Simply put, from a client's perspective, wealth management consists of a financial advisor providing solutions to financial and related legal issues and concerns. Its problem solving for the client, and it regularly involves providing financial products as part of the “solution set.”
For the financial advisor, wealth management is the consultative process of delivering an array of financial products to meet the needs and wants of clients. Very often wealth management can be operationally conceptualized as “cross-selling.”
In individual coaching sessions and in workshops, financial advisors are telling us that one of their key concerns is increasing assets under management (AUM). While these advisors are obviously intent on helping their clients and delivering additional types of financial products, they, nevertheless, are extremely interested in building a larger book of business.
What we're going to address here is how wealth management readily translates into additional AUM. It's the additional assets, coupled with the revenues from additional financial products, that enable financial advisors who have successfully transitioned to the wealth-management model to see their incomes rise by 35 percent or more within a year.
Basically, wealth management results in additional AUM in two ways:
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The ability to capitalize on the asset capture process.
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The liquification of hard assets that then need to be managed.
Furthermore, wealth management results in ties that bind. That loyalty proves to be especially powerful in ensuring the client doesn't transfer assets away, or completely leave a financial advisor.
Capture the Assets
As we can see in the accompanying chart, a little more than 40 percent of middle-class millionaires with investable assets of $500,000 to $5 million are employing one investment advisor. A similar percentage of these millionaires (43.7 percent) are using two investment advisors, and the remaining 14.2 percent are using three or more investment advisors. Our research also shows that as these millionaires acquire more wealth, they are inclined to use more than one investment manager.
At the core of wealth management is a consultative process that is effective in developing an in-depth, holistic profile of a client. There are a number of tools that enable financial advisors to create such a comprehensive profile. The one we employ is referred to as the Whole Client Model.
When financial advisors use the Whole Client Model, they are able to uncover pockets of additional assets. These assets might be managed by other financial advisors or are just sitting in a checking account at a bank.
With this information in hand, plus all the additional insights unearthed by the Whole Client Model, the financial advisor is best positioned to implement the asset capture process. The Whole Client Model is made up of four steps:
Step 1: Create loyal clients
It's essential that the financial advisor is seeking more assets from loyal clients. More assets for the advisor means the client is satisfied with the quality of the relationship they have, and it's important to recognize that investment performance is only one component of that quality relationship.
Step 2: Identify asset transfer opportunities
The Whole Client Model is useful in enabling financial advisors to identify asset transfer opportunities that are a function of a client's life transitions. At the same time, structural changes, like a significant move in the stock market, are excellent asset transfer opportunities.
Step 3: Ask for additional assets
It's critical for financial advisors to ask for more assets to manage. The facility with which a financial advisor can ask for additional assets is what makes this step so effective. The use of investor psychology — personality type driving investing behavior — enhances the effectiveness of “asking.”
Step 4: Reinforce the asset transfer decision
The rationale for a client transferring assets must be reinforced. Moreover, the client should be thanked for the faith he is showing.
The wealth-management process — in particular, the Whole Client Model — has repeatedly proven to be effective in driving the asset capture process. To the extent that a financial advisor doesn't have all of a clients assets, wealth management can be instrumental in increasing that financial advisor's “share of wallet” of his clients.
The Liquification of Hard Assets
Besides the asset capture process, wealth management of more affluent clients regularly results in the liquification of hard assets. By hard assets we're referring to assets that are not financial assets, like fine art, real estate and other collectables.
The Whole Client Model enables financial advisors to understand a client's complete asset and liability picture. Then the financial advisors can bring expertise to bear, when appropriate, to restructure assets in a manner that greatly benefits the client. What tends to be the norm is that some hard assets are converted into financial assets that, consequently, need to be managed.
An example of this is a client that has $1.8 million in real estate with a $300,000 mortgage. The client doesn't need the real estate but keeps it to ensure the college education of his grandchildren. We also know, by using the Whole Client Model, that the client is charitably inclined. The end result is a charitable remainder trust funded with $1.4 million that will generate income that is to be used to pay for his grandchildren's education.
A more sophisticated example involves the use of a derivative transaction to freeze the value of a numismatic portfolio valued at a little more than $8 million. As part of the transaction a loan was arranged and the financial advisor ended up managing about $6 million in a nine-year trust.
In both these cases, the wealth manager facilitated the liquification of hard assets — real estate and rare coins — and subsequently managed the money. In our experience, wealth managers offer wealthy clients more opportunities to maximize their hard assets. This often means liquefying some portion of the hard assets.
Building Client Loyalty
The adverse of getting more AUM: The financial advisor has to make sure he doesn't lose assets to manage, which includes a client leaving the financial advisor completely. In this regard, wealth management, because it's about solving a client's financial problems as well as creating financial opportunities, goes a long way to creating very loyal clients.
In the study of 1,417 middle-class millionaires, only 13.8 percent of them could be defined as loyal. Of those 13.8 percent, 75 percent of them are working with wealth managers as we've previously defined the field. The very consultative nature of wealth management translates into greater client loyalty.
Wealth management can be critical in generating new AUM. From asset capture to liquefying hard assets and managing the monies, wealth management can enable financial advisors to grow AUM. Furthermore, wealth management can be critical in ensuring investable assets are not lost to other financial advisors by helping to make clients loyal.
