Counselling high net-worth (HNW) clients is not what many financial advisors who aspire to serve this client segment might expect. Whether the client/advisor conversation centres on discussing the needs of aging parents, managing a business in multiple jurisdictions, passing a business to the next generation or making decisions on charitable giving, HNW individuals first seek support, insight and understanding from their advisors, not intricate details about products and planning.
Before HNW clients commit to an advisor, they want to have wide-ranging discussions about the obligations and opportunities that wealth can bring and how best to deal with their legacies, among other topics, notes Robert Pierce, managing director, co-founder and portfolio manager with Stonegate Private Counsel LP in Toronto. Pierce, who specializes in serving clients with at least $3 million in investible assets, says he has an obligation to clients that branches out far beyond the usual issues that many advisors might expect to address with clients. “[The conversation] gets pretty philosophical,” he says, referring to the extensive, exploratory dialogues on a broad range of life issues that he conducts with wealthy clients. “The discussion takes on a different frame of reference when you can buy anything you want.”
It is therefore wise to avoid diving into financial details at the outset of relationships with HNW clients. Indeed, talking in-depth about matters such as an investment portfolio at this stage is likely to elicit “blank stares” from these clients, says Larry Distillio, assistant vice president, practice management, with Mackenzie Investments in Toronto. A more productive route, he says, and one that’s more likely to gain and maintain a HNW client’s trust, is to focus on the client’s fundamental concerns, such as caring for their families. Adds Distillio: “Clients want to know that you have their back – and that everything is going to be OK.”
In Pierce’s experience, most HNW clients who come to his firm for the first time have never had what he refers to as “deeper” conversations about their wealth. They often are unsure what to do with the assets they have accumulated and may want advice about how other wealthy people approach the challenges of using their wealth in ways that have personal meaning. And even though HNW clients may have great expertise in their own fields, they tend to want simplification in their financial affairs.
“HNW clients are not generally sophisticated about money, in particular,” Pierce says. If you focus on the details of products or give HNW clients the impression they are being “sold,” you may lose those clients, he adds: “They want to know that you care, not about the next, greatest ETF.”
And they are willing to pay for advice they value. Despite the rising regulatory emphasis on fee disclosure, Pierce says he has not experienced increased concerns among his HNW clients about what they’re paying for advice, which can include extensive quarterly meetings in a client’s home and 24/7 availability.
“They are not as concerned about price [as other clients may be] unless it’s ridiculously expensive,” Pierce notes. In exchange, HNW clients want to know you will be there in moments of crisis, ranging from family meltdowns with financial repercussions to the gut-wrenching market declines of 2008. It’s like buying an expensive car, Pierce says: “You might complain about the price – until you are in an accident.”
Of course, HNW clients differ from one another and tend to exhibit a range of behaviours when the conversation eventually moves to the specifics of how you and your firm will manage their affairs. Distillio notes that HNW client types generally fall into three categories: “delegators,” who prefer not to be closely involved in financial choices; “collaborators,” who prefer a partnership-style approach; and “soloists,” who want to review all decisions.
Assessing which group the HNW client is likely to fall into at the outset of the relationship is important, Distillio adds: “By asking those questions, you will know how to allocate your time accordingly.”
This part of getting to know a HNW client tends to be especially important for risk management and managing responses to market volatility, Distillio says. Like other advisors who specialize in the HNW client segment, he has found that they tend to lean toward the conservative end of the investing spectrum and are focused on preserving their wealth. These concerns can lead HNW clients to worry excessively about market losses, he notes. You can help alleviate this worry by talking to your HNW clients about realistic outcomes.
“The reason they’re sitting in the chair [in front of you] is because there is a point of pain in their lives,” Distillio says. “That’s when the advisor can say, ‘Mrs. Smith, I really understand what you are feeling and what you are thinking. Why don’t I show you a way to reduce your anxiety around this so we can build a plan that will allow you to have more control over your financial well-being?’ It really takes a special amount of time to build that kind of relationship with a client – to really understand where their points of pain are.”
Those initial conversations can, in turn, help greatly in managing clients’ responses to market downturns. Asking how they will handle a market drop – or repeated drops – is important, Distillio says: “The answer to those questions will allow you to get involved in an educational strategy with that client.” The understanding developed during that process will lead to investments that provide real rates of return while preserving wealth.
Driving HNW clients’ aversion to risk generally is a strong desire to ensure the long-term security of their family. Andrew Wilkin, partner and advisor with Cowan Wilkin Financial Services Inc. in Waterloo, Ont., which operates under the Sun Life Assurance Co. of Canada banner, notes that developing a relationship with HNW clients can take years of effort. During that period, connections with a client’s family are almost as important as those with the client. That family-wide relationship may grow out of one that begins in the insurance or investing arenas and eventually branches out into broader financial planning tasks that require wider and deeper discussions.
