The secrets to succeeding with a younger, up-and-coming client base

'Millionaires of Tomorrow' are uneasy about money and must be treated differently than their elders

Jan 16, 2014 @ 9:03 am

By Carl O'Donnell

Practice management, financial planning, investment management
+ Zoom

As new technologies allow financial advisory firms to connect with more clients at a lower cost, advisers are increasingly reaching out to a younger, less affluent demographic, according to Bob Oros, executive vice president at Fidelity Institutional Wealth Services.

But winning over this group of investors requires advisers to change their approach. That's because the investor demographic dubbed “Millionaires of Tomorrow” is much more uneasy with money than their elder millionaire counterparts, but at the same time, they're much less likely use a financial adviser, according to a new report by Fidelity Investments.

These potential clients have a net worth of roughly $800,000 and an annual incomes of $150,000. The typical almost-millionaire is 51 years old, 10 years younger than the typical millionaire.

More importantly to advisers, these investors are not very money savvy. According to the Fidelity report, about 70% say they are not very knowledgeable about investing while 77% have no written financial plan. Only 17% intend to become more involved in their finances, and nearly half say their investment strategies are primarily focused on minimizing risk.

This timid approach can lead to subpar results. For example, this group's most coveted goal is retirement and while they are young enough to prioritize returns over security, you wouldn't know it by the average portfolio. The typical member of this group has an investment portfolio skewed toward ultrasafe assets such as cash, CDs and money market funds, which are offering returns that do not keep up with inflation, according to the survey.

“When you put all of this together, you see a group of investors who need [financial advisers],” Mr. Oros said. “The best thing for advisers to do is lead by focusing on planning and then show them how to strategically take on risk.”

This group of investors might shy away from advisers for a number of reasons. The most obvious reason, according to Mr. Oros, is that they think advisers don't want them. Traditionally, financial advisers target high-net-worth individuals, often with assets over $1 million. In fact, the opposite is true, Mr. Oros said. Though in its nascent stages, there is a visible movement among advisory firms toward courting less affluent clientele, he said.

One reason for this shift is sheer volume. Though many people in Generations X and Y may not be millionaires yet, this demographic is expected to hold $41 trillion in assets by 2023, according to the survey. Equally importantly, the Internet is allowing advisers to serve clients in a variety of ways that are more cost-effective than face-to-face visits.

“There now is a critical mass of people who are comfortable being served in a different way,” Mr. Oros said. “We don't have to sit across the table from an adviser to feel comfortable.”

Lowering costs is reducing one of the key pain points preventing “Millionaires of Tomorrow” from seeking advisory services. The average financial adviser takes roughly 1% of the first million dollars in assets. For a household with $800,000 in wealth, an $8,000 year fee could seem very substantial, said. Mr. Oros.

Progressive advisory firms are quickly addressing this problem. One approach is the use of digital advisory tools, better known as “robo-advisers.” This type of advising allows firms to charge fees as low as 0.35%, Mr. Oros said.

Another approach is to offer a different fee structure for financial planning than for investment management, with the hope that affordable planning services help develop relationships that eventually lead to investment management, he said.

0
Comments

What do you think?

View comments

Recommended for you

Sponsored financial news

Upcoming Event

Apr 30

Conference

Retirement Income Summit

Join InvestmentNews at the 12th annual Retirement Income Summit - the industry's premier retirement planning conference.Much has changed - and much remains to be learned. Attend and discuss how the future is full of opportunity for ... Learn more

Featured video

INTV

Ed Slott: The conversation advisers need to have with spousal IRA beneficiaries

Clients who inherit IRAs from their spouses need to decide whether to remain beneficiaries or do spousal rollovers. One important factor in that decision is their age, according to Ed Slott, founder of Ed Slott's Elite IRA Advisor Group.

Latest news & opinion

Will Jeffrey Gundlach's Trump-like approach on Twitter work in financial services?

The DoubleLine CEO's attacks on Wall Street Journal reporters is igniting a discussion on what's fair game on social media.

Fidelity wins arb case against wine mogul but earns a rebuke from Finra

In the case of investor Peter Deutsch, Fidelity doesn't have to pay any compensation, but regulator said firm put its interests ahead of his.

Plaintiffs win in Tibble vs. Edison 401(k) fee case

After a decade of activity around the lawsuit, including a hearing before the U.S. Supreme Court, judge rules a prudent fiduciary would have invested in institutional shares.

Advisers get more breathing room to make Form ADV changes

RIAs can enter '0' in some new parts of the document before their annual filing next year.

Since banking scandal, Wells Fargo advisers with more than $19.2 billion leave firm

Despite a trying year, the firm has said it will sweeten signing bonuses for veteran advisers.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print