In this Section:

The Psychology of the Affluent Buyer

Agents and advisors are always looking for insight into selling big cases, but it’s knowing the big case client that really earns the business.

Interest in getting into the big case market is ramping up. At least that is how insurance distributor Bill Levinson sees it. His firm, Levinson & Associates of Coral Springs, Fla., has been getting calls from agents who want help in breaking into the high-net-worth and wealth markets. “They want to know which products to use and how to get started,” he said.

Many of the callers had been selling to small businesses successfully, but they were looking to grow business with new opportunities, and they figured the wealth market would be a good place to turn.

According to upscale market experts, these agents are spot on. The wealthy market teems with opportunity. For instance, the wealthy household pie has grown bigger in recent years. Data from Chicago researcher Spectrem Group indicates that the market numbered 24 million households in 2012, up by more than 26 percent from the 10-year low of nearly 19 million in 2008.

But while the growth is significant and the potential dollars may dazzle, breaking into the market is not a shoo-in. Success here is not about selling to the money, experts say. It’s about acquiring a deep understanding of the market, building relationships and earning trust.

Who Is “Rich?”

To get started, it helps to identify who is rich. Time was, maybe in the 1950s and 1960s, when the term “millionaire” was synonymous with being incredibly rich. But no more.  A survey by UBS Wealth Management Americas found that only 28 percent of investors with $1 million to $5 million in investable assets considered themselves rich.

Even so, people with half or even a quarter of that sum often show up in surveys on the wealthy. That’s because these households do have assets squirreled away and they may be on a wealth-building journey. In addition, depending on circumstance and geographic location, some may already be comparatively free from financial worry and so may be considered wealthy in the comparative sense.

The contradictory perspectives can create a mishmash for producers. At national conferences, for example, some talk about wealthy customers as having millions while others put the number at a half-million or so. Researchers and demographers have been trying to sort things out by dividing the wealth market into various segments.

For instance, Spectrem Group divides the wealthy into three main net-worth segments: mass affluent ($100,000 to $1 million), millionaire ($1 million to $5 million) and ultra-high-net-worth ($5 million to $25 million). These figures are “NIPR,” or “not including primary residence.”

“We’ve added a new segment, too,” Spectrem president George Walper Jr. said. “We call it $25M & Plus.”

Spectrem also subdivides each market category into more discrete segments. For instance, almost half of millionaires (46 percent) have between $1 million and $1.9 million in net worth. The remainder have $2 million to $2.9 million (27 percent) and $3 million to $4.9 million (28 percent).

Some producers use segments like these to help identify which wealthy customers they might be able to serve. Jeff Wilson, cofounder of Netstreet Brokerage, Nashville, Tenn., said that, in his view, the high-net-worth market ($5 million in investable assets) is the only place where life insurance producers can make money in individual and business sales today.

What about the mass affluent? It’s hard for producers to make $75,000 to $100,000 a year by selling life insurance to this market unless the agent has “significant infrastructure,” he said. “But then, infrastructure involves significant cost.”

What about the ultra-rich market? “There are only 110,000 families in that market,” Wilson said, referring to those with $25 million or more in net worth. “Very few insurance agents will spend their time and resources chasing that.”

More Approaches

Relying on market segmentation has its limits, though. Producers are noticing that experts identify different segments in different ways, use different terms and create different suggestions for wealth management approaches, products and practices.

As a result, producers find they must unravel multiple terms and definitions before deciding which part of the market, if any, to serve.

Here is a fairly simple case in point. A 2012 Northern Trust survey defines the mass affluent category as starting at $250,000 in investable assets (not $100,000 in net worth, as in Spectrem’s analysis) and going up to $1 million (as does Spectrem). It calls the $1 million to $4.99 million segment the affluent (not millionaire). But its high-net-worth category is the same as Spectrem’s, at $5 million or more.

At LIMRA, researchers analyzed Federal Reserve Board data on older Americans, retired and not retired. Out of that study came four segments that identify the more well-off households based on financial assets:  mass affluent ($250,000 to $499,000), affluent ($500,000 to $999,000), high net worth ($1 million to $3.5 million), and mega-millionaire ($3.5 million and up).

