While it's easy to get caught up in the seemingly endless waves of reform and inquiry hitting the financial advice industry, there remains a much stronger tidal force in the background - one that could sweep away client books and recurring revenue if it isn't managed proactively.
This force is, of course, the staggeringly large wealth transfer from the retiring baby boomer cohort to subsequent generations. As per research from NMP Education and Griffith University, this represents an estimated $3.5 trillion in assets over 20 years - and that's from 2017, which suggests generational wealth has steadily been changing hands since then.
If the process has already begun, what does that mean for the average financial adviser? What happens when a long-term client passes on their wealth to their inheritors? Crucially, what will those inheritors end up doing with that money?
Based on historical data, one of the first things they'll do is find a new adviser. Deloitte research suggests that 90% of inheritors promptly switch advisers, and as the Institute for Preparing Heirs's Victor Preisser has noted, "70% of families lose control of their assets when an estate is transitioned to the next generation."
In an environment where there's a gradually shrinking number of advisers around to service this new cohort - the industry has seen over a 25% reduction in headcount since FASEA's introduction in January 2019 - it's clear that those who remain will need to become highly competitive in the arenas of client acquisition and retention.
Of course, it's not quite that simple. As the years go by, advisers won't just be competing against their flesh-and-blood industry colleagues - they'll have robots to contend with, too.
The new client
This isn’t to say that robo-advice or micro-investing platforms are in any way incompatible with traditional personal financial advice - quite the opposite, in fact; assuming advisers can appropriately leverage these services, they can be highly complementary. But it’s still worth taking scope of just how different the investing appetites are for younger generations (particularly millennials and zoomers) compared to previous generations and what that might mean in terms of their expectations from a financial adviser.
A Finder report, The state of investing in 2021, suggests that smartphone users have an average of 2.5 finance-related apps each and around 75% of users regularly use those apps to manage their finances.
The report continues: “As consumers increasingly turn to their phones for financial advice, the market for investment robo-advisors is flourishing. Like traditional financial planners, robo-advisors provide tailored financial advice, but at a fraction of the cost.
“The platform uses a mix of algorithms and background analysis to customise an investor’s portfolio, and then continuously re-balances the portfolio to ensure alignment with the investor’s financial goals.”
A 2017 Deloitte report, which now seems quite prescient given the explosion in robo-investing and robo-advice services over the past few years, states it even more plainly: while the traditional client services model won’t become entirely obsolete, “a shift is inevitable”.
“Clients are getting used to experiencing the services of and interacting with a provider over several channels,” the report explains, “and they expect this communication to be as seamless as possible. These expectations include geographical freedom and device independence which is pushing solutions optimized for mobile interaction to the forefront.”
The first step
So: advisers are facing a situation where wealth is being transferred en masse from one generation, whose inheritors are highly unlikely to maintain existing advice relationships and may, in fact, opt out of the market entirely due to the prevalence and accessibility of automated