What It Takes To Attract And Serve HNW Entrepreneurs As A Financial Advisor

Show Notes

• CEG's "The Winning Edge: Attracting and Retaining High-Net-Worth Entrepreneurs" Slides – Download (PDF)
• CEG's Report: The Winning Edge: Attracting And Retaining High-Net-Worth Entrepreneurs
• What High-Net-Worth Prospects (Really) Want From A Financial Advisor

Full Transcript

Michael: Welcome, John.

John: Well, thank you, Michael. I am excited to be with you again.

Michael: I'm excited to have you back. So for those catching up, this is John Bowen, CEO and founder of CEG Worldwide and CEG Insights. So CEG Worldwide, John, I'm probably going to do a little bit of disservice, but coaching/training for financial advisors, has long had a focus on particularly training around business development efforts and business development efforts through referrals and through centers of influence and how to actually do that in a way that helps you to move up market.

John: Jeez, I'm glad we're recording this. That was good, Michael.

Michael: All right, fantastic. I'm learning it. I'm learning it. And then our particular focus today, you also run a company called CEG Insights, which is a research offering, a kind of predecessor organization that some people may have heard of was Spectrem Research, now CEG Insights with your additional work into expanding the research. And so I'm excited today to get to talk about, well, really, some of your research and cool data points, because everyone knows I love just nerding out on data and data points.

John: We both do.

Michael: You reached out, you're like, "We have data. Do you want to talk about it?" I was like, "Of course. Can I turn on a camera?" And so now we have the 2nd of this series. So 3 months ago or so, we had talked about some of the research you had around attracting high net worth clients and very high net worth clients and what they're really looking for, what they want, how it's different than our traditional financial planning wealth management offering. So we'll have some links in the show notes here for anybody that wants to go back and listen to that one. Today...

John: We call it the wealth management divide, for everybody with a million or more of investable assets. If you're working in that market, you need to see it.

The Unique Challenge Of Working With High-Net-Worth Business-Owner Clients [01:55]

Michael: So now we're going to drill, I feel like, one step further in, which is not just working with the high net worth clients in general but working with entrepreneurs, with business owners. And so, in financial advisory, I feel like we sort of always talked about the benefits of working with small business owners. I started in the insurance world, so talk to small business owners basically meant find out who's creating a buy-sell agreement because we could sell permanent insurance to fund the buy-sell agreement. That was why we worked with business owners.

Now, we've kind of shifted into this wealth management and AUM model where, perhaps my own bias or limited experience, I have found challenge over time in trying to work with entrepreneur, business owner clients that feel like...there's 2 types of entrepreneurs, those who put everything into their business and those who put everything into the next business, neither of which are necessarily the best from a wealth management end. But those are my anecdotes. You have actual data.

John: I have the data, and I'd say there are definitely some of those, and they're certainly unsuccessful business owners as well.

Michael: That too.

John: But when we start focusing on the successful business owners, they actually want to work with financial advisors. So we're going to talk about that today, Michael, is that we had the opportunity to go out and survey 2,049 successful entrepreneurs. The only catch was they had to own a business, at least one, and make over $100,000 of net income. That was the only thing. And they completed, on average, it was about a 25-minute survey. So think of the data that came out of that.

Michael: Yeah, we're going deep. That's a lot of data.

John: And they gave us a roadmap with this data as well.

Michael: Well, so then let's dive in and share, as you're willing, some of your results of what this advisory market looks like for those that want to work with entrepreneurs.

John: Well, I'm going to start with the sizzle, okay? When you do the research, one of the things that you're always looking…and you and I have talked about this off-camera in previous conversations that business owners aren't right for everyone. They're a little bit more complex. You'll see they want more than the average, certainly, retiree. But I got to tell you, if you want to play at the high end of the market, this is a real huge opportunity.

Now, coming out of the pandemic, things have shifted. And let me put up a slide that's going to really give us some framing on this. So, as we're assessing the market, we're looking for shifts in advisor relationships. And I want you to look at this. When we ask them, "Are you likely to switch your primary financial advisor in the next 2 years?" To have 20% of them say very likely…

Michael: And another 18% somewhat likely.

