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Why Advisors Could Lose Out on Trillions of Dollars Changing Hands

By Rita Raagas De Ramos April 4, 2019

If advisors and brokers don’t alter their business models to cater to the heirs of their clients, they’re likely to lose trillions of dollars in the transition.

Building relationships with the next generations sooner rather than later, adopting new technology and allocating to more socially responsible investments are just some of the ways to retain the next generations’ assets, according to Asher Cheses, a Boston-based analyst at research firm Cerulli Associates.

Nearly half, or 47%, of the high net worth practices surveyed by Cerulli in 2018 indicated that the primary reason a client left their firm over the past year was because the client passed away and the beneficiaries opted to leave after inheriting assets. That survey was conducted from June to September last year. The 100 respondents included advisors, brokers, multi-family offices, private banks and trust companies.

“It is a constant challenge in the industry. Many advisors seem to be very narrowly focused on the spouse, often at the expense of the next generation,” Cheses says. “Once a client passes away and their child receives the assets, the child inevitably will have a relationship with another advisor, or they simply will want to choose to go with an advisor they know and get along with.”

Cerulli projects that nearly 45 million U.S. households will transfer a total of $68 trillion in wealth to heirs and charity over the course of the next 25 years.

Around 88% – or $60 trillion – of that total will likely go to heirs and the rest to charity, according to Cheses.

This expected multigenerational shift in wealth should incentivize advisors and brokers to alter their existing business models and services, according to Cheses.

Timing is crucial for advisors and brokers who want to make sure assets transferred to heirs stay with their respective firms, according to Cheses.

“From what we’ve heard in the field, I wouldn’t necessarily say there’s a certain [client] age” when advisors and brokers must start working to retain the assets that will eventually be transferred to heirs, Cheses says.

Many advisors and brokers “often just wait too long and they’ll wait until they actually find out that the child is going to inherit the assets, and this comes off as really disingenuous,” Cheses says. “From the child’s standpoint it will seem like they’re only looking to cultivate a relationship for selfish reasons to retain those assets.”

Cheses says the key is to build “a more genuine interest” in the clients’ heirs from an early age – as early as 18 or when a child is getting ready to go to university, starting to budget finances and thinking about their career. “That’s a good starting point,” he says.

These would-be heirs would appreciate advice on student loans, education, budgeting, and certain education tools that can be effective, for example, according to Cheses.

“One thing that we hear pretty frequently – and I think it’s been one of the most successful strategies that a lot of firms are doing right now – is hiring younger advisors,” Cheses says.

Cheses says pairing senior advisors with younger advisors to work with the clients’ children is a strategy that is “much more likely to successfully cultivate and establish relationships with the younger investors.”

Cerulli’s data shows the average advisor is 52 years old, according to Cheses.

“Not a lot of 52-year-olds can really connect with the 25-year-old client segment,” Cheses says. “I think that’s something that is extremely, extremely important.”

A common obstacle for advisors and brokers, however, is gaining access to the would-be heirs and getting permission from their clients to start the wealth transfer conversation.

“One of the things we find, especially in the high-net-worth space, is many clients really don’t feel comfortable sharing their information with their children,” Cheses says.

“A lot of families simply wait too long to involve their children in the process. And I think a big part of this is the fear that if they tell their children that they’re going to receive a significant windfall of assets, they’re simply not going to be motivated to go back to school and will become a couch potato,” he adds.

Advisors and brokers who hit this roadblock say having individuals with tax and investment knowledge in their firm who can walk the family through the “more difficult conversations” involving wealth transfer have helped them significantly, according to Cheses.

Cheses says technology will play the biggest role in altering the business models of advisors and brokers to retain the next generations of clients.

“A lot of our data shows that millennials and Generation X households, in particular, are seemingly becoming more accustomed to digital capabilities so being able to access data easily and on a 24/7 basis is really important,” Cheses says.

From a service standpoint, firms that adopt certain tools – whether account portals, performance reporting tools or even just digital mobile or tablet communication technologies – can help target younger investors that prefer a different way of communicating with advisors, according to Cheses.

“I think it’s really important to recognize that the business model that has been built for the baby boomer generation isn’t necessarily going to cater to the younger group of investors,” Cheses says.

There’s also a difference in how the next generations invest, and advisors and brokers must pay attention, according to Cheses.

Cheses says there’s a lot of opportunity to attract or retain millennial and Generation X investors through investments that comply with environmental, social and governance or socially responsible investing criteria.

“More advisors are looking at products that align with the younger wealth inheritors’ values, whether that be environmental concerns, climate change, gender equality, [etc.]," Cheses says.

“That’s something that we’ve certainly heard in the field that has really helped in terms of engaging this next generation of clients who really prefer to make a greater impact with their wealth compared to their parents,” he adds.