Best Practices. of Elite Advisors EXECUTIVE SUMMARY. The Wealth Management Edge. An Industry Intelligence Report from

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1 SM Best Practices of Elite Advisors The Management Edge EXECUTIVE SUMMARY BY PATRICIA J. ABRAM, JOHN J. BOWEN JR. AND RUSS ALAN PRINCE An Industry Intelligence Report from

2 BEST PRACTICES OF ELITE ADVISORS Management Today Financial institutions today are captivated by the promise of wealth management, and for good reason: It has been thoroughly documented that wealth managers that is, financial advisors who cultivate consultative relationships with a relatively small number of affluent clients are likely to garner greater assets and earn higher incomes than do advisors who employ the traditional transactional business model. Financial firms therefore have spent millions of dollars marketing wealth management and training advisors to provide it, and the phrase wealth management has become pervasive throughout the financial industry. Recent industry research strongly reinforces previous studies showing that wealth managers generate much higher levels of success than do investment generalists. But it also finds that only a tiny percentage of advisors actually employ the wealth management model. Furthermore, it suggests that wealth managers success is directly attributable to a particular set of business practices practices that other advisors would be wise to replicate. Our study, conducted during the first quarter of 2007, surveyed 2,094 wirehouse brokers, registered investment advisors and independent broker-dealer representatives. It focused on the industry s most successful advisors: those who had been in business for at least five years and controlled at least $50 million in assets. Those advisors who provide customized client solutions through a consultative process were considered wealth managers; other advisors were labeled investment generalists. Best Practices of Elite Advisors: The Management Edge By Patricia J. Abram, John J. Bowen Jr. and Russ Alan Prince Copyright 2007 CEG Worldwide, LLC. All rights reserved. No part of this publication may be reproduced or retransmitted in any form or by any means, including, but not limited to, electronic, mechanical, photocopying, recording or any information storage retrieval system, without the prior written permission of the publisher. Unauthorized copying may subject violators to criminal penalties as well as liabilities for substantial monetary damages up to $100,000 per infringement, costs and attorneys fees. The information contained herein is accurate to the best of the publisher s knowledge; however, the publisher can accept no responsibility for the accuracy or completeness of such information or for loss or damage caused by any use thereof. CEG Worldwide, LLC 1954 Hayes Lane San Martin, CA (888) [email protected] [2]

3 THE WEALTH MANAGEMENT EDGE Nearly half of this group described themselves as wealth managers. Yet a scant 6.6 percent of the advisors surveyed actually employ wealth management s fundamental tenets a surprisingly low figure, especially considering that the group represented the country s top financial advisors. More than 90 percent of them continue to operate in the more traditional mode of investment generalist, focusing on transactions rather than on building long-term, consultative relationships. We found that wealth managers are by any measure substantially more successful than investment generalists. Most notably, they earn much higher annual net incomes before taxes than investment generalists (Exhibit 1) and administer far more assets (Exhibit 2). EXHIBIT 1 AVERAGE ANNUAL NET INCOME BY BUSINESS MODEL $1,000,000 $881,000 $750,000 $500,000 $250,000 $279,000 $0 What s more, the gulf is widening between wealth managers extreme success and investment generalists more moderate level of achievement. managers average income in 2006 grew at almost twice the rate of investment generalists 15.4 percent vs. just 8.7 percent. The results imply that these most elite advisors may be just beginning to realize their business model s potential. They also suggest that financial institutions would be wise to pay attention to this segment of the market, which is generating by far the greatest productivity gains. [3]

4 BEST PRACTICES OF ELITE ADVISORS Furthermore, wealth managers superior success is not the result of greater time in business. managers and investment generalists have provided financial services for nearly identical lengths of time, on average. That fact suggests that wealth managers success instead results from their use of different, more effective business practices. EXHIBIT 2 ASSETS UNDER ADMINISTRATION (MILLIONS) $750 $645.2 $500 $307.8 $250 $0 [4]

5 THE WEALTH MANAGEMENT EDGE Owe Their Success to Distinct Business Practices The study uncovered a number of indications that wealth managers superior level of success results from conscious choices and particular business practices. One indication that wealth managers employ a more effective business model is their ability to generate greater income, assets and growth while serving far fewer clients (Exhibit 3). This point is critical, because advisors reluctance to limit the size of their client lists provides one of the greatest impediments to the transition to wealth management. In fact, this study and other evidence suggest that wealth managers succeed not in spite of serving fewer clients, but in part because they have shorter client lists. A EXHIBIT 3 NUMBER OF CLIENTS smaller stable of clients allows wealth managers to spend more time cultivating the client relationship, resulting in better client service and, in turn, greater client retention and referrals. managers freedom from the [5]

6 BEST PRACTICES OF ELITE ADVISORS pressure to recruit and serve a large number of clients also allows them to pursue greater quality of clients those who allow the advisor to provide the greatest value while earning the greatest potential profit. Consider client contact, for example a key to developing the close relationships with clients that are essential to the wealth management model. managers contact their best clients almost three times as often as do investment generalists (Exhibit 4). EXHIBIT 4 TIMES PER YEAR ADVISORS CONTACT EACH OF THEIR TOP 20 CLIENTS That annual rate works out to about one contact every three and a half weeks for wealth managers, versus one contact every other month for investment generalists. Prospecting Methods The study found that wealth managers are much more focused about the ways they recruit new clients (Exhibit 5). [6]