John: Yeah, when you combine that, it's 38.4%. I know everybody can do math. And one of the...I'll just put it up on the screen here real quick. We are going to give you access to the financial advisor version of this report. And CEG Insights, we're really more corporate for the big broker-dealers, the investment firms, and we also have media clients in this where they like 200-page reports. That's not what this is. But it has everything and more than what Michael and I are talking about. But I want to go to what Michael was just bringing up.

When you add these 2 together, that means 38.4% of these business owners are open to switching if there's a compelling value promise. So this is really dynamic. There's a growth opportunity. If you want to work, this is a great time to do it. And we're going to show you today exactly what they're looking for. Strategic positioning, you've got to have a compelling offer though. Because every one of these people that want to switch to a primary financial advisor already has a primary financial advisor. And I want you to understand the change and really the need to build trust and demonstrate value, Michael, so that it's not just about "I got a little higher rate of return of investment" type of thing.

Michael: So my curiosity in that end, is that market all about somehow winning away from another advisor? Is there a large slice of unadvised small business owner, or does your research show they're pretty much all attached to someone at this point?

John: They're pretty much attached to someone, whether it's a financial advisor, an accountant, or an attorney. These are people of the...almost half had a net worth of $5 million or more. Even with that low cutoff of $100,000 net income and own a business, half. So there's a huge concentration of wealth, and there's a bunch. On average, this group had assets, I think it was $15.6 million in assets. So this is a group...

Michael: That's a big number. On average, they've harvested a lot out or they've had a liquidity event or something's good already.

John: It's $32 billion, okay? And so there's an opportunity there, I want to be clear. But what happens is most business owners...Michael, were you an overnight success? Did it take a little work, a couple of hours?

Michael: After the first 10 years of toiling that no one saw, then all of a sudden we started showing up at everyone's radar screens as the overnight success.

John: That was kind of my experience too.

Michael: At the beginning, yep.

John: And what happens is so many of the entrepreneurs start with someone, and then the ones that have success, particularly big success, they really start questioning whether that's the right person. Because so often, that financial advisor, the accountant, the attorneys didn't grow with them. So that's that. And we're going to go into a little bit more detail of that too. But the concept...

Michael: I was going to ask where all the dissatisfaction is coming from with upwards of 1-in-3, thinking about an advisor change. So, should I think of it like this is a complexity dynamic? Their businesses grew, their lives got more complex, and they're looking back and saying, "I'm not sure my current advisor can handle the complexity of where I am right now. I might have to shop and 'upgrade' to an advisor that can handle the level that I'm at right now."

John: Very much so. So there's a concept, FOMO. I'm sure you're familiar with it. Fear of missing out. Yeah. And this is really prevalent in this group because they are working hard in their business, and this is why the insurance guys...when I did the insurance training, Michael, we were taught to knock on the door. Because where are business people hanging out? At their offices.

Michael: Their offices. We're always working.

What Entrepreneurs Want From Their Financial Advisor [09:13]

John: Yeah. So we're going to talk about how you can market to the group a little bit later, but the idea here is they aren't sure. They're unsure. And the more successful ones want to continue building their businesses, no question about that, but they also want to build personal wealth. And this is really where it starts coming together. So one of the things...let me share some research, Michael, that would be helpful, I think, on this discussion. Entrepreneurs are seeking...

Michael: What they're looking for.

John: Yeah. And this is where, I think, when we asked, and I focused in on the $5 million and above, and it was...

Michael: Particularly good prospects, yep.

John: Yeah. And so what we found was a better financial performance. Now, one of the things that I think this is where it's really interesting, it's not getting basis points. They're looking at the whole advanced planning. And we'll see that in a little bit, the next research I might put up. But they're looking at mitigating taxes, taking care of the errors, protecting the assets from being unjustly taken.

Michael: So financial performance is not just investment performance in this context. It's all the things that make their net worth, their balance sheet better. So you can save me on taxes, you can improve the value of my business or portfolio stuff also helps.

