The mass affluent—anyone with over $100,000 in investable assets—is a demographic that is hugely underserved by the RIA market. Historically, RIAs don’t think they can serve the mass affluent profitably. But that’s not true.
Brokerages have realized the potential and have been serving this market for 50 or 60 years because they’re transaction-based. But given the technology that’s out there now, RIAs can serve this market as well.
When you talk about the mass affluent most advisers think of some poor kid out of college making $40,000 a year. In reality, more than 50% of the mass affluent make $100,000 or more. Most of them are young, but that works out in the adviser’s favor because they are accumulating assets, as opposed to older, high-net-worth individuals who are going to be withdrawing their money.
There are 120 million households in the United States, and 50% of them are mass affluent while just three million are millionaire households.
But RIAs avoid this market because they don’t think they can make a profit. There’s a status quo that suggests you work with clients with assets between $500,000 and $1 million. The market started out this way because the cost to service a smaller client was too high, and the technology wasn’t there to make it profitable.
Advisers should take the time to figure out how much it really costs to serve a client – many will discover it’s a lot cheaper than they think. Most advisors charge 1% because that’s what everyone else does, but some RIAs charge a fraction of a percent to manage client assets and still make a profit. The key is utilizing the new technologies that allow you to manage portfolios on a massive scale, instead of having four or five analysts do the balancing by hand.
Also the number of new RIAs created is well above the rate of new millionaires in the United States, and at some point there are going to be too many RIAs going after too small a pool of assets. On the other hand, a couple who has a $100,000 saved up—say a husband and wife, young professionals who probably make around $150,000 a year—could be millionaires in 13 years if they max out their retirement accounts and save a little bit extra on top. They become the perfect client the RIA wants, and the RIA gets its branding in front of these clients before they become wealthy and before other financial advisers get involved. This strategy can dramatically lower acquisition costs.
The mass affluent currently have two options available to them when it comes to financial advice: They can go to a broker, which is more expensive, or use do-it-yourself software and online RIAs. But at the end of the day, people want to talk to someone about their money when the going gets tough. And that is where RIAs can step in.