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| "WEALTH MANAGEMENT - DELIVERING ON THE PROMISE" - Dec. 1, 2005 |
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"WEALTH MANAGEMENT - DELIVERING ON THE PROMISE"
Peter R. Wheeler
CLU, ChFC, CFP, CIMIC
Family Office Network, LLC
Wheeler/Frost Associates, Inc.
December 2005
(c) Copyright 2005, Peter R. Wheeler,
All Rights Reserved
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FOREWORD
We are delighted to bring readers the following highly informative guest article on the shifting sands of wealth management. This article is another installment -- many more to come -- in our program to share with readers the vast experience and knowledge possessed by many of our clients and friends.
The current offering is authored by client, Pete Wheeler, managing director of Family Office Network, LLC, of San Diego California. The biographical sketch found at the end of the article bears ample witness to Pete's extensive vocational experience and accomplishments.
NOTES: (1) These articles appear with the understanding that readers who might want additional information from the authors are encouraged to request it. See the "Contact Information" section at the end of the article.
(2) I am very appreciative to Ms. Nancy Stevenson, associate contributions editor, for her extensive help in coordinating, editing and assembling this article.
(3) Would you like to be advised directly of future GRA guest material? There are many good items on the schedule, and we would be happy to do so. Just send your name and e-mail address to: Nancy Stevenson at NanStevenson@aol.com, or to Doug Gillespie at gsrdr@aol.com, or to Doug Gillespie at the GRA website's "Contact Us" link. -- Doug Gillespie
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INTRODUCTION
"Wealth Management" is not just a title, it's a process. It means knowing more about your clients and taking on new responsibilities. It means finding an efficient way to work with other advisors, to manage the process and provide clients with regular feedback.
Without the right technology, this is a daunting task. Studies have shown that advisors underutilize technology. However, with proper use, technology frees advisors to have more face time with their clients. Advisors who spend 60% or more of their time with their clients earn six times more than advisors who spend 30% or less of their time with clients.
Advisors are being asked to do more for their clients - to be the client's wealth manager, wealth coach, personal CFO, etc. Without the right tools, this can be a challenging and non-profitable endeavor. In this article, we will review the evolution and reasons for wealth management and how advisors can deliver on the commitment to provide comprehensive services to their clients. -- PW
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ONWARD
Things were simpler when I entered the financial services industry over forty years ago. Then, bankers took in deposits and made loans, stock brokers sold stocks and bonds, and insurance agents sold insurance. Today, mutual funds and annuities are available at your local bank and brokerage firm representatives are called everything except stock brokers. There is increased competition for the client's pocketbook from all sides. As a result, financial advisors are seeking to find profitable markets and distinguish themselves.
In the 1980s, Financial Planning was the service model of choice as advisors endeavored to become Certified Financial Planners. In the 1990s, it was Investment Management as a booming market and the challenge of delivering financial planning effectively and profitably redirected the efforts of many financial advisors. Now, "Wealth Management" is the service model of choice.
For many, this focus on wealth management may seem new, but the trend has been in place for several years. In September 1999, Mark Hurley, Undiscovered Managers, published a white paper concluding that over the next 7 to 10 years, the financial advisory business would consolidate into a handful of major firms, and small firms would find it increasingly difficult to compete and would ultimately perish. The second paper, September 2000, softened the view a bit, adding that certain niche players would also survive. Other works also pointed to the need to change and added that through strategic alliances and the Internet, independent advisors would be able to survive and prosper.
In late 2001, Schwab published an excellent work, "Strategies for Building a Successful Wealth Management Firm." The paper focused on the increasing number of wealthy and how advisors needed to change to meet their requirements. Quoting from the report,
"The message is clear: This new generation of affluent Americans is seeking advisors who can provide financial solutions that take their entire scenarios into account. In short, they want comprehensive wealth management."
To do this, Schwab concluded, advisors would either incur the expense of building an "in-house" solution, or they would find new ways to partner, particularly through the Internet.
Industry leaders had identified the trend of the decade, but the dotcom bust, 9/11, and Enron would distract advisors for the next several years. Only recently have many advisors taken note of the changing world around them. Why?
