You know you’ve earned your client’s trust if you’re the first call when the dog gets sick.
Stories of elderly clients’ emergency calls abound in the advisor community, but this kind of hard-won goodwill is difficult to monetise or to enter on a balance sheet. The value of client relationships is central to the question of how the industry faces up to the ageing of many baby-boomer generation financial advisors who are now looking to sell their franchises as they reach retirement or build them into sustainable, multi-generational businesses that can serve their clients’ children and grandchildren.
In recent years concerns have been aired about the steadily rising average age of the financial advisor community and implications for the quality and quantity of advice available to existing and future clients. Fears have been fueled not only by demographics, but also regulatory and competitive pressures. The possible expansion of fiduciary responsibilities and downward pressure on fees resulting from low-cost, high-tech upstarts in a climate of prevailing low returns are widely seen as pushing many greying small-practice heads to the exits.
Recent data suggest the ship has steadied somewhat. The average advisor age is 51, ticking up only slightly in recent years, while overall advisor headcount turned modestly positive in 2014 and 2015 after an eight-year decline, according to Cerulli Associates. Nevertheless, 27% of advisors plan to retire within 10 years. These figures tally with the Investment Adviser Association and National Regulatory Services’ annual Evolution Revolution report, based on the ADV filings of SEC-registered investment advisors. Admittedly skewed by the inclusion of broker-dealers and others alongside ‘classic’ independent fee-based RIAs, the 2016 report notes a 3.3% increase in firms to 11,847, while the number of employees providing investment advisory services grew by more than 10,000 to more than 386,000.
Nevertheless, IAA CEO Karen Barr acknowledges the importance of the demographic challenge. “Succession planning is the number one topic members ask us to create programs around,” she says. “Some have decided their practice will die with them, but many others want to ensure continuity.”
Such firms are taking M&A advice, exploring financing options and diversifying ownership. But to optimise their lifelong investment, advisors need to ensure their franchises have long-term earning potential. Just carrying on providing the same services to the same clients is not an option for most. On the one hand, baby boomers are stopping accumulating assets and now need a broader range of support services as they plan for extended periods of retirement. On the other, Millennials under 35 have not yet earned the assets to qualify for advisors’ attention, many instead opting for robo-advice.
Serving these two demographics might seem very different tasks but there are common threads.
“The best advisors are holistic wealth planners,” says Shannon Reid, VP of education and practice management at Raymond James’ Private Client Group. “Client expectations used to be about performance, but now it’s more about expertise and planning and acting as a sounding board.”
Although Reid was referring to the evolving needs of baby-boomer clients along the three stages of retirement (termed ‘go-go’, ‘slow-go’ and ‘no-go’), the need for holistic advice applies equally to Millennials. In a recent report, Corporate Insight found that Millennials are highly aware of their need for financial education and advice.
“The primary objective is not amassing wealth, it’s about having enough money to reach particular goals. Millennials want to form partnerships with advisors who they can bounce ideas off, rather than be told what to do,” says analyst Silviya Simeonova.
One firm trying to use these cross-generational similarities to develop a sustainable franchise is Yeske Buie, a financial advisory and planning firm managing over $500 million with offices in Virginia and California. As part of a business strategy to make founders Dave Yeske and Elissa Buie "dispensable" by 2020, the firm has loosened traditional practice in a number of ways.
To serve Millennials Yeske Buie has hired Millennials, scouring the 240+ educational institutions that now offer financial planning courses. Moreover, the firm has almost entirely turned over the recruitment process to Millennials, apparently reaping the rewards in terms of staff retention and client service. To compete for under-35 business, Yeske Buie has reinterpreted its US$3m minimum account threshold to bring on clients with the potential to reach that asset size within a decade.
At the other end of the age spectrum the firm has developed partnerships with a network of eldercare consultants who can deliver specialized medical and other types of expertise to the firm’s clients. Yeske says these partnerships are increasingly important to the business and acknowledges the need for a shift away from AUM-based fee structures. According to the IAA/NRS Evolution Revolution report, around 28% of advisors charge hourly fees, which could suit firms providing a wider range of services – but this percentage has barely increased over the last three years.
Technology, says Yeske, is being applied across the board – including an active social media presence – but he insists its role is to make advisors more efficient.
“Math is easy; change is hard,” he says. “There are lots of paths to a particular goal but the skill of the advisor is to choose the one suited to who the client is as a human.”
While Yeske is confident he and Buie will be dispensable on schedule, the appropriate succession and growth strategy for individual firms will likely reside not only in their current skillset and capabilities but also in their ability to navigate still-evolving dynamics. As Denise Valentine, senior analyst at Aite Group, points out, the role of advisors in eldercare – in terms of service scope, price points, revenue models, and technology platforms – is still being developed.
“Wirehouses might not get into this business but there’s an opportunity for smaller entrepreneurial firms to leverage trusted client relationships,” she says.
Similarly, the transformative impact of digital technology – and in particular its ability to meet Millennials’ need for advisor engagement, educational content and planning tools on a multi-channel basis – is still in its infancy. The advent of robo-advisors has already brought forth a new hybrid service model for a broader wealth management market which offers more flexibility in the role of humans and technology in supporting increasingly fluid client needs, according to Luis Viceira, senior associate dean for international development at Harvard Business School and co-author of a recent case study, ‘The Wealthfront Generation.’
Advisors can adapt to this model, adding value through their mastery of complex human (and canine) relationships, but time is running out.
“It would be a strategic mistake for financial advisors to think Millennials will switch to them in the future. Millennials may well stay loyal to those who make the effort to serve them today,” he says.