Key Terms

It helps to bone up on some key terms for measuring wealth, such as the following:

Investable assets. The financial services industry, including dual-licensed insurance practitioners, often views the wealthy in terms of “investable assets.” This refers to the money or assets the client has available to invest. It’s liquid. Most firms exclude the equity value of the household residence because they consider it an illiquid asset. For the same reason, some also exclude the value of retirement accounts, particularly those associated with guarantees, as well as collectables and other such assets.

Then again, using investable assets as a measure of wealth can be iffy. Clients who are business owners typically plow almost everything they have into their business, so they may have comparatively little to show by way of investable assets until they sell the firm, explained Norm Trainor, president and chief executive officer of Covenant Group, Toronto. For this market, focus on net worth, he said.

Net worth. This refers to assets minus liabilities. In reference to individuals, this often includes the value of the family residence since it is an asset and it may entail a liability (an outstanding mortgage, for example). But some studies and financial experts do exclude the home value when talking net worth, so it pays to check.

Annual income. Some experts reference annual income, not investable assets. For instance, Mark Rank, a professor at Washington University in St. Louis, defines a category he calls the “new rich.” This refers to people with annual household incomes in the $100,000 to $150,000 range and who have reached $250,000 or more in income at some point during the working years.

There are off-shoots on this, too. For instance, Fidelity Investments has blended assets and income to create a wealth category it calls the “millionaires of tomorrow.” These are people with the potential for becoming millionaires. According to Fidelity, this market segment has average household assets of $800,000 and an average annual income of $150,000. Incidentally, Fidelity reports that the average age of these “millionaires of tomorrow” is 51.

Financial assets.  These are intangible assets (as opposed to tangible assets such as a house or a piece of real estate). They have value due to contractual relationships. They are considered to be liquid or at least reasonably liquid. Examples include stocks, bonds, bank deposits, certificates of deposit, etc.  The term is less widely used than, say, investable assets, but because the term focuses on the contractual value of the asset, it is sometimes used in lieu of investable assets.

Knowing the nuances between terms and measurements will help advisors assess their customer base, a referral or a lead list for potential opportunities, according to wealth market experts. It will also help in evaluating suggestions from providers and marketers on which products, services and approaches to pair up with which market segment.

Look Beyond the Assets

Don’t just focus on assets, income or net worth, Spectrem’s Walper said. It’s also important, if not more important, to study key demographics within the segments, such as age, employment and education.

“I publish information about net worth segments because advisors want to see that,” he said. But understanding the characteristics of the segments – such as age, education and dependency upon advisors – will help the field get a better sense of market possibilities based on needs and values, he said.

For instance, in a 2013 survey, Spectrem found that:

» Wealthy people are educated. All three wealth categories had a very high proportion of college graduates, for example. Among the ultra-high-net-worth, 97 percent graduated from college and 39 percent held advanced college degrees. Among millionaires, 88 percent had graduated from college and, among the mass affluent, 80 percent had done the same. Presumably, then, the wealthy value education.

» The wealthy use advisors. All three segments do use investment advisors but in different ways and to different degrees. In the ultra-high-net-worth segment, 18 percent rely on an advisor to make most or all of their investment decisions, 32 percent consult regularly with an investment advisor and 27 percent use an investment advisor for specialized needs even though they make most of their own decisions. By comparison, millionaires come in at 13 percent, 29 percent and 32 percent, respectively, and the mass affluent at 11 percent, 18 percent and 34 percent. So, the value placed on advisory services appears to increase with wealth.

» The wealthiest people are owners. The top occupation among ultra-high-net-worth investors is entrepreneur/business owner (14 percent) followed by senior corporate executive (12 percent). By comparison, the top occupation among millionaires is manager (17 percent) followed by educator (12 percent).

Agents and advisors can use information like that, in combination with other information, to develop a way to approach and serve their target market effectively, Walper contended.

For instance, the survey found that senior corporate executives use advisors the most. This suggests that this particular occupational group should be easier to reach than previously thought, Walper said.

“These executives are used to using advisors at work so they tend to do the same when they purchase individual products for themselves,” he explained.

Don’t Sell by the ‘Slots’

Success in the wealthy markets is not a matter of slotting clients by net worth and then selling them the products that someone says fit the category, said Matthew A. Treskovich, chief financial officer and wealth advisor at Creekmore Insurance Group, Oviedo, Fla.

