As advisers start to focus on adding younger individuals and couples to their client mix, choosing prospects with the genuine potential to grow their assets will be important to running prosperous businesses.
Research based on conclusions from the best-selling book “The Millionaire Next Door” (Gallery Books, 1998) asserts that wealthy people have similar traits that influence their financial success, such as living below their means. Therefore simple demographic data that many advisers use to judge whether a client is worth taking on, such as current net worth or even income, are not enough to predict which clients are destined for a high net worth future.
For instance, those who report they spend a significant amount of time planning for their financial future are likely to be high value clients down the road, according to a new report from Data Points, which has created an assessment that it says can predict wealth potential.
“Identifying one's potential for building wealth is important if you have a limited ability to focus on all new clients or prospects,” said Sarah Stanley Fallaw, author of the study and president of Data Points.
About 85% of those with high net worth potential rarely or never have to tap savings to pay monthly bills, as opposed to 32% of those estimated to be at a low potential for generating wealth, according to the Data Points report, which analyzed wealth potential assessments given to 494 household financial decision makers in September 2015.
In addition to finding prospects who are likely to increase their wealth, advisers can coach clients they identify as having the behaviors of those with a low net worth potential to help them change, she said.
KEEPING A BUDGET
Helping clients get a firm grasp on how much they are spending each year on food, clothing and shelter — something that those with high wealth potential typically know — could help boost wealth chances, said Ms. Fallaw, daughter of Dr. Thomas J. Stanley who wrote “The Millionaire Next Door.”
Additionally, advisers could introduce technologies to help clients move toward the behaviors that seem to predict high net worth potential, such as having them use budgeting tools that provide alerts and reminders when spending is outstripping their income, she said.
Data Points will be introducing a tool later this year for financial advisers to use with clients or prospects to identify wealth potential, but some advisers already evaluate prospects' futures, though much more informally.
Michael Brady, president of Generosity Wealth Management, said he looks for people who “are owning up to their responsibilities” in their lives and know it's up to them to be empowered and proactive in securing their financial future.
“I also make sure I can have an impact on their lives,” Mr. Brady said.
He takes on clients who may not have an income or obvious inheritance that suggest the person will one day be wealthy, as long as they show they are willing to make the needed sacrifices, he said.
Sometimes he'll tell prospects to save a certain amount over the next six months and return to prove they are willing to do what it takes to delay gratification, Mr. Brady said.
Grant Webster, senior wealth manager for AKT Wealth Advisors, recommends advisers “look for younger versions of their favorite, more successful clients.”
“This generation of young professionals are much better off than most advisers think,” Mr. Webster said.
John Grable, a financial planning researcher at the University of Georgia, is using some of Ms. Fallaw's conclusions as the basis of his own studies on what attitudes and behaviors can position people to generate and retain wealth.
“It appears there are some individuals and households more likely to be wealth accumulators than others,” he said.
Knowing why could help advisers — who today generally work with those who are already wealthy — build successful practices serving those who are in the beginning stages of wealth, said Mr. Grable, who also sits on the Data Points advisory board.