John: Yeah. The point I always like to make is one of the things...I have been an entrepreneur pretty much all my professional life and a number of businesses. I go up unbelievably gracefully, both on personal net worth and business net worth. I don't like it when I go down. And I've had that experience on both sides. And the same with every business owner, and particularly, more and more, they are interested in...to the extent you can help them on the business side, but also, they want to build wealth outside of their business. And that's when we start talking about the financial performance. They want to build that wealth. They want... none of these are like, they're having terrible communication. Well, 18% want better communication. Well, that's not that high. Comprehensive services. And then the thing that I thought was really interesting was the fee part. They don't even care about fees. They feel like they're fair, what they're paying now.

Michael: Yeah. I guess, in the purest sense, we're not competing on fees. We're competing on value. And it's like, well, if you want to be a financial advisor, you might have to compete on the outcomes of your financial advice, i.e. helping improve their financial situation, financial performance. There is sort of a rather clean simplicity to that. If you want to be a financial advisor, they need to feel like their finances are better because of your advice.

John: Yeah. And here's where it gets really interesting, because I want to share the next research where it's different. If you go back and you watch the interview that Michael and I did on what we call the wealth management divide, this is great for really the whole marketplace. Now, because entrepreneurs are such an attractive group to work with, they almost always have a primary financial advisor. And when I share this next piece, they're actually doing pretty good. They're delivering what the entrepreneurs want. So let me share that, and then we'll talk about, well, okay, if they're sharing, they're doing all of this stuff, why would they want to leave?

Michael: Yeah, then why are they switching?

John: So bridging the gap. I expected to see it across the board, very similar. And what we always do, when you look at this, you can see services received. Okay, received means they perceive they received it from a financial advisor. It doesn't mean, when we survey the financial advisor, a lot of times, they perceive that they delivered it at a much higher rate. And then when we asked them about, "Did you expect it?" Okay. When we start looking at this, pretty consistent. And then when we said, "Did you value what you received?" Okay, what we're finding, these are pretty good alignments. There's little gaps. When we look at investment management, if you look at this chart, there's a 3.4% difference. Okay, that didn't fill the gap.

Michael: I struggle a little. The biggest gaps here are they actually value the financial planning a little less than they received and they value the tax advice more than they received.

John: Yeah. And this is where it gets really interesting in my mind, and this is where that FOMO comes in, that fear of missing out. Because they kind of feel like they have decent advisors, but they're members of CEO groups, associations, mastermind groups. Over half of these people are in those kinds of groups. And the higher the net worth, the higher percentage. And what came out of it was they think they're missing something. They're not sure what it is. So this is a challenge for every one of the financial advisors to work with this group. Coming in and saying, "You're going to do just a little bit better wealth management than other people," is not going to win the day. You have to have a different, compelling process that is going to get them to see you as someone different.

Michael: I feel like there's kind of a psychographics thing here in the first place. Look, entrepreneurs, particularly your quintessential, "I'm going to go start a business from nothing because I see an opportunity to create something that has value."

John: I see a big problem that I'm going to solve.

Michael: Yeah, I'm going to solve a problem. Entrepreneurs, almost by their nature, scan the horizon looking for opportunities. It's why they make businesses. And so if you got people who are hardwired to scan the horizon looking for opportunities, they probably have a lot of FOMO around professional advice, right? If they scan opportunities for business opportunities, they're going to scan opportunities for advisors that can bring something new or different to the table.

Why Succession Planning Is A High-Value Service For HNW Entrepreneurs [16:04]

John: Very much so. And the part...what we really saw is, how could you differentiate yourself? And let me show one service that is not being done that much, and there's a lot of confusion on this.

Michael: What's that?

John: This is the succession planning.

Michael: Okay.

John: And so when we looked at succession planning, 2/3 didn't have any kind of planning whatsoever. And when we started...

Michael: It feels pretty normal.

John: Yeah. It's not different than the financial advisors. But what surprised me was when we asked them, "How are you going to do a succession?", what they said, 45% said, "We're going to just do it among family members, internal, where we're going to self-fund it with our employees. Internal, but we're going to go out and get some kind of equity group or financing."

Michael: What I'm struck is, for people listening, family succession, 45%, I'm rounding, internal succession to team, almost 32% more, internal succession that's externally funded but the internal team still buys, another 11%. I think if I cumulatively add this up, 87% are doing some kind of family or internal succession as their goal.

