How planners should handle the ‘emerging affluent’ investor

Financial planners well know that every client is different, however, some are more different than others. A new report by Cerulli Associates says that a rapidly growing segment of the market, which it calls the ‘emerging affluent’, requires particular attention from their advisers.

Cerulli, the leading US-based research firm in the funds management industry, has defined emerging affluent investors as those with between $US500,000 and $US2.5 million in investable assets. This group has more than tripled in size in the past 15 years and now makes up about 8 per cent of all US households. While the Cerulli report focuses only on the US market, its recommendations for advisers provide some insights for their Australian counterparts. For instance, Cerulli says that while commodotised service, which is increasingly being provided by advisers as they strive for greater efficiencies in their practices, may be enough for many investors in the mass-market wealth tier, it will fall short of serving the needs of emerging affluent investors. The report suggests that the best way for advisers to approach this market is through a top-down segmentation, where clients are put into one or more of various categories, such as: business owners; established retirees; real estate wealthy; spenders; up-and-coming professionals; inheritors; and the suddenly affluent. “In general, lower-net-worth individuals prefer a more anonymous service model,” the report says. “On the other end of the wealth spectrum, high-net-worth individuals are more human orientated. These individuals have a large amount of assets and potentially complex needs, which are easier to address via human contact – though more and more they do want information available to them via the internet. “Because the emerging affluent fall somewhere in between these two groups in the wealth spectrum, it is not surprising that they also gravitate toward a service model that is a meshing of these two different techniques as well.” A major difference between emerging affluent clients and other wealth tiers is that they have experienced “greater fluctuation in adviser tenure” – that is, they are less loyal as clients. The merging affluent tend to be younger than the very wealthy clients and therefore more assertive. Cerulli says there are three major issues which are having a relatively large effect on those advisers who service the emerging affluent investor. They are: the proliferation of managed accounts; rollover opportunities; and the retirement income opportunity. Dealer groups, which Cerulli calls ‘home offices’ in the US, have an important role to play in servicing the emerging affluent. “Emerging affluent advisers will benefit in particular from managed account platforms (IMAs) and retirement income modules provided directly by their home office or indirectly by third-party vendors,” the report says. “Different channels have different strengths and weaknesses vis-à-vis the needs of the emerging affluent due to the way each channel has evolved over time. “Some channel strengths include: propensity of advisers to offer fee-based planning; resources devoted to retirement, retirement income and wealth transfer; ability to offer a variety of services to business owners; ability to assist heavily leverage clients; and strength in alternative products.”