Truly Affluent Require Wider Type of Service

Jonathan Chevreau

Financial Post, May 14, 2007

For many financial advisors, the Promised Land is a client base comprised exclusively of High Net Worth (HNW) or -- better yet -- Ultra High Net Worth (UHNW) individuals.

But as a Strategy Institute conference in Toronto made clear last week, that magic kingdom is neither easy to reach nor all that profitable once you get there.

First, the field is extremely competitive. There isn't a bank or major financial institution that isn't targeting wealthy investors. At least 200 firms in Canada are vying for this market.

Second, the pool of wealthy investors is a shallow one. According to Investor Economics Inc., only 415,000 of Canada's 13 million households can be classified as HNW in 2005.

"There's not a huge number of high-net-worth households out there," Investor Economics president Earl Bederman told the conference. Still, the segment is growing at 7.2% a year. Bederman will be updating his numbers in a few weeks.

A third and less evident consideration is that these wealthy families are extremely fee-sensitive and demanding. That means margins are not as lucrative as those seeking such clients may think.

Indeed, this is why some advisors prefer to focus on clients with more modest wealth -- of perhaps $500,000 to $1-million. As the global academic study released last week showed, Canada's retail mutual fund investors seem willing to pay mutual fund Management Expense Ratios (MERs) that are consistently higher than those in 18 countries.

There are a lot more such clients and the margins serving them are higher.

But if you do want to swing for the fences, you must be prepared to offer the wealthy a much wider fleet of services.

The mere "affluent" (with net worths of $1-million to $5-million) may only need investment management.

As you ascend in the advisory hierarchy, you need to add full Wealth Advisory services and ultimately Family Office Advisory capabilities, said Tim Cestnick, founder of WaterStreet Family Wealth Counsel.

Cestnick sets the threshold for HNW as $5-million to $20-million in net worth and for UHNW at $20-million-plus. WaterStreet serves 17 such families currently.

Bederman classifies households with $1-million to $5-million as "mass millionaires." There are 335,000 such households in Canada. There are 60,000 "penta millionaires" (with net worths of $5-million to $10-million) and 20,000 decamillionaire households with more than $10-million.

Despite comprising only a fraction of Canada's households, the wealthiest families control almost half the investable assets: $1.3-trillion of $2.4-trillion.

The "vast majority" of that $1.3-trillion held by wealthy families is controlled by the decamillionaires. They are the ones with "family offices."

Not surprisingly, "the world changes above $20-million in net worth," Cestnick told the conference, "Demand for transparency is much greater -- in fees and everything you do."

Clients at that level also expect "true objectivity."

"Below $20-million, clients should not expect true objectivity," Cestnick said, hastily adding "that doesn't mean they're getting bad advice."

Such clients have less tolerance for proprietary or "inhouse" financial products and prefer "open architecture" solutions. The complexity of the planning rises, as does the time commitment required by the advisor.

Bederman looked at the HNW market both from the demand side and from the supplier side. His conclusions are similar to Cestnick's: "The demand side is certainly positive. There's no question this market is expanding, but that doesn't make it easy."

Bederman also breaks out the millionaire households by age cohort. There are 82,000 millionaire households in the 45 to 54 year age bracket, or about 20%; 85,000, or 21%, are aged 55 to 64; 59,000, or 15%, are aged 65 to 74; and 107,000, or 26%, are aged 75 or over.

Therefore, the Baby Boomer generation presents a "great opportunity" for aspiring wealth advisors, Bederman said.

"This is a money-in-motion marketplace. No one owns it or has a lock on it. Needs are changing, which is scary for some but an opportunity for others."

Many boutique investment counselling firms serve this market: Speakers at the Strategy Institute included Stonegate Private Counsel, Northwood Stephens Private Counsel Inc. and Cumming & Cumming Wealth Management.

Bederman says the top 20 of the 200 firms control "the vast majority of assets": $94.5-billion. Not surprisingly, four of the top five are the big banks. Other firms in the top 20 include investment counsel firms such as Jarislowsky Fraser Ltd., Burgundy Asset Management or Gluskin Sheff & Associates, and firms with a base in mutual funds, such as Phillips Hager & North, and AGF Management Ltd.

The banks are reorganizing their private counsel structures. While dominant overall, they are "hugely under-positioned in this high-net- worth area," Bederman says, "It's a major challenge for them because much of what they do is driven not just by opportunities but by their need to retain wealth."

Conference attendees got a singular peek into how one bank approaches marketing to the wealthy.

John Doig, senior vice-president of marketing for Scotiabank, described how various divisions of the bank -- estate and trust services, private banking, brokerage, investment counselling, mutual funds -- are all vying for the same affluent customers. The marketing challenge was to segment its customers while preserving the bank's overall brand.

In the mass market, Scotiabank is well known for television commercials that declare "you're richer than you think."

Scotiabank's main brand uses the colour red in its marketing materials but a brochure for Scotia Private Client Group was able to omit that colour, Doag said. They "drew a line in the sand" for clients above $1-million in assets.

That group was targeted through a "customer appreciation" program called "Scotia Private Client Group Great Nights."

Taking a leaf from a similar program at Northern Trust, Scotiabank's first Great Night was three years ago with singer Michael Buble.

It became such a success that today clients ask the bank when the next Great Night is scheduled. As a result, assets in the private client group doubled to more than $35-billion.

Little wonder TD and BMO have followed suit with similar events. Just more perks for the affluent.

jchevreau@nationalpost.com.

- - - - Is the HNW market getting too crowded for advisors? Comment at Jonathan Chevreau's blog at www.wealthyboomer.ca.

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