The Needs of the Mass Affluent Are Not Simple

Clients with as little as $500,000 may have complex problems advisors should address.

By David I. Leo

A June report from the Boston Consulting Group referred to an underserved group of clients, a “simple needs segment,” with personal wealth of less than $1 million to about $3 million.

The phrase “simple-needs segment” is highly inappropriate, and the range of wealth is too broad. There are a large group of investors with perhaps $500,000 to $3 million, and even up to $5 million, that has what I prefer to call “core wealth management needs.” They may include many or most of the following:

Cash Flow & Financial Positions

• Cash Reserves
• Income / Expenses Management
• Net Worth Analysis
• Debt Management
• Buying Real Estate
• Lines of Credit / Mortgage

Protection Planning

• Life Insurance
• Disability Insurance
• Long–term Care Options
• Property & Casualty
• Beneficiary Designations
• Special Needs Situations

Investment Planning

• Current Portfolio Analysis
• Investment Management
• Risk Tolerance
• Asset Allocation
• Diversification Strategies
• Education Planning
• Options / Restricted Stock
• Tax Management

Tax Planning

• Tax Management Planning
• Effects of Liquidation
• Filing Status
• Business Ownership
• Same–sex Couples

 Retirement Planning

• Savings Strategies
• 401(k)s Review
• IRA Review
• Roth Conversion
• Social Security Maximization Analysis
• Medicare / Medigap
• Withdrawal Strategies / Income Streams Planning

Estate Planning

• Transfer Assets
• Asset Ownership / Titling
• Trusts
• Wills
• Advanced Directives
• Powers of Attorney
• Succession Planning
• Minor Children
• Special Needs Dependents
• Longevity Planning
• Gifting
• Prenuptial agreement

I believe advisors serving clients up to $5 million should consider the following issues when building their businesses.

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Content Personalization Needs Vast Improvement

It’s not a stretch to use data and artificial intelligence in some processes to ensure the client and advisor have considered all core elements of potential needs. Clients above $3 million in investible assets may require more of these elements and in greater depth.

Digital tools will obviously grow in their use in helping FAs design portfolios. But the current use of digital tools to provide curated content needs vast improvement. For example, sending a group of five to 10 general-interest articles to retail clients is mostly a waste. The articles don’t address clients’ individual needs or interests because in-depth client-interest data is not used in the software to select the articles. The result is that clients don’t find them very useful and may not even read them.

A few companies, such as Riskalyze or FP Alpha, do offer useful tools for client targeting. There are others, and the list will grow.

Selecting Individual Securities and Funds Adds No Real Value

Financial advisors know their clients and are best at effectively developing client asset allocation models. That’s where personalization matters. For the vast majority of advisors, selecting individual funds or securities adds no real value over time. Personalizing portfolios is a red herring. Advisors have better things to do with their time in delivering value to clients as well as growing their businesses.

In his book “Thinking, Fast and Slow,” Daniel Kahneman outlines a huge distortion between our actual investment experiences and our remembrances of our past performance. Our memory is fuzzy at best. It favors selected recall of positive outcomes while it more likely suppresses losing actions. To combat this bias, performance records should be carefully maintained and reviewed. Remember the erroneous reporting that the infamous Beardstown Ladies documented in their popular book a few decades ago.

Kahneman emphasizes the persistence of a regression-to-the-mean law. We incorrectly do not acknowledge superior performance as being an unusual outlier event. Bill Miller’s recent mutual fund performance is a superb illustration of the regression-to-the-mean phenomenon. His performance was lackluster after 15 seasons of market-beating success.

Given the spotty predictive record of market gurus, the inconsistency record of mutual fund managers, and the dismal record of professional institutional equity advisors, Kahneman concludes that experts in the financial advisory field are no more expert than the individual investor. Since it is impossible to see the future, he advocates a passive index investment approach when constructing a portfolio.

Kahneman said, for example, that “suggesting that investment management is a unique skill or offers differentiation makes relatively little sense.” Advice in his 2011 book still holds true today:

The evidence for more than 50 years of research is conclusive:
• For a large majority of fund managers, the selection of stocks is more like rolling dice than like playing poker.

• Typically, at least two out of every three mutual funds do not achieve their own benchmark in any given year.

Marketwatch published an article in 2017 that is still relevant and included four major findings. One, over the previous 15 years, 92.2% of large-cap funds lagged a simple S&P 500 index fund. Two, mid-cap funds lagged their benchmarks by 95.4%. Three, small-cap funds lagged their benchmarks by 93.2%. Four, the odds you’ll do better than an index fund are close to 1 out of 20 when picking an actively managed domestic equity mutual fund.

Tomorrow’s Three Groups of Advisors

When it comes to financial advisors themselves, I see three segments.

• New and/or young FAs. They have two years of training and are studying for and earning a CFP as a job requirement. These FAs would ideally have degrees in finance, accounting, sales or marketing. They would possibly be MBAs. For four to five years, they service clients in the $250,000 to $500,000 range. The clients would be young with good potential to grow over time or older investors, perhaps 55 plus, who have modest growth potential or in the withdrawal stage but absolutely need planning services and the “core wealth management needs” noted above.

They would service up to 300 or so individual clients using enhanced digital solutions for financial planning and firm-based investment management solutions. Every client would have a minimum of four to six contacts per year averaging perhaps four to six hours per client per year.

These advisors would seek introductions from clients on a relatively passive basis. They could use basic business development approaches, such as education-focused events. Income would be salary plus bonus with upside limits and be performance based. Retention, growth and client-satisfaction metrics would be analyzed by an outside agency. Performance will be ranked on a five-point scale: 3 = meets base requirements, 4 = exceeds base requirements, 5 = outstanding. Keeping the job requires a 4 or 5 performance. Promotion to another level requires a 5 performance.