The slot approach takes control from the hands of the advisor and puts it into the world of competition. “The focus turns into finding the next latest and greatest life insurance product for the wealthy person, the annuity with the hottest rate, the term policy with the most liberal underwriting or the investment that delivers the best year-end results,” Treskovich warned.

The danger to the advisor? The wealthy client might start looking around on the Internet, consulting other advisors or demanding spreadsheets and other products, he said. The advisor could end up being replaced in the process.

Some advisors rely on traditional approaches, he added. For instance, they will offer to address estate tax problems. “But that’s not catching fire in today’s world,” he said. “The cheese is moving, and no one knows where it’s going to end up.” He points to the decline in estate tax filings as an example. They plunged 87 percent from 2003 to 2012.

What will work, then? Innovate around the wealthy client’s problems, needs and wants, he said.

To illustrate, Treskovich cited some surprising findings from a U.S. Trust survey of the wealthy. Among those having more than $3.5 million in net worth, 84 percent attributed their success to focus and hard work. In addition, 50 percent attributed it to intellect, and 45 percent to personal values. As for how they want to use their personal wealth, the main answers were to build financial security and create financial freedom.

In view of that, he said, advisors will get more interest from people in this market segment by talking with them about their goals and values than, say, about taxes and net worth.

He suggested that advisors concentrate on building relationships in this market. “Find out their problems. Perhaps draw upon your own challenges for ideas about issues they too might be facing, especially with those who are in a similar life stage or circumstance as you.”

Often the wealthy will have relationship issues, he said. Although an ultra-wealthy person might have specialists who help with those problems and a team of advisors who help in other areas, “the person might still want to talk with someone else about other relationships.”

Covenant Group CEO Trainor sees that happen. He noted that financial advisors often become the most trusted advisor to wealthy clients, who reveal intimate details of their lives and relationships. For instance, one advisor that his firm works with had a very wealthy client who had a 17-year-old grandson with addiction issues. “The advisor was able to connect the family with a specialist in adolescent addiction. The grandson received the help he needed.”

This is a connections economy, he concluded. “The best advisors create a web of connections that add value to the lives of clients.”

The Needs of Entrepreneurs

In the United States, about 83 percent of people with $10 million or more in net worth are first-generation wealth, Trainor noted. “They are immigrants to wealth, and the vast majority is made up of entrepreneurs from lower- or middle-income households.”

This is the market where Trainor sees the most opportunity for insurance, investment and wealth advisors today.

“The people who grew up with wealth already have advisors in place, but not so the first-generation wealthy,” he said. “After they sell their businesses and come into $10 million to $200 million, they must suddenly move from being a wealth creator to being a wealth steward. Their lives become more complex, and they often struggle to deal with the wealth they created.”

This opens up opportunity for the advisor because many of these former business owners now need advice on what to do with their millions. Unfortunately, it also creates a dilemma for advisors, he said, because “many entrepreneurs are not used to letting someone else manage things for them.”

Many advisors get hung up on the disconnect, Trainor said. “They don’t understand the psyche of the entrepreneur,” and they don’t know how to build the trust that will bridge the gap.

Trainor’s suggestion is to identify which types of clients represent the firm’s most valuable relationships. Then focus on educating and informing clients in this category; that’s a big part of the role of the advisor in this market, he said.

“To get buy-in, you need to give these clients what they want. And what they want is freedom from worry, financial independence, security and time for personal pursuits. Then to keep these clients, you need to give them what they need.”

That’s where setting up the wealth management plan comes in, he said. The advisor will need to make recommendations for protection, risk management, estate preservation, etc., then implement, and then “track to ensure success.”

The big case market is not just about evaluating net worth, making the sale and collecting commissions, Trainor emphasized, echoing points raised by Walper and Treskovich. “It’s about building relationships with the clients. That’s where trust is critical, and it reveals the advisor’s real value proposition – advice, dependability and a profitable relationship over a lifetime.”


Linda Koco, MBA, is a contributing editor to InsuranceNewsNet, specializing in life insurance, annuities and income planning. Linda can be reached at [email protected] [email protected].

More from InsuranceNewsNet