The opportunity presented by middle-class millionaires

Too many advisers believe the surest path to growth is by going up-market and pursuing ultra-high-net-worth clients. While this may be a strategy to maximize revenue on a client-by-client basis, for most advisers, it’s not a realistic path to success.

Rather than continuing to swim upstream, more advisers should focus their energies on targeting the largest group of people in need of wealth management advice in America: middle-class millionaires.

That’s because, first, you must be realistic about the numbers. There are about 200,000 households in the U.S. that have north of $20 million in investible assets. Yet, according to the Bureau of Labor Statistics, there are 218,000 financial advisers. That’s roughly 1.1 advisers for every possible ultra-high-net-worth client. Even if you narrow it down to only advisers who hold a CFP, it still means that each one only has access to 2.3 clients.

Conversely, if you look at households that have between $500,000 and $20 million, there are a whopping 15 million people in that demographic. (That’s 170 households for every CFP.)

Next, consider scalability. If each client you serve has distinct planning needs, it’s difficult to grow with any sort of scale. However, if you have a client base mostly from a similar financial gene pool, say professionals who have between $1 and $2 million in their retirement accounts, there will be a great deal of advisory crossover. This enables you to put in place procedures that are repeatable and scalable.

Then look at the economics. The smaller the client size, the larger the fee you can charge. As the accounts get larger, the fee declines. Rather than being able to charge 100 basis points on an account of $20 million, you’ll likely be in the 30 bps to 50 bps range. Granted, the annual revenue from a $20 million account at 30 bps could be six times as much as that on a million-dollar client, but the level of service needs to be six times as much as well. All that, and I’d be wary of owning an advisory firm serving just a palmful of demanding high-net worth clients.

Lastly, there’s the impact we have on people’s lives. How much of an impact will you make on someone who has $50 million? But the effect we can have by providing great planning for a family with $2 million in savings can’t be overstated. It could be the difference between their being able to afford to travel to visit the grandkids a few times a year, and help pay for their college, versus being a few expensive health or home repair setbacks from not being able to travel, at all.

One of the great aspects of this industry is that every adviser can choose their path. If you’ve been pushing hard to work with the ultra-wealthy, but aren’t having the level of success you’d like, you ought to take a hard look at where your outcome, and the outcomes for the clients, may be greenest.

Scott Hanson is co-founder of Allworth Financial, formerly Hanson McClain Advisors, a fee-based RIA with $15 billion in AUM.