Advisors too focused on the wealthy, study says

Advisors who are constantly aiming for that prized catch to boost their book of business are fishing in the wrong pond, a new study suggests. Forrester Research says advisors should look to the mainstream if they want to net some new business.

In a new report, Forrester says advisors are missing a huge opportunity by ignoring a group it calls “mass-affluent validators” — individual investors who have more than $100,000 and gather their own information, but seek input and validation from experts.

The Nash equilibrium, the theory popularized in the film A Beautiful Mind, might help explain Forrester’s findings. In a collective strategy game where everyone is after the same goal, players are loathe to change their strategy away from top prize because it would mean they would earn less than if they stuck with their original plan. But the theory holds that if players were to mix those strategies, the expected payoff must be at least as large as that obtainable by any other strategy.

In other words, in a zero sum game a player improves her chances of winning by adopting a strategy that is different from the other players. Although the small, elite affluent market segment is the most attractive, it is drastically over-served and hard to reel in. These households control half of the wealth in the U.S. but represent only 5% of the overall market.

“These millionaires households are courted by every wealth management firm in the market, particularly the firms that already have some other form of relationship with them,” writes Bill Doyle, author of the report entitled “Mass-Affluent Validators: the battleground for direct and full-service investment firms.”

Instead, advisors should consider the mass-affluent segment, which is the largest overall grouping and offers the best opportunity for growth. According to Forrester, mass-affluent investors in the US average about $300,000 in investable assets, not including their retirement savings or their home equity.

As Doyle points out, while this is an attractive group of investors, the most compelling reason for focusing on this segment is that they’re underserved. “No major brokerage firm [in the US] is a dominant provider to this group.” In contrast, firms like Charles Schwab, E*Trade, Fidelity, Scottrade, TD Ameritrade and Vanguard, have a disproportionately high share of the affluent market segment.

Forrester identifies nine segments in total by analyzing investors by investible assets and by the level of involvement they want in directing how that money is invested (i.e. soloists, do-it-yourself; validators; who seek input but not handholding; and, delegators, who trust their advisor to make their investment decisions for them). These two attributes combine in form nine-different segments. (See table below)

While brokerages have done a good job serving the do-it-yourselfers and the affluent, Doyle says a number of brokerages need to do a better job for those investors who fall somewhere in the middle. Firms have fallen short in providing a professional human contact, who can validate a client’s decision and move the client towards a purchase.

“Smart firms have begun to move in this direction,” he writes, pointing to the efforts by Charles Schwab, which is adding financial consultants in branches.

At the low end of the mass-affluent asset scale, Doyle suggests firms need to make more effective use of their use of non-dedicated, phone-based advisors. One way to do this, he says, is to use screen-sharing technology that allows an advisor to illustrate concepts and swap information with a client while having a conversation over the phone.

Adding online tools is another way to hold on to mass-affluent clients, he says. “Allowing investors to run online plan scenarios at home and then share their thoughts with their advisor will result in a more accurate plan, a more in-touch advisor, and a happier client,” writes Doyle.