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

Jan 16, 2014 @ 9:03 am

By Carl O'Donnell

Practice management, financial planning, investment management
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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.

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