“The line of questioning [with a client] really takes the form of a conversation in a relaxed, non-intrusive manner,” Wilkin says. “It may be a husband and wife, or an individual and the advisor. Ultimately, the spouse [needs to be] involved because [the results of those discussions are] going to be impacting the spouse.”
The process also may involve other professionals, such as lawyers, accountants and insurance advisors who are involved in complex, related activities such as tax planning and will preparation. But the biggest question, Wilkin says, is asking your clients about what they want to accomplish. “You throw that out and, my gosh,” he says, “the number of things on their minds – their heads are spinning.”
At this stage, you should document this aspect of your client conversation carefully, Wilkins adds, because it will become a template for what needs to be done for the client, which can include legacy planning, dealing with dependents with special needs, reining in the family spendthrift or dealing with estranged adult children. “[HNW clients] want to address these questions,” he says, “and they want to sleep at night knowing it’s been done fairly.”
Taking a family-centred approach also can help you get to know the younger generation in a client’s family. Among the many preferences and concerns of the client’s children that may be somewhat different from those of their parents is that of investing in ways that generate support for environmental and social goals. Patti Dolan, a portfolio manager in Calgary with SAGE Connected Investing, which operates under Toronto-based Raymond James Ltd.’s banner, is devoted to helping her HNW clients with responsible investing (RI) decisions.
RI is growing by “leaps and bounds,” Dolan says, noting that a recent conference for the investment philosophy drew more than twice as many attendees as one held a decade ago and that, according to a recent report, more than 80% of investors would like to direct a key part of their portfolio toward RI.
Dolan’s clients are a mix of young and old, with many older clients coming to her as a result of the investing preferences that their children expressed. Indeed, Dolan says, many of her older clients reported they have never been asked about RI before. “Frequently, when you do ask [about RI],” she adds, “there’s a high percentage [of HNW clients] who would really like to know how their money can influence that sector.”
A common knock against RI is that the returns may not be as strong or consistent as non-RI portfolios. “That’s not true at all,” Dolan says. “The Jantzi social index, established in 2000, has outperformed the S&P/TSX 60 index in the past 10 years.” She also suggests there are misconceptions about industries such as oil and gas, noting that many Canadian energy companies have “amazing” sustainability practices.
However, Dolan avoids investments in oil companies in developing nations, due to lack of transparency in many of those regions. She generally restricts investments to blue-chip companies based in developed nations, with the regions in her clients’ portfolios divided in thirds among Canada, the U.S. and Europe.
Dolan’s firm also checks on the companies it recommends to clients by doing “engagement” exercises with those companies to assess their records for socially responsible activities, while also using voting proxies to further monitor and influence those firms.
This approach can take more effort, but failing to take account of client’s preferences can cost you money, Dolan cautions. She recounts the case of a client who asked a previous advisor to avoid the pharmaceutical industry due to RI concerns. That advisor failed to do so, resulting in the loss of a $4-million account.
Younger clients are also making their preferences known when it comes to using financial digital tools, although acceptance by older clients is not lagging far behind. Pauline Shum Nolan, a professor of finance at the Schulich School of Business at York University in Toronto, studies the financial behaviour of investors, among other research interests. She recently launched a new, low-cost online investing tool, Wealthscope.ca, that allows investors to track their overall investment returns and performance, as well as experiment with different hypothetical portfolios. It also provides a “scorecard” tool that allows users to assess the diversity and risk tolerance of their investments, as well as the performance yield and an analysis of the management fees they’re paying.
The goal in creating Wealthscope.ca is to provide an objective, overall analysis of a portfolio, she says, adding that she’s somewhat surprised by the age range of the website’s visitors thus far. “A lot of the users are high net-worth,” she notes, “and 70% are aged 45 to 75, with more than $1 million in investible assets.” Before launching the project last spring, Shum Nolan had anticipated users would be mostly in the 30 to 45 age bracket and have less wealth.
Shum Nolan, who notes that the financial services sector is going through a period of major change due to rising fee transparency, says it’s likely that more investors will be using machine-based tools to test and review their ideas about investing. “I hope that advisors will latch on to [the idea of digital portfolio analysis],” she says. “It can help generate evidence-based options for clients.”
Distillio, for his part, says that more digital-based challenges may indeed be coming for advisors who focus on HNW clients. Although certain services, such as tax and estate planning, will be a key strength for advisors for some time, even these services may eventually move into the digital realm. That could make attracting and keeping clients even more difficult in the future.
While emphasizing the importance of the client/advisor relationship, Distillio also notes that technology has enormous appeal for younger clients: “If advisors don’t do a good job of demonstrating their value, robo-advisors may be a choice that people who now are in their 30s will choose down the road when they have more wealth.”