Advisors struggling to service HNW clients

(October 21, 2004) Although mutual funds remain the dominant choice for Canadian investors, fund-only advisors catering to high-net-worth clients are worried about being able to compete as those clients gather more assets.

Advisors recognize that it is becoming increasingly difficult to adequately service HNW clients without offering individual securities, says Keith Sjogren, head of Taddingstone’s wealth management practice.

“You’ve got a whole group of customers that will still be well served by fund-based products because there are constantly smaller investors entering the market,” says Sjogren. “They will be well accommodated by bank-based planners and conventional planners.”

“But it gets harder to compete as the wealth pyramid grows, with the customers essentially outgrowing the ability of the planner,” he adds.

“There’s so much choice that customers feel they are adequately served by the banks and we’re seeing banks succeed in picking up mutual fund assets,” adds Taddingstone consultant Greg Holohan. “And that may be the problem for planners, as the banks are winning these low-end customers.

Nearly one-third of advisors surveyed by Taddingstone cited an inability to access adequate products as one of the main barriers in their efforts to serve HNW clients.

More than 90% of advisors rely on mutual funds to serve households with less than $100,000 in investable assets. And more than three-quarters of advisor revenue flows from fund products in the form of commissions and fees.

“The problem for planners,” says Holohan, “is that as wealth increases, investors tend to move away from mutual funds.”

The survey found that nearly 90% of financial planners’ clients have less than $500,000 in household investable assets. “In other words, there are only a handful of wealthy clients for the average mutual fund advisor,'” the survey says.

That’s consistent with the ADVISOR Group’s third Annual Dollars & Sense Survey, which revealed that the average MFDA advisor had $21.6 million in assets under management, compared to the IDA average of $45 million.

In addition, the ADVISOR Group survey showed that IDA advisors have higher personal incomes, with an annual average salary of $115,789, compared to the MFDA average of $81,310.

The Taddingstone study also found that many fund-based planners see alternative offerings, such as wraps and separately managed accounts, as critical elements in serving affluent clients. But only about one-third use the products, with some suggesting that they diminish the role of the advisor and make it difficult to justify fees to clients.

“The wrap area has supposedly given advisors more time to develop expertise in other areas, but whether that’s happening or not I don’t know because planners are complaining they’re getting bogged down in administration and compliance,” Sjogren notes.

Advisors also told Taddingstone that they have trouble identifying their wealthy clients and aren’t getting much help in that area from dealers and fund companies.

“For planners and the fund companies that support them, the challenge is to provide affluent prospects with access to sophisticated products, reliable expertise and unique investing opportunities,” Sjogren says. “The competitive environment is very intense and financial planners need all the support they can get.”

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Taddingstone conducted in-depth focus groups with more than 50 planners, biased towards those who were well established, with a client base of affluent individuals.

Filed by Doug Watt, Advisor.ca, doug.watt@advisor.rogers.com

(10/21/04)

Doug Watt