7 THE WEALTH MANAGEMENT EDGE EXHIBIT 5 VERY IMPORTANT SOURCES OF NEW CLIENTS Referrals from existing clients 87.7% 78.9% Referrals from other professionals 81.9% 26.2% Joint-venture or other strategic arrangements with other professionals 19.6% 13.0% Seminars (public) 4.3% 11.0% Seminars (by invitation only, to defined groups) 2.9% 12.0% Cold calling 0.0% 13.5% Direct mail (fliers, newsletters) 0.0% 1.7% Public relations activities (articles, mentions in the press) 0.0% 1.3% Advertising (phone book, newspaper, radio, Internet) 0.0% 1.2% managers by and large source new clients through client referrals, referrals from other professionals, or joint ventures and similar arrangements. generalists are far less likely to use referrals from professionals. They are far more likely, meanwhile, to employ methods that research consistently shows to be relatively ineffective for attracting ideal clients: For example, more than one in eight investment generalists consider cold calling a very important recruitment tool. This finding suggests that investment generalists don t emphasize the prospecting methods that work best. It should come as no surprise, then, if they serve lower-quality clients than do their wealth manager colleagues. Simply focusing more of their time, effort and resources on the most effective sourcing methods and less on methods such as seminars, advertising, direct mail and cold calling, which are almost entirely ineffective in sourcing high-quality clients has the potential to improve those advisors practices substantially. [7]

8 BEST PRACTICES OF ELITE ADVISORS managers are much more likely to use other highly efficient prospecting methods as well. Two-thirds of wealth managers regularly ask clients for referrals, compared to fewer than 2 percent of investment generalists, and about five times as many wealth managers regularly ask clients for additional assets to manage. Formal Systems Help Maintain Best Practices Our study also found that wealth managers are much more likely than investment generalists to formalize systems that ensure adherence to industry best practices. For example, Exhibits 6 and 7 illustrate the fact that wealth managers are roughly twice as likely to require a minimum asset size for new clients or charge a minimum fee both of which serve to guarantee a focus on high-quality, profitable clients. EXHIBIT 6 ADVISORS WHO REQUIRE A MINIMUM ASSET SIZE FOR NEW CLIENTS 100% 75% 73.2% 50% 38.8% 25% 0% Likewise, we found that wealth managers specialize in a particular type of client almost three and a half times more than do investment generalists 59.4 percent compared with 17.5 percent. Again, embedding such practices into the business focuses the advisors efforts on clients who are likely to be highly suitable and profitable. [8]

9 THE WEALTH MANAGEMENT EDGE EXHIBIT 7 ADVISORS WHO CHARGE A MINIMUM FEE 100% 84.1% 75% 50% 33.9% 25% 0% In keeping with these findings, wealth managers also are more than three times as likely to have formal business plans than are investment generalists and more than twice as likely to use formal business plans. Taking a more systematic, formalized approach to business practices presumably helps wealth managers incorporate industry best practices into their own businesses while providing the discipline to adhere to them as time passes. We also found signs that wealth managers rigorous, analytical approach to their operations helped them identify more efficient strategies. For example, wealth managers on average outsource more than three-quarters (76.8 percent) of their money management business, while investment generalists outsource only one-fifth (21.2 percent) of their money management business. Outsourcing money management likely frees wealth managers to spend more time cultivating relationships with high-quality clients a more valuable way for an advisor to spend his or her limited time. Feelings About the Future We saw in Exhibit 1 that wealth managers earn more than three times the income of investment generalists. Yet the majority of wealth managers also believe that their businesses could be more profitable than they currently are. Conversely, more than 60 percent of investment generalists believe their practices already maximize profits (Exhibit 8). [9]

10 BEST PRACTICES OF ELITE ADVISORS EXHIBIT 8 ADVISORS SAYING THEIR BUSINESSES COULD BE MORE PROFITABLE 75% 58.7% 50% 39.0% 25% 0% These findings suggest that wealth managers are considerably more optimistic about the outlook for their businesses than are investment generalists. Yet wealth managers also express certain concerns more strongly (Exhibit 9). EXHIBIT 9 TOP CONCERNS Expanding service and product offering to serve wealthier clients 42.8% 22.6% Improving client satisfaction 41.3% 35.0% Better understanding client needs 35.5% 14.6% [10]

11 THE WEALTH MANAGEMENT EDGE managers concerns adhere to a common theme of client-centrism. These elite advisors recognize that to realize the success they envision, they must better understand their clients needs and improve their own ability to address them. Financial institutions would be wise to listen carefully to these concerns. The institutions that address them effectively are likely to attract and retain more of these highest-value producers. The case for wealth management is stronger than ever. Nevertheless, a surprisingly small number of advisors currently employ the wealth management business model, despite financial firms efforts to encourage its use. Our comprehensive study powerfully suggests that financial institutions should redouble their efforts to attract and retain existing wealth managers and to help investment generalists make the transition to the wealth management model. The study also offers hope for those efforts, by showing clearly that wealth managers success is the product of replicable business practices. The most important of those practices include emphasizing client quality over client quantity; developing close client relationships through frequent contact; and instituting formal, systematic business processes that ensure adherence to industry best practices. Firms may wish to use these characteristics as touchstones in their efforts to build a stronger, more productive base of financial advisors. [11]

12 CALL YOUR DOW JONES NEWSWIRES ACCOUNT RESPRESENTATIVE FOR THE FULL VERSION OF THIS STUDY CEG Worldwide, LLC 1954 Hayes Lane San Martin, CA (888) [12]