diversify their advisory relationships is a “solvency issue,” according to Cerulli senior analyst Katharine Wolf.

“Clients have become more worried about whether their assets are safe, and they don't want to place all of their assets with one adviser,” she said. “These wealthier clients started looking for second and third opinions, and they will sometimes use small amounts of money to try out a new adviser.”

Cerulli also found that 44% of wealthy households had changed their primary financial adviser over the past 12 months.

The “Cerulli Special Quantitative Update: Investors in the High-Net-Worth and Ultra-High-Net-Worth Marketplace,” which is slated to be released next week, is based on ongoing analysis of 400 affluent households that have at least $10 million in investible assets.

In addition to wanting to diversify their advisory relationships, these wealthier households tend to view their overall net worth in various compartments based on certain needs and investment objectives, the report found.

“We found that a lot of these households have a specific number in mind that they need to ensure a certain standard of living and to educate their children,” Ms. Wolf said. “Their primary fear is losing money beyond that number.”

Maintaining a comfortable standard of living ranked as the top priority by about a third of the households studied, followed by education funding, which was a top priority of one out of every five respondents.

Once the top priorities are covered, however, the research found that wealthier households are ready to shoot for the stars in terms of investment performance.

The overwhelming majority of households — about two out of three — are looking for annual investment returns of 15% or more.

“Beyond that number that they have in mind for a certain standard of living, these wealthier investors want a high level of investment return,” Ms. Wolf said.

Toward that goal, 59% of households studied indicated they investing in hedge funds. And of those investors, 63% have at least $750,000 invested in hedge funds.

“As wealth increases, so does the complexity of the investments and the overall relationship,” Mr. Testa said.

The bottom line, according to the Cerulli research, is that financial advisers should be prepared for the higher level of wants and needs that come with working with wealthier clients.

On average, the households studied had more than 13 in-person meetings with their primary financial adviser per year, as well as more than 18 adviser-initiated phone conversations.

Add to that another 18 client-initiated phone conversations, and advisers are speaking with these clients about 50 times per year.

“That level of contact is expected,” Ms. Wolf said. “High-net-worth clients tend to be more deliberate in choosing an adviser, but they also have more choices.”

  @IN Wire

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