GAMA International Journal Jul-Aug 2013 - 9

increased competition for the Affluent M arket

excerpt From Firm 2020

Converging Trends
The conclusion of the 2012 World Wealth Report observed, “A
range of firm-specific and industry-wide trends are converging to
undermine the profitability of wealth management operations
today.” Using 2004 household wealth data, Chip Roame,
founder of Tiburon Strategic Advisors, concluded, “There are far
too many advisors for today’s number of affluent households.
“If one includes brokers, independent reps, life insurance
agents, private bankers, et al, there are 400,000 advisors and
approximately 40 million households having $100,000 or more
of investable assets, leaving a maximum of 100 clients per
advisor.”
Roame further estimates that only 70 of those 100 households
actually engage financial advisors, and only 12 of the 70 have
assets in excess of $1 million.
In addition to the above supply-and-demand problem, the
market has fewer wealthy individuals under 50 years old. Thus,
the number of new entrants into the “very wealthy” pool
(investable assets of $2 million or more) will decline through
2020.
At the same time, more wealth is being concentrated at the
very top of the very rich spectrum, and competition for these most
affluent Americans will become increasingly fierce.

Competition
Fewer firms in the affluent market will survive, but as Roame
points out, “surviving is not prospering.” To succeed, these firms
will need to focus on “serving fewer, more wealthy clients with
more comprehensive services.” But they will face steep
competition for the very high end of the market from a growing
number of institutional players. Four banks have entered this
market since 2011: Wells Fargo, with its Abbot Downing brand
(2012); PNC Bank’s Hawthorn Unit (2012); U.S. Bank’s Ascent
Private Capital Management (2011); and Fifth Third Bank’s
Mirador Family Wealth Advisors (2011).

Client Value
As wealthy Baby Boomers enter retirement and live longer, their
concerns will transition from wealth accumulation to wealth
decumulation and risk management, making them less likely
prospects for traditional wealth management products and
services.

In side GA M A f o u ndation for edu c ation an d r ese arch

The traditional insurance agency and financial services firm will
most likely continue to practice in the affluent market. However,
there will be fewer firms serving a much more targeted and, on
average, wealthier clientele.

To retain the very wealthy clients, firms will need to greatly
expand their product and service offerings. And with higher
costs to service these clients, firms will need to instate feefor-service pricing to offset the shrinking profit margins of
commission-based compensation.
Decumulation will be essential to serving even the ultraaffluent households, and the range of services required will
grow even as margins are squeezed. The 2012 World Wealth
Report noted that the cost-to-income ratio for assets under
management for high-end clients had been climbing before the
financial crisis. As these clients live longer and become even
more demanding, the cost-to-income ratios will continue to rise,
making commissions on assets even more difficult to get. Many
of the independent registered investment advisors (RIAs) serving
these markets had already shifted from commission to fee-based
compensation by 2010.
In addition to intergenerational wealth planning and risk
management, ultra-wealthy clients will need to be protected from
the variety of tax changes that will be put forward to address the
growing deficit and for which they, the infamous “One Percent,”
will be targeted. To service these clients, firms will need deep
benches, with a broad array of talented professionals.

Impact on the Firm in 2020
An axiom of economic development is that businesses
consolidate in smaller markets and differentiate in expanding
ones. Facing a more affluent but shrinking number of high-end
clients, expect the following changes by 2020:
Insurance-based firms in the affluent market will
certainly become fewer in number and markedly larger.
■ Banks, in particular, with their broad range of
resources and abilities to serve broad geographic
areas, will have a natural advantage in this market,
which explains why so many have started divisions to
serve it.
■ A growing number of financial advisors will be
salaried employees working for large financial
institutions.
■ Independent RIAs and small firms will be hard-pressed
to compete for affluent retired Boomers, who have
been labeled as “validators” and not “delegators,” like
previous generations. They will survive as niche
players in narrowly defined markets.
■

Order Today
To understand the markets, clients, and change drivers that will
define your business in 2020, order your copy of Firm 2020
today at 800-345-2687 or gamaweb.com. To learn more about
Firm 2020, visit gamafoundation.org/research/firm-2020 or
contact Kathryn Kellam, CEO, at kathryn@gamafoundation.org.

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GAMA International Journal Jul-Aug 2013

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