John: Yeah. This is where I went...when you do these studies, there's "ahas" and "wows". This was a wow to me because I expected to have a much higher sale by investment banker.

Michael: Sale by investment banker, 6%, asset sale, 2%.

John: It's a very, very different number. And this is where...a couple of things. There's a classic, Michael, where we have the ability to go ahead and say, "Okay, you should have a succession plan," but that's really not...one of the things, everybody should have a sustainability plan that the business can continue without the entrepreneur, the key people, any of the key people. So how are they going to do that? And you look at this, and I don't know. I grew up in a family business, a cast iron foundry in upstate New York. And it was a family succession. My dad was president. My uncle was the CEO. And my dad gave me the worst jobs in a foundry. It is a bad type of thing. And being the president's kid, not a good thing. And my uncle had his son who was a little bit older.

Michael: So he had to really prove the point by giving you the really least desirable job.

John: Yeah. And I just said, "I'm out. I'm going to go into financial services." My cousin stayed, took it over, failed, went bankrupt, the whole thing. And it's just a huge missed opportunity had they had good financial advice, because there was a lot of free-flowing money, but high lifestyles. I was a rich kid in a poor community, became a poor kid in a poor community. I was in college.

Michael: So, how does this change? I feel like a lot of advisors, when we think and talk about working with small business owners, particularly in the assets under management world, it's basically business owner liquidity events, because that's when the dollars become liquid and we can work with it as investible wealth. Do we need to think about that model or approach differently when 87% of these succession plans are internal and not going to the traditional, an investment banker that gets them a deal for a big check? I guess...

John: But that's what they're thinking. So they really haven't thought it through, Michael. And this is where they have that fear of missing out. So let's go to a simpler one, tax planning. They prepare their tax returns. They file them on time. Okay. Do they really do a lot of tax planning? Certainly, going forward, I can tell you the vast majority don't in this group. So each of these areas, they have that fear of missing out because they are missing out. But they can't tell financial advisors apart.

Repackaging The Firm As A "Virtual Family Office" To Attract HNW Entrepreneurs [20:41]

So let me kind of jump to the chase for a second, the chase scene. What we've got that's really winning is repackaging. In our coaching programs, we do this for our clients. If you're going to work in the business market, you really should repackage yourself as a virtual family office, focusing with people probably in the $10 million and above net worth, but you can do it down to about $5 million in net worth, and where you're going to have a team of professionals. No one person knows all of this stuff. So we're going to go ahead and have a professional network we put together to serve this group. So it's not just siloed. I know somebody. It's somebody that's working in concert together.

And what happens is, first of all, they love this concept of a virtual family office because what they see in the way we position it is that it's really how you can move above the rest of the market. But it's an opportunity that's different. And then the framing that we have, and I don't have a slide on this, but what we find that really works is doing a stress test. And what happens is...

Michael: Stressing what? A stress test.

John: So let me walk through. A lot of times, we think a stress test is just the investment side. The part I'm talking about here is when we look at family offices, so we study family offices as well, in a study that we did of just short of 200 family offices, average net worth $500 million or more, 94.5% of them had gone out and hired somebody in the last 5 years to come in, even though they have a multimillion-dollar payroll of attorneys, accounts, financial, investment, and so on. They wanted to see that they weren't making any strategic mistakes. There wasn't any missed opportunities. And one of the things that entrepreneurs see is they should be doing that as well. And when you position that as a missed opportunity to do what people that are "you're not at $500 million" type of thing, they love that. And what your stress...

Michael: So your virtual family office works well specifically because it's something people the next tier up do. Wouldn't you want a version of that for you now?

John: Yeah. And so the framing that we have is this concept of thinking about virtual family offices positioned as the top of this wealth management hierarchy. And investment advisors just focus on investment. Financial advisors focus on investment, kind of reactive. Wealth management is very extensive, but it's where virtual family office pulls it together with a team.

Michael: So help me understand the difference in that framework between wealth managers and virtual family offices. I feel like every other advisor I talk to these days, we're our client's personal CFO, we're their financial quarterback. We have an advisory team.

