Making middle net worth work

(August 11, 2003) Chasing high net worth (HNW) clients has always been something of a Holy Grail for financial advisors. But competition for the already tight HNW market is heating up and recent studies suggest the number of millionaires is on the decline. If the idea of running even harder to snare that rare but lucrative well-off client doesn’t appeal to you, keep in mind there are options.

One possibility is to shift the focus of your practice to middle net worth investors, that vast population of firefighters, teachers and middle managers that make up the bulk of the Canadian population.

“It can make sense. Virtually any group of clients can make sense as a strategy provided you build an infrastructure that makes it profitable for you to provide service to that group,” says Julie Littlechild, president of Advisor Impact, a Toronto-area company that coaches advisors on how to run their practice.

Perhaps the largest asset of middle-income earners is their potential to develop into higher net worth individuals. Fraser Smith is a Vancouver-based author who recently wrote a book about converting equity in your home into an investment portfolio at a rate faster than the many conversion techniques already familiar to Canadians.

Getting clients to convert home equity is like creating a new client says Smith. “You take middle-income people who have been diligently paying off their mortgage and turn them into investors who control a large portfolio of investments,” he says.

The added bonus is that these people often turn out to be the best clients you can hope to find.

“In some ways, dentists and doctors are the worst possible clients. They’ve been through the wringer and many times you’re getting them on the rebound,” says Smith. “But if you start with someone who hasn’t been much of an investor before, you’ve made a new client and he’ll be loyal to you.”

The huge potential numbers of clients is another obvious advantage. And unlike high net worth clients, who may be more reticent to talk with an advisor, middle-income clients are often easy to access.

“Advisors have been brainwashed for years that they have to go after people with high incomes,” says Smith. “But middle-income clients make wonderful [sources of referrals]. When someone catches on, they can’t help but talk to their friends and neighbours, something you don’t find in a dentist and doctor practice where they don’t want you to have more clients because they want you to have full-time availability for them.”

Of course there are challenges. The big banks have perfected the delivery of mass financial planning and have access to a deep pool of resources that give them certain advantages. Nevertheless, it is possible to compete against those institutions, says Littlechild. The key for the advisor is getting the practice infrastructure right.

Often that means limiting the number and function of team members. “You’re really going to be the source of knowledge. You’re not going to have a junior advisor. You’re going to have assistants who do the admin work but probably not the client contact,” says Littlechild.

As well, an advisor looking to target middle-income earners will want to lease less expensive real estate for the office and load up on technology. You’ll rely to a large degree on financial planning software and e-mail rather than face-to-face contact.

“You’re going to be doing a base level of financial planning. You’re probably going to employ financial planning software. Automate as much as humanly possible,” suggests Littlechild.

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Most important, says Littlechild, will be managing the expectations of the client. Define a base level of contact, say once a year, and then work from there. Although you may find some clients choose to go elsewhere, for many advisors this kind of basic operation may be the perfect match for their personality.

“It’s an advantage if someone doesn’t want to get into very comprehensive planning for example. If you don’t want to do a lot of intensive one-on-one time with your clients — if that’s not your real strength — then you can get away with building a different kind of business,” says Littlechild.

“Some people are just drawn to different models for those reasons. I don’t think it’s more profitable, but targeting middle net worth clients can be just as profitable.”

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Are you an advisor who is currently serving the middle net worth market? Is this a market you’d consider working with? How would you work with this market? Share your thoughts about this topic in the Talvest Town Hall on Advisor.ca.

Art Melo is a Toronto-based investment writer.

(08/11/03)