• Longtime FAs or successful younger FAs with a business development mentality. Income would be salary plus bonus with upside limits and be performance based. Retention, growth and client satisfaction metrics performed by an outside agency. Performance would be ranked on a five-point scale: 3 = meets base requirements, 4 = exceeds base requirements, 5 = outstanding. Keeping the job requires a 3, 4 or 5 performance. Performance determines grid and upside limit.

• Advisors without a business development mentality but are good mentors. They could be successful, younger advisors or longtime ones who prefer to get out of the rat race and may be transitioning their business.

Income would be salary plus bonus with upside limits and be performance based, including retention, growth, and client and mentee satisfaction metrics performed by an outside agency. Performance would be ranked on a five-point scale: 3 = meets base requirements, 4 = exceeds base requirements, 5 = outstanding. Keeping the job requires a 3, 4 or 5 performance. Performance determines grid and upside limit.

Each mentor FA would have perhaps 50 to 75 clients and 10 mentee FAs with whom she/he spends at least 50 hours a year one on one time. They can also hold group meetings that are firm funded.

Advisory Firms Will Increase Emphasis On Cost Analysis

The industry always speaks of the value of the variety of services advisory teams offer to clients. Hypothetical values are projected in multiple articles and studies such as those from Vanguard, Morningstar, Russell Investments, BNY Mellon Wealth, and others. Though it may exist, I haven’t seen a definitive study on how investor clients value advisory relationships other than in general terms, e.g., satisfied, very satisfied. How much is a financial plan worth in dollars and cents? How much are client contacts worth in dollars and cents? How much is a portfolio review worth in dollars and cents? How much is portfolio management worth in dollars and cents? There may be 40 or 50 or more components of a comprehensive client service model.

There was even an article entitled “Client Value Of Advisor Relationship Is 41% Emotional, Vanguard Says.” How ridiculous is it to suggest the value can be placed on emotion and to the tune of a specific, even non-rounded number?

One thing we may be able to determine is how long it takes to deliver each of the elements of a client-service model and who invests that time. Based on who, their hourly rate, and the length of time it takes to deliver the service, we can estimate the cost of any service. One method is called “Activity Based Costing” that has been in use since the late 1980s.

A best practice client-service model could estimate the costs of delivering services to different client tiers and compare those costs to revenue generated by each tier, and in some cases, by client. This process would help determine profitability of different client groups.

Advisors can then more accurately determine what services to deliver to whom. Clients can determine if those services bring that value to them. In particular, clients might conclude:
• “You give us peace of mind that we won’t run out of money in retirement.”
• “You helped us set financial goals and put a plan in place to reach them.”
• “You helped me ensure I will leave a legacy behind for my family.”

These are the emotional points that can’t be calculated except by individual clients and are the final determinants of with whom they decide to do business. A well-run, profitable business is based on more than total revenue – total costs = profits.

RIAs Need Captive Accounting and Attorney Divisions

Almost all large RIAs and independent firms will have captive CPAs and tax and estate attorneys to provide competitively priced fee-based services to its advisory clients.
The Boston Consulting Group’s Global Wealth 2021 Report says, investors, especially those in the decumulation phase, have “lots of questions, from tax and estate planning to broader life planning. Often, they have few reliable outlets to consult in trying to gather answers. And those that are available often require them to chase down specialists in particular domains, such as accountancy and estate lawyers — a time-consuming and often frustrating exercise.” Most of these remarks apply to all investor clients whether in the accumulation or decumulation phase.

However, the report states, there is more “complexity of the decumulation phase. Not only do retirees’ financial questions tend to be tangled — with asset drawdowns raising tax implications, for example — but their nonfinancial needs can be challenging as well, whether they involve finding a sense of community, pursuing a part-time job, or something else. Such needs vary by person and by stage of retirement.”

Having “Advisor-Led, Digitally Enabled Decumulation Models” with “Continuous Access to Retirement Topic Experts” via a “Shared teams of experts can help advisors cost-effectively deliver advice on specialized subject matter.”

These services would be of value in all firms, though larger firms might well have in-house resources while smaller firms may team with outside firms.

Alternative Investments For More Clients

Some form of democratized access to investments like private equity, hedge funds and venture capital that have long been the exclusive preserve of institutional clients and very wealthy individuals will become available to the general marketplace with appropriate limits.

Employee Benefits Will Improve

Given the ineptitude of governments, individual best places to work firms will continue to enhance their personal and family friendly policies. This will include paid parental leave, flexible hours and locations, profit-sharing and employee assistance programs, paid volunteer time and more.

Firms Will Use Less Proprietary Software

My view is that IT development inside of brokerage firms should be limited to needs analysis, implementation support, systems integration where needed, emergency maintenance if needed, level 1 training, and operations. New applications development should be left to software providers and consultants with unique and broad expertise. Proprietary software development is high risk in terms of costs, employee turnover, maintenance, and an inability to keep current with the pace of change.

I am not sure it’s a projection, disappointment over a lost way of being, or a hope for a return to days gone by. I spent 30 years at IBM, and believe the beliefs and principles that chairman Thomas J. Watson penned in the 1960s should still drive business now.

I don’t see enough of them in today’s businesses, but I believe embracing such a philosophy and culture can make a positive societal impact. The new Certified B Corporations may offer a sign that some organizations are working in that direction. I am sure there are others, including some of the leading RIAs, that seem to be operating with new principles and values. I believe it’s not only about profitability but long-term survival.

David Leo is the founder of Street Smart Research Group LLC. He is an author, speaker, coach, consultant and trainer to financial professionals. If you would like more information about his services, contact him at or visit


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