Cash and magnet that attracts customers or clients. Credit: Vitalii Vodolazskyi – stock.adobe.com
Working with high net worth individuals is one of the most reliable ways for financial advisors to elevate their practice. But how exactly can advisors stand out to these clients? New research published this month in the Journal of Financial Planning helps answer that question.
Researchers Matthew Sommer, lead behavioral finance researcher at global asset manager Janus Henderson Investors, and Sonya Lutter, director of financial health and wellness with the Texas Tech University’s School of Financial Planning, explored the investment beliefs and behaviors of 1,000 participants through a survey conducted in 2023.
Within that pool of participants, researchers designated each person as either “affluent” — with investible assets between $250,000 and $999,999 — or “high net worth,” if they had at least $1 million in investible assets.
Comparing the two groups across 25 different variables, Sommer and Lutter found that high net worth individuals showcased distinctly different investment practices and beliefs compared to those in the affluent group.
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High net worth individuals were more likely to own separately managed accounts, the researchers found. Despite wealthier individuals self-reporting greater financial knowledge, they were no less likely to have made missteps in their investments, according to the report.
Wealthier individuals were also more likely to see the behavioral benefits of having a financial advisor, with a greater portion of them reporting that their advisor keeps their “emotions in check” compared to the affluent group.
Based on their findings, the researchers identified five key practices that financial advisors can incorporate into their practice to better serve the high net worth clients they already have or to attract the ones they aspire to work with. Here’s what they found.
Separately managed accounts may be an untapped opportunity for advisors working with high net worth clients, who appear to show greater interest in the accounts than their affluent counterparts. Roughly a quarter of high net worth individuals reported owning SMAs, compared to just under 20% of affluent clients.
“SMAs are generally considered a more tax-efficient investment compared to mutual funds. These products also have lower fees and are quickly becoming the vehicles of choice (in addition to ETFs) for higher income and wealthier investors,” the researchers wrote.
Alternative investments offer similar opportunities. A smaller portion of HNW respondents own alternative investments than those in the affluent group, the researchers found, despite their benefit to investment diversification.
“Alternative investments, such as hedge funds, managed futures, real estate, private equities and commodities provide superior risk-adjusted returns, particularly during periods of market shocks,” the researchers wrote.
It’s easy to think you possess above average investment knowledge with over a million dollars of investable assets, and indeed many high net worth individuals think just that. Yet, across the 1,000 people surveyed, researchers found that high net worth individuals reported making emotion-driven investment mistakes at the same rate as their affluent counterparts.
Overconfident investors are often guilty of three particular behaviors, according to the researchers. Those include the belief that past performance will help predict the future, attributing portfolio performance to their stock-picking skills rather than broadly favorable market conditions and an overreliance on intuition.
Advisors looking to improve their value proposition to HNW clients would benefit from addressing these common beliefs in their communications with clients. Sommer and Lutter recommend two techniques to accomplish that.
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The first technique they suggest advisors use is called “SPIES,” which stands for subjective probability interval estimation. This strategy uses a graphical representation of multiple subjective probabilities, helping individuals think beyond a simple range or single point predictions.
Professors Don Moore and Uriel Haran developed the technique over 10 years ago; to better visualize and understand it, try out a sample of the tool here.
The second approach Sommer and Lutter recommend is called premortem planning, which they said can also help address investor overconfidence.
“Premortem planning starts by posing the question, ‘What is the worst outcome and why would that occur?’ Next, ask, ‘What is the best outcome and why would that occur?’ Presenting both good and bad outcomes reminds investors of suboptimal outcomes not previously considered,” the researchers wrote.
A vast majority of high net worth individuals — some 84% — said they were very or somewhat interested in expanding their financial knowledge, according to the report.
That’s a striking number when compared against the 54% of HNW people who said they’re receiving financial education from their advisor. That gap is an opportunity for advisors looking to attract more high-net-worth clients.
Researchers were surprised to find that HNW individuals rebalanced their accounts no more frequently than affluent respondents, given the fact that rebalancing a 60/40 portfolio has been shown to increase annual returns.
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Financial advisors working with HNW clients would benefit from encouraging more proactive rebalancing of investment accounts, according to the researchers.
“If left unchecked, the portfolio will drift from the targeted asset allocation and may become misaligned with the investor’s original risk and return preferences,” the researchers wrote.
HNW individuals who don’t already work with an advisor are less likely to hire one compared to affluent respondents, survey data shows. But among respondents who have advisors, HNW individuals were more likely to cite “keeping emotions in check” as one of the services their advisors offer them. So, what does that mean in terms of client management?
Advisors looking to attract HNW clients should be highlighting the value they offer beyond strictly financial knowledge. Because HNW clients tend to think they possess a heightened level of financial knowledge, advisors have to offer something more than investment knowledge if they want to underscore their value to HNW individuals.
“Much of the emotion-based conversation can happen with the financial adviser leading the conversation in a therapeutic way without being a therapist with the proper training,” the researchers wrote. “High-net-worth individuals who indicated that the primary reason for not wanting to work with a financial adviser was the confidence in their ability to ‘do it themselves’ may not be fully aware or appreciate the emotional support advisers provide clients.”
