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When investing, millionaires of tomorrow should avoid ‘going it alone’

Because they are typically younger than the more-established millionaire cohort, they should look for a financial advisor who can tailor advice to their age and stage

By: VIRGINIA GALT

Date: July 09,2014

Many well-off individuals with the potential to become millionaires shy away from investment advice because of a perception that advisors don’t care about clients with less than a million, according to research by Fidelity Investments in the United States.

“Only 51 per cent of MoTs [millionaires of tomorrow] use an advisor, compared with 71 per cent of today’s millionaires . . . . A view that advisors are not interested in investors with a lower base of assets, and a concern about advisory fees may be holding them back from starting a relationship [with a financial advisor],” Fidelity said in its white paper, Millionaires of Tomorrow: Poised for Growth, but in Need of Advice.

These concerns are not entirely misplaced, said Keith Sjogren, managing director of consulting at Investor Economics in Toronto. “It can be a challenge for the small investor to get somebody who is going to give them the level of attention they need in order to become a bigger investor …

“There is a lot of focus on wealth that has been accumulated already as opposed to helping people accumulate wealth in the future,” said Mr. Sjogren, whose firm specializes in Canada’s retail financial services and wealth management industries.

The industry is working to change this through market research that will help financial advisors better meet the needs of these MoTs, as Fidelity calls them.

“The next generation of potential millionaires is generally composed of a few distinct groups, driven by gender, life stage and ethnicity,” Fidelity said in its white paper. “With an average age of 51, they look very different from today’s millionaires on a number of fronts. More MoTs are women and Gen X/Y [between the ages of 21 and 48].”

And because they are typically younger than the more-established millionaire cohort, they need advice more tailored to their age and stage, Mr. Sjogren said in an interview.

“There is a large group of high-income people who are balancing expenses …as well as the need to save for retirement. These individuals need advice on debt management, the need to minimize their taxes, and [how to] to become active, effective savers,” Mr. Sjogren said.

Still, Fidelity found, relatively few have comprehensive financial plans in place. “They are hyper-focused on the long term and consider saving for retirement to be their No. 1 goal, yet lack a formal plan that could help them get there.” (While the research was conducted in the United States last year, the findings reflect the sentiment of Canadian consumers as well, Fidelity Canada said.)

Mr. Sjogren said those who approach their financial affairs in a disciplined way are more likely to crack the million-dollar threshold. “If you have it written down and there is somebody who is checking on you, you are probably going to achieve your objectives – kind of like Weight Watchers.”

However, he added, “individuals have to be very confident in the ability of the advisor and the objectivity of the advisor before they share a lot of personal information.

“[As the client], you have to make sure that you are going to get the level of attention that you want, and that you are not going to make a move until you are absolutely convinced that it is right for you.”

Fidelity said prospective clients have the right to expect – and advisors should be prepared to provide – recommendations tailored to their needs and level of risk tolerance. But, in order to make the most informed decisions, these MoTs – who tend to “play it safe” when it comes to investing – should be given information on a range of options.

“If MoTs are to meet their goals, they may need to move away from having a saver mentality to having an investor mentality. To help them make the shift, advisors may want to consider describing the potential returns from an investing strategy versus a saving strategy over a number of years. This could include education about different risk-return trade-offs under a range of market scenarios in order to help temper MoTs’ more conservative approach to investing, while also helping to increase their overall knowledge level.”

Concerns about fees should be dealt with head on, Fidelity said. Investors need to know upfront what the fees are, and the value that they are getting for those fees.

Mr. Sjogren’s firm has noticed “that people are becoming a little more confident, and that they are moving away from just holding bank deposits and fixed income.

“We certainly saw, in the last RRSP season, a greater willingness to assume some risk in a portfolio,” Mr. Sjogren said. Given the recent stock market performance, “there may be some evidence that willingness to assume risk was a reasonable decision.”

But “it’s cautious optimism, it’s not unbridled optimism,” he said.

Advisors must be able to outline the options within their clients’ “risk parameters,” Mr. Sjogren said. “There is more than one answer, and it’s [about] ensuring that the solution actually reflects the objectives of the individuals.”

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