Why It Makes Sense to Build a Next Generation Practice

Journal of Financial Planning: September 2016

 

Everyone has seen the statistics related to the aging financial adviser. The average age of a financial adviser, depending on what study you look at, is anywhere between 55 and 60. Over the next 10 years, more of these advisers will exit the profession than will invest in building next generation practices. It’s hard to argue against advisers wanting to exit and take short-term risk off the table, because having a longer-term view requires greater investment and risk.

We live in a noisy world. We are inundated with information, and much of that information is negative. However, many industry trends point toward the positive impacts of building a next generation firm, including:

More investors will need advice in the future, not less. More assets will be in play going forward, and even if fees compress, the firms with effective asset-gathering programs will be armed to gain a disproportionate share of the assets and revenue in motion.

We will experience a shortage of well-trained advisers, and the digital-only solutions once believed to help with this shortage may be inadequate in their attempts to do so. Competition will still be fierce, but taking the long view on talent attainment and development will lead to success.

We have a shortage of successor talent, and believe it or not, this can be a positive for building a next generation firm. In many cases, having a successor or group of successors in place will raise the overall value of a firm. Taking the longer view and creating a next generation firm built on successor talent will differentiate that firm in the eyes of many prospects and industry partners.

Now that you know “why” you should build a next generation practice, here are four tips for “how” to capture the assets of next generation clients:

Don’t Let Ambitions Get Ahead of Your Wallet

When the robo-adviser movement picked up steam about three years ago, it seemed that nearly every adviser I communicated with had the goal of starting their own robo-adviser offering and using it to build small-account relationships. As this has played out, it’s obvious that most advisers have inadequate marketing budgets to even make a dent against entrenched players. The investment to take on these institutions is a fool’s game. What’s not a fool’s game is focusing on your clients’ kids. Everyone says that’s a strategy to focus on, but many question whether it really works.

At Envestnet, we analyzed the practices of thousands of advisers on our platform, focusing on the top 10 percent of advisers based on growth rate. We looked at their growth rate in assets by age segment and by what factor they were growing assets against the peer group in each age segment.

In the “next generation” category, defined as clients under 30, the top advisers were growing assets at a rate of 18 times the overall universe. This same group also outpaced the collection of new assets from the over-60 age demographic by 15 times. These top-growth advisers also outpaced the peer group in the other age demographics, but not by as wide a margin as the younger and older segments. When we analyzed the data around this barbell effect, we noted the top-growth advisers were not only winning the retired clients, but also winning the assets of their children.1 This behavior shows how advisers who focus on clients’ children also win assets among clients of all ages.

Financial Planning Is the Key to the Inter-Generational Bridge

There are some certainties in the world: the sky is blue, and financial planning is moving to the center of the financial adviser’s value proposition. As this happens, the use of technology becomes even more paramount in advisory practices. The firms leveraging financial planning software are going to be able to scale the delivery of good planning advice. However, financial planning’s value in the client relationship comes not only in the financial plan itself, but the interpretation of the plan.

As financial planning technology gains more widespread adoption, firms have an opportunity to leverage junior advisers to use the technology to run the plans and leverage the skillsets of the senior, more experienced advisers, in order to help the junior adviser interpret the planning results. One key area is the idea of goal trade-offs—helping clients understand how their goals interact with each other. It’s this use of technology and skillsets that can bridge the gap to not only better serving clients of all ages, but also developing future talent.

Take Advantage of Early Transitions

I believe investors experience 11 major transitions throughout their lives. Of those 11, four are ripe for next generation advisers to use to increase engagement, especially with clients’ children: (1) when the child gets their first job; (2) gets married; (3) buys their first home; and (4) has their first child. This sounds like a small thing, but it can go a long way to building client loyalty.

I was in a very successful adviser’s office a few weeks ago, and we were talking about how it’s easy to forget what clients really care about. This adviser had recently met with a longtime client and, out of nowhere, decided to ask the client what he and the firm had done over the life of their relationship to deliver value. The adviser thought the answer was going to be something along the lines of, “You helped me with my divorce,” or “You helped me figure out a complicated long-term care situation.” The answer was surprising: “I was so impressed that you took the time to sit down with my daughter when she got her first job to discuss her benefit elections. She walked away feeling confident in her start right out of college, and it showed me you care about being an adviser not just to me, but to my family.” That adviser took it as an opportunity to begin encouraging his clients to allow his junior advisers to meet with their children in similar circumstances.

Think Differently

Many advisers have built their client experience around two things: quarterly statements and in-person client meetings. Building a firm that will be successful in the future is going to require thinking differently about a firm’s ability to deliver on multiple client-experience expectations.

Accepting clients who want to conduct some self-service using robo-technology doesn’t render the adviser to be less relevant, and it doesn’t ruin the stickiness of the relationship. In the future, value in client relationships isn’t going to be provided through delivering reports on performance, but by building relationships with multiple generations of clients’ families. Meetings with younger clients need to be more impactful than ever, and advisers will need to tailor their communication strategies to each demographic.

Another example of the need to think differently comes across in something as simple as the onboarding process. The average adviser’s onboarding process involves multiple meetings over the course of a quarter for due diligence, assessment, and selling. However, according to various industry research, most millennials appear unwilling to have multiple onboarding meetings with an adviser.

In the end, embracing this next gen mindset will give advisers the ability to serve a wider client base, protect the loss of assets during wealth transfers, and allow them to serve more clients, thereby increasing the long-term equity value of their practice or firm. 

Endnote

  1. See the October 2015 issue of ENVESTAT Intersection at www.envestnet.com/files/Envestat-Report/images/10-13-15/EN-Envestat-Intersection-Final-10.15.pdf. The data provided was derived from Envestnet user data composite and has not been independently verified.

Jay Hummel is managing director of strategic initiatives and thought leadership at Envestnet, and co-author of Success and Succession: Unlocking Value, Power, and Potential in the Professional Services and Advisory Space, and The Essential Advisor: Building Value in the Investor-Advisor Relationship.

Learn More

Join us for a Journal in the Round virtual roundtable discussion with key Journal
contributors on next gen topics and issues:

· Sept. 28, 2016, 2 p.m., Eastern

Visit OneFPA.org/PDC for details and to register.

   

Topic
Practice Management