A tremendous growth in the wealthy has become a recognized fact. In 1992, there were an estimated 2.82 million households with over a $1 million net worth. By 2000, that number had grown to 5.35 million (a compound growth rate of 12.6%). During that same time, households with over $10 million increased at a rate of 13.2% to 326,500. While growth has slowed with the market downturn, the number of millionaires continues to grow. These new millionaires demand more from their advisors, while advisors look to offset increased costs and declining fees.
The financial service industry, broadly defined, includes accountants, attorneys, bankers, financial planners, insurance agents, investment managers, stock brokers, and many others. All, at some point, assist clients in wealth building and preservation, investment decisions and implementation, and asset protection. We will focus on the investment professionals. They can be divided into three groups:
· Investment Generalists - including stock brokers, investment managers, and financial planners.
· Product Specialists - such as bond brokers, annuity salesmen, and insurance agents.
· Wealth Managers - defined as providing a comprehensive, holistic approach to the client's total financial situation, presenting and coordinating an integrated solution.
Many advisors will continue in a generalist or specialist role, but there is a growing trend towards adopting the wealth management model. Part of the reason is economics. In a recent report, 85% of advisors identifying themselves as "investment advisors" made less than $150,000 per year, while 80% of those identifying themselves as "wealth managers" made more than $150,000. CEG Worldwide has found that advisors who adopt the wealth management model in their practices experience an average 35% increase in income.
Certainly, advisors want to be profitable, but they also want to be relevant. Clearly, the demands of the affluent are changing. Studies have found that today's affluent want more than a list of investment choices or even a managed account. In fact, the affluent put service above investment performance. A 2002 study of affluent investors by CEG Worldwide for Merrill Lynch found "they are looking for advisors who will help them make smart decisions about their money and not just facilitate the placement of investments."
In 2002, I published a white paper entitled, "An Industry in Transition, the Financial Services Industry, Adoption of the Family Office Model". I concluded that the new level of service expected by the affluent and the way in which advisors must respond to deliver on the promise was the family office model.
In my 40 plus years, we have always spoken of the client's team of advisors and the need to be the "quarterback." The old model had the client running from advisor to advisor, getting pieces of advice in isolation and trying to pull it together. If there was a team, only the client knew of it. The affluent expect much more. They need someone to assist them with the complexities of investments, tax, insurance, wealth preservation and transfer, etc. They need a "wealth manager."
Some have suggested advisors become the client's "personal chief financial officer," others say the "wealth coach." Both present interesting analogies. As CFO, the advisor is responsible to the client, COO, for developing financial strategies, monitoring progress, and supervising the performance of others.
"Coach" is a much better analogy than the old promise of "quarterback." The quarterback is just another player and takes some of the hardest hits on the field. The coach, on the other hand, is standing on the sidelines directing the play of all the players. As plays work or don't, he adjusts the play call and substitutes players. Ultimately, he is responsible to the owner to get the job done. Whatever analogy you prefer, the bottom line is that the advisor must be able to provide a much higher level of service and coordinate client service.
According to CEG Worldwide, building a world class business for high net worth clients is all about building an extraordinary experience for the client. Advisors must:
· Select the best technology and incorporate it seamlessly into their operations,
· Create and document a world class set of systems,
· Design and implement WOW service.
Whether or not the wealth management model is right for you, it is clear that all participants in financial services delivery will have to change how they do business. As a wealth manager, you will have to find ways to deliver on the comprehensive promise. As a specialist, you may find your access to the client is through his wealth manager (much like the gatekeeper model in medicine). As CEG Worldwide puts it,
"You need to change and evolve with the market if you are going to serve your clients well. Even if you do not care about growing your firm, increased competition and the pressure of lower fees and commissions will erode your business if you just continue to do the same thing you have done year after year."
Regardless of who is the coach, all the players are going to have to find new and more efficient ways of working together.
Every speaker and writer on the topic will tell you this is what you must do, but no one tells you how to do it. The question still remains: how do you deliver on the promise? In 1998, when we started to transition our practice from investment management to wealth management, my immediate concern was how we could fulfill our promise. I traveled the country attending all the tech conferences, but nothing existed that would bring the various advisors together in a "virtual family office." So... I created it!
