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Is the Mass Affluent Investor the Right Client for You?

Forrester Marketing Forum 2009

There are nearly 40 million mass affluent individuals – those with investable assets ranging from $100,000 to $1 million – in the United States, according to Forrester Research. Deloitte estimates that more than a third of those investors do not work with financial advisors.

That is somewhat understandable as many advisors have struggled to deliver services to the mass affluent in a profitable manner.

Yet, some advisors have found pursuing the mass affluent to be a power strategy for growing their business, despite the challenges presented by the market segment.

Some advisors realize high-net-worth clients will ask them to manage assets for children or other relatives who fall within the mass affluent category. By offering services to those mass affluent investors, advisors can strengthen their relationships with their high-net-worth clients. In similar manner, many mass affluent clients have elderly parents and are therefore likely to receive inheritances that can represent substantial assets. By establishing relationships with existing high-net-worth clients’ relatives, advisors can improving the likelihood of managing the assets after an estate transfer occurs.

From a long-term perspective, advisors realize that mass affluent investors will generate wealth over time, so the market can be a long-term strategy for raising assets. In some cases, mass affluent investors’ use of 401(k) plans and the benefits of employers providing matching plan contributions can result in significant wealth creation.

The challenge, of course, is developing services that can be delivered profitably to mass affluent investors. After all, with smaller account sizes, generating sufficient commissions or advisory fees can be a challenge. Many affluent investors, therefore, may have needs for a variety of financial planning services, such as estate planning, risk management, retirement planning and other matters. Providing personalized services that address those needs as part of an asset management offering can be cost prohibitive.

Yet, some advisors have developed strategies for serving the mass affluent profitably. One approach is to use turnkey asset management programs, which are also called TAMPs. Some of the largest programs are offered by Envestnet, SEI, and FundQuest. They typically conduct due diligence on mutual funds and create fund-of-fund portfolios based on investors’ risk tolerance and investment timeframes. As turnkey programs, they deliver account statements to investors and may provide investment proposals for advisors to use with prospects. By outsourcing the asset management function, advisors can focus on client prospecting, educating investors and conducting services such as retirement planning.

Advisors are also developing tiered services based on the amount of assets that each client has. With tiered services, investors with smaller accounts are encouraged to use lower cost channels, such as telephone representatives or Internet services, rather than face-to-face meetings when making account inquiries. For younger investors, using the Internet may be a preferred approach, so the lower cost channel may enhance certain clients’ satisfaction with their advisors. The approach can still include personal meetings to present initial investment proposals and to provide annual account reviews.

Advisory firms are also implementing fee structures that may include an hourly fee for certain services in addition to more traditional trading commissions and asset based fees. Ironically, many investors are reluctant to pay an upfront hourly fee, even if the fee may be less than other fee arrangements that are based solely on commissions or asset under management. Yet, advisory firms may feel charging the hourly rate is warranted because the asset management fees generated by small investment accounts are insufficient to cover the costs of delivering services.

For advisors, the biggest challenge is to develop a long-term and disciplined approach to providing services that are appropriate and profitable for the level of revenues that smaller accounts may generate.  Not only will doing so allow firms to maintain their profits, but it will also allow firms to manage their clients’ expectations regarding the level of services that they will receive.

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