Competing aggressively on price isn’t the key to success in the high net worth space, according to a new report from PriceMetrix.

Competing aggressively on price isn’t the key to success in the high net worth space and advisors should instead focus their efforts on business development, according to a new report from PriceMetrix.

All too often, understanding of high net worth clients is hampered by vague terms and a lack of comparable data, the report says.

The observation seems a fair one, not least because firms are often unwilling to share hard data on client average balances, performance and fees.

“Being unable to say ‘how high is high’ leads to a proliferation of definitions grounded in little more than intuition,” says the report.

It was based on an aggregated database of 7 million retail investors and 500 million transactions.

Looking at percentiles and using its database, the firm says the 90th percentile has around $1.3 million in assets, the 95th around $2 million. The 99th percentile, meanwhile, can lay claim to around $6.5 million, while the 99.9th percentile (the top one-tenth of a percent) has around $27.8 million.

The study takes the 95th percentile mark, or $2 million, as its cut-off point for high net worth individuals. Only around 5 per cent of relationships in the retail wealth management space meet this definition, it says.

The higher up the wealth scale, the more likely individuals are to replace fund investments with individual securities. These individuals are also more likely to hold fee accounts, often combined with transactional accounts, but are actually less likely to hold retirement accounts – as they structure their investments differently and are more likely to deal with multiple providers.

While firms should seek to be a primary provider to their high net worth clients, such clients are unlikely to want to move all of their assets into one specific type of relationship (fee or transactional), the report recommends.  

Fee dispersion

While it holds true that discounts on fees tend to be greater as household assets increase, there is significant variation in fee pricing among HNW clients. For fee accounts, median revenue on assets for a $2 million-plus household is 0.76 per cent – but the top decile of fees is 1.45 per cent. Around a third of $2 million-plus households pay over the 1 per cent mark, PriceMetrix says. At the other end of the scale, a quarter of these clients are paying 0.45 per cent.

Who owns the high net worth space?

When it comes to who’s winning these clients, those advisors with more experience do have an advantage, as the data shows correlation between years of experience and the number of HNW households in a book of business.

However, accounting for this, there are still big differences between advisors.

Shedding small accounts is seen as a key way to increase scope to do business with the high net worth. Advisors with only 20 per cent of their books dedicated to small households had a median of 12 HNW households on their books – far better than the overall average for the data.

What’s more, when it comes to household wealth, the small fry are unlikely to turn into big fish, according to the report’s data. The belief that cultivating good relations with affluent households is likely to lead to future HNW clients is not borne out by the data, and this activity is an inefficient use of an advisor’s time on balance, it says.

Are high net worth clients price sensitive?

There is no benefit to wealth management firms in competing on price for fee-based accounts, the report says. While there is an optimum range for high net worth clients (between 0.5 per cent and 0.99 per cent), the data indicate that pricing either too high or too low results in less success.

“One can price oneself out of consideration by pricing too high; at the same time, discounting too much can erode perceptions of value,” the report says.