John: I didn't trademark personal CFO.

Michael: It's not just me. We've got a whole diamond team of advisors that support you. We're saying that, and I feel like what you're talking about is something different. So help us understand...

John: Let me give you a framework.

Michael: ...what you're talking about versus what we do.

John: So when we study high-performing virtual family offices, this is what we come up with. In the center of this is creating your own optimal financial world. And I'm going to share with you why it's so prevalent. When we look at the demand from entrepreneurs, what they want is they're very focused on having the same advisor. Over half want the same advisory that's going to be guiding them from a financial personal CFO kind of positioning on the business and the personal side. And 30%...

Michael: Because as an entrepreneur, my business and personal finances are so inextricably linked anyways. It's just extra work to explain to the advisor of one what the other is doing.

John: Yeah. My guess is yours are, mine are, that type of thing. That's the most common. So they're looking for that, but they can't tell us apart. It used to be that they could tell us apart, whether we had a red tie or a blue tie if you're a guy type of thing. That was a big differentiator type. So now that most of us aren't wearing ties, that's not going to work. So let me go back to this model. So one of the things they want is they want to know that their goals are being maximized. They want to have access with authentic confidence that they're actually working with people that know what they're doing. Because they don't believe they are. That's one of the common…and then they want to implement. They want to have the outcomes, like we all do. So what we look at is...

Michael: I'm struck by the access end. So, no, no, no, it's not just like you know attorney's account or your personal CFO. It's like, "No, I know the best ones in town. I found and vetted the best ones in town, and I will bring you the best ones."

John: Yeah. Think of it, Michael, the way I like to think of it is this whole concept of...I don't like using sports analogies, but let me use it. General manager, not a quarterback, because the quarterback implies you can do everything. You're the general manager of franchise players, and your job is to bring the best of the best together for them. Because that's where...I don't know. Have you ever built a house or an office building type of thing? I've done that a few times. And having a good general contractor, I don't want to deal with all the specialists. Business owners don't either. They want somebody that's going to bring a cohesive team right from the beginning. And that's what we're talking about. They want to have that authentic confidence.

Michael: But I'm struck just by the framing that maybe I'm reading too far into this, but there's an implication here that I'm not just coordinating with multiple professionals. I'm finding and vetting them.

John: Well, yeah. No, I have the best of the best contacts. I have a preferential arrangement. Typically, it means you cut to the front of the line, could be a lower fee, and they're state of the art. These are people that are specialists in whatever niche of the business community you have.

Michael: So I don't necessarily have to employ them. It's not like I have to have all these people on staff. But I need the contacts. I need to be able to get my client in with the best in town who basically doesn't take anyone, but they're going to take one of my clients.

John: Yeah. And if you are focused, we've done studies of accountants and attorneys, what they all want to do is move upmarket. They'd like to work more in the family office. It's very compelling for them to work with you in a virtual family office if you're providing that leadership. Because, also, this is a thing where people get caught up, and particularly in the AI environment, and we're saying, "Geez, we can get a lot of this just running it." Well, the big thing they want, and this is why this is the first lever, is a human element. They're tired of working with professionals, whether it's accountants, attorneys, financial advisor. Everybody has a hammer working with successful entrepreneurs. They have one idea that's hammering.

Michael: Well, I started like you. I've got insurance. If you've got a buy-sell need, that was scope of my career.

John: They want a bespoke personal solution. That's what they're looking to do. They want you to do a deep discovery so you understand who they are, they want great communication, and they want a long-term intimate relationship. And when we come...so humans first, team second, because if they don't feel they connect with you, they're not going to work with you. Second is the team. You got to be bringing the team. Then there has to be credibility that it's a coordinated elite team, not that, "Hey, I know somebody that could help you on this." And then the third part is systemic process. And think of it, this is why I was talking about the stress test, they feel most of us are pretty haphazard unless they bring it up or some pressing new issue. We want a methodical way. So they want some way that you're going to consistently address failures, identify opportunities that they'll miss, and that you're going to be constantly working with them to improve.