The founding principle of FamilyOfficeNetwork was to create an efficient, secure, and cooperative environment in which unique client teams could work together. While some were suggesting the way to handle the complexity of comprehensive advice was to form strategic alliances with one or two other professionals, my experience was telling me it doesn't work that way in real life for most of us. Clients come with many of their other advisors already in place, and one must have a way of working with many different advisors (unique teams for each client).
With my focus on advisor communication and collaboration, we created an extremely efficient client communication tool. Futurist David Pearce Snyder says that within five years, "For certain, people are going to get their advice online." With FamilyOfficeNetwork, we have been able to achieve that today.
We estimate that the delivery of performance reporting and other financial planning documents through the secure website saves us $1,000 to $3,000 per month. Recently, a licensee told us that her Staples representative called to see why they weren't ordering as much paper and toner as they used to. The cost savings and efficiencies are substantial. In fact, my operations manager recently asked me what he should be do with the extra ten hours per week he was now saving. What would you do with a savings of $1,000 each month?
By posting quarterly reports, investment policy statements, tax returns, wills and trust, birth certificates, insurance information, etc. on a secure website that can be accessed by the client and her other advisors, we find that we can effectively manage and deliver on the wealth management promise. In fact, one licensee told us that it wasn't the cost savings, but the reduction in client anxiety that she found most important. She said the availability of documents for the clients had substantially reduced client issues and improved relationships.
In light of the hurricanes, we now recommend that our clients copy their most important documents to FamilyOfficeNetwork. Access to important papers like birth certificates, divorce decrees, and property insurance could be the most important benefit of all to those displaced.
While still serving as the client's investment manager, we see many benefits to being their wealth manager. We are gaining a much better understanding of our clients' needs and wants, and helping them to fulfill lifetime dreams. We would not be able to meet our promise if it were not for the efficiencies of our virtual family office.
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Peter R. Wheeler - Biographical Sketch
Peter R. Wheeler is founder and managing director of Family Office Network, LLC. He also serves as president and CEO of Wheeler/Frost Associates, Inc., a registered wealth management/investment advisory firm in San Diego, California.
Pete was awarded a BS in finance from the University of Arizona. In 1968, he was commissioned an Ensign in the United States Navy, serving three years on active duty, including a tour in Vietnam. By the completion of his reserve commitment, he attained the rank of Commander.
After leaving active duty with the Navy in 1971, Pete returned to the insurance business. In 1982, he founded, initially as a financial-planning firm, what is now Wheeler/Frost Associates, Inc. In 1989, the financial-planning operation was converted into its current structure -- a fee-for-service wealth manager/investment advisor. Pete is responsible for the firm's overall management and operations and serves on the W/F investment committee.
His roughly 40 years of experience have earned Pete recognition for his advanced knowledge of insurance, estate, business, and pension planning. He holds the professional designations of: Chartered Life Underwriter (CLU), Chartered Financial Consultant (ChFC), Certified Financial Planner (CFP) and Certified Investment Management Consultant (CIMC). He also is one of only a small number of people in California who are licensed life analysts, and he is included in Worth magazine's most recent listing of the nation's top 250 advisors.
Pete is the author of An Executive's Guide: Incentive and Nonqualified Stock Options. He also has co-authored a book on planning strategies for privately owned businesses. In addition, he has been featured on numerous television and radio programs and in a variety of financial journals.
Pete has served on a variety of boards including the Planned Giving Committee of the American Heart Association, the Endowment Development Committee for the Boy Scouts of America, the Practice Development Advisory Committee of Scripps Memorial Hospitals, and the Planned Giving Committee for Sharp Hospitals’ Foundation. During his tenure in the insurance business, he served as president of the San Diego Association of Life Underwriters.
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Contact Information
If you would like additional information on the contents of this article, you may contact Pete Wheeler through Ms. Allyson Phillips at allyson@wheelerfrost.com, or via the "Contact Us" link on the Wheeler/Frost website.
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