The ’emerging affluent’ is the cohort with the strongest client potential for advisers, however their preferred fee method may not be inline with the preferred business model of many advisers.
Speaking at the SMSF Association National conference Netwealth marketing general manager Andrew Braun said the trend towards flat fees is ramping up – despite reluctance from much of the industry to reduce its reliance on ongoing fees.
“What we found was that the reality doesn’t necessarily meet what the emerging affluent wants,” Braun said. “Unfortunately for us, the margins compress with flat fees according to our data. This is something you need to be aware of… that your margins may compress slightly.”
Some 67 per cent of emerging affluent clients prefer a flat fee, but are divided on whether it’s an annual, monthly, an hourly rate or a service fee for each piece of advice.
Another 27 per cent preferred a percentage-based fee with 19 per cent preferring performance-based fees and eight per cent wanting it as a percentage of funds under administration.
“This reflects their financial literacy and engagement,” Braun said. “They’re happy to take on some risk if there’s some reward.”
Meet the emerging affluent
The emerging affluent cohort is just under 2 million people with an average age of 33 holding a collective $1.5 trillion in assets.
However, with retirement decades off in the horizon, their needs are more focused on career advancement and the costs associated with over-providing for a family (i.e. high-priced tuition), as well as paying off their own debt.
“They’re earning great coin,” Braun said. “Their household income is over $300,000. They’re probably dual earners. If you compare that to the mass market, it’s three times as much money they’re earning.”
Their average home size is $1,000,000 but 40 per cent have a house greater than a million. They have $1.1 million in investable assets which includes their combined superannuation balances.
“I like to refer to emerging affluent as millennials with money and these are fantastic potential clients.”
ESG considerations are going to be important for their advisers to consider as two-in-five have already invested in socially responsible options and the other three-in-five would consider them.
“You need to educate yourself on the different type of responsible options and then you’re in a position to educate your clients,” Braun said.
While 40 per cent are already using a financial adviser, another 33 per cent plan to use one with 63 per cent of that figure planning to do so in the next three years.
They generally have a high bias propensity to using professional services with 30 per cent already using a stockbroker, 36 per cent using private banking, 59 per cent using an accountant and 42 per cent using a mortgage broker.
Millennials are typically defined as being born in 1982, coming of age at the start of the new millennium. They’re used to using computers and phones and for this reason, client portals are going to be their most used point of contact.
“Client portals are a really important way to evolve the relationship particularly with this cohort,” Braun said. “They’re used to self-service. They’re used to buying on their phone through eBay, Amazon, surfing Netflix, and solving problems themselves using phones.”
When Netwealth surveyed advice firms they found 29 per cent are using a client portal with 62 per cent looking to deploy one within the next two years.