And this is where we see just so much power in this, Michael. It's been a big thing. And you asked me about stress test, so I'll put it up real quick. The way we teach it is you do a profiling, deep discovery, where are you now, where you want to go the gap. We have a whole process for that. You're going to get all their information, what they have. You're going to work the assumptions. Are they aligned? Are they aligned with the goals, outcomes they want? Almost always you can save them money. What are the alternatives, and what are the recommended courses of action? And what we find is that the accountants and attorneys can do this with you. Oftentimes, they're the ones charging for it, and this is where there can be some great partnerships, strategic partnerships on this, again, addressing that need that they want help for both business and personal side.

Where Advisors Can Find Business-Owner Clients [30:42]

Michael: So with the few minutes we have left, share with us a little bit about where we go to find these clients or, I guess, where they go to find us.

John: Yeah. Well, we could knock on the doors of the businesses, but that's not very effective. For some reason, that's not considered a credible type of thing. So when they're not working in business, how do they find us? So we asked them. So referrals dominate. It is a big deal. You can see that here. But I got to tell you, if you don't already have the client base and you're not already delivering this experience, you're not going to get the referrals. So then the next group is professional networks, and think of this as the CEO groups, like YPO, EO (Entrepreneurs' Organization), Vistage, that type of thing, associations in a niche. We have advisors that are having unbelievable success inside associations doing this.

Michael: I know you've got some generational layers here as well. For Gen Z and millennials, the professional networks are actually scoring a little bit higher than referrals.

John: Well, the reason for that is they're referrals of their colleagues. If you're a young entrepreneur, you don't have that many friends that are young entrepreneurs, typically. And so you’ve got to rely on the networks.

Michael: You're not at that career stage to have the personal network to drive referrals. So you go to your professional network where your peers are who can give you helpful introductions.

John: Yeah. And the young Gen Z and millennials too are seeing some online search, but those are pretty low numbers. I'm not going to bet 90% of the way you find is not this.

Michael: Younger generations search more than 2X the older generations, but it's still less than a third of just getting it from referrals and less than a quarter of getting it from a professional network.

John: So one of the things to think through, if you share how entrepreneurs are dealing with these issues and present what are the solutions generically to any of these groups and then you point out how they could create a virtual family office and the process of evaluating a stress test to see if that makes sense, you will have a huge percentage. It goes back to what you and I started with, the 20% raising their hand, probably if you're very good at presenting, that 38%.

Michael: Well, very cool. Very cool. So, John, for folks that want the full research, where do they go if they want to dive into the whole? They've got even more than what we shared here.

John: Yeah. One of the things, Michael and I could nerd out for a long time going over a lot of research. You can see, it's 24 pages. There's a lot of charts that I couldn't go over. And what you can do if you're a QR code guy, you can go ahead and scan that.

Michael: We'll put it up on the screen.

John: If you're better at typing than I am, you can go ahead and type the link. I'm more of a QR.

Michael: So for those who are listening by podcast style, cegwin.com/kitces-growth. Cegwin.com/kitces-growth.

John: Right. And we tried to shorten it, but Michael's name was long and cegwin was as short as we could get the domain type. But yeah, definitely, download this and share it and not only read it, because if you're thinking at all about working with business owners or you already are, huge insights. But run it by your team as well and get their thoughts. This is an exciting opportunity. This is a group that's really crying out for help. And if you want to play at the higher end of the market, want to create these virtual family offices, it's really for those of you who like a little complexity in your life.

Michael: Guilty as charged.

John: Yeah. No, I am too. That's why...doing retirement, rolling over in IRA. Okay, I've done many of that. I was 26 years a financial advisor, grew it up to a couple of billion dollars with 2 partners. I wanted complexity along the way, and it's a lot of fun doing this. And these are lifelong relationships, Michael. But again, let me just put it up so everybody has it, and I'll say it again. Go to cegwin.com/kitces-growth. Michael, I really do enjoy this because we're helping people. There's so much opportunity there, but use the empirical insights to really get clear on where you want to serve so you can make a big impact and create that value.

Michael: Awesome. Awesome. Well, thank you so much, John, for joining us. Appreciate kind of what's now becoming our ongoing quarterly series.