There are affluent investors who do not use financial advisors. They enter the markets and search for investment products on their own for a variety of reasons.

Financial advisors and providers search for these investors. They do require convincing, but they can be snagged by a variety of offerings and the prospect of starting a relationship slowly and building it over time.

But in order to change their mind on the use of financial professionals, advisors and providers need to understand why these investors have eschewed their services. Is it all about the fees, or is there a greater argument they use?

Spectrem’s 2016 wealth segmentation study about the investor-advisor relationship asked those questions. In Advisor Relationships and Changing Advice Requirements, investors not only explained why they don’t use an advisor; they also explained what life event might cause them to start a relationship with a financial advisor.

“The advisor-less investor is a market of potential clients which advisors should try to understand,’’ said Spectrem President George H. Walper Jr. “There are conditions that cause them to avoid advisors and events that could cause them to change their mind. The study illustrates the factors involved.”

The Spectrem study looks at three wealth segments, including Millionaires, with a net worth between $1 million and $5 million, a segment that could benefit from a respectful and open relationship with an advisor. Among Millionaires, 21 percent claim they do not use any advisors.

About 32 percent of those Millionaires consider themselves to be Self-Directed investors who make their own investment decisions with very little assistance from an advisor, if any at all. That means almost one-third of Millionaires function as investors without the aid of an advisor.

Why do they choose to function without professional assistance? While fees play a role, more than half of the Millionaire investors say they can do a better job investing than a professional advisor, which is a knock on the services advisors provide.

Can advisors change the mind of investors in that area? For many investors, the only way to alter that way of thinking is for the investor to suffer a series of financial setbacks that cause them to approach an advisor. When an investor places a call to an advisor looking to start a new relationship, it may be because they failed at investing on their own and will be calling out of a sense of desperation or need.

The Millionaire investors actually had another reason for not using an advisor. Fifty-four percent of investors don’t believe a financial advisor would be looking out for their best interests. Investors are suggesting advisors promote products and services that will garner them more in commissions and do not necessarily consider the needs of the investor first.

This is another perception advisors must battle in dealing with first-time clients, especially those who have never had an advisor before. Of all Millionaires, including those who use an advisor, 39 percent believe financial advisors are more concerned with selling products than helping clients.

Fees, on the other hand, are not a factor for investors without advisors. Only 7 percent of Millionaires say they cannot afford a financial advisor, and only 6 percent said they don’t have enough assets to require the advice of a financial advisor.

Millionaires who do not use an advisor were asked to list the reasons they might change their mind. Chief among them was a sudden windfall of money that they would require help with (41 percent). The next most popular answer was sheer exhaustion: a situation where the investor just grows weary of wrestling with investments.

Top Takeaways for Advisors

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Advisors can attract investors who do not have an advisor or have never used an advisor. They need to be prepared for that circumstance by having some idea why the investor did not use an advisor previously and why they have decided to start a relationship with an advisor.

For those investors who are wary of advisors in terms of either investing skill or fiduciary purpose, advisors must be prepared to prove their value. A comparison of investments against the market growth can solve the concern about investing skill. A prepared explanation of the advisor’s priority – the well-being of the investor’s portfolio more than the growth of their own business – would help alleviate the second concern.

 

Even though fees aren't necessarily the primary reason an investor might not be using an advisor, being able to easily and transparently identify fees will go a long way in convincing the investor that they are ready to use an advisor.

 

 

*According to Spectrem research, there are currently 29.8 million households with $100,000 - $1 million in net worth (not including primary residence, NIPR).  There are 9.1 Millionaire households ($1 million - $5 million net worth, NIPR), 1.21 million Ultra High Net Worth households ($5 million - $25 million net worth, NIPR) and 145,000 households with more than $25 million in net worth, NIPR. 

©2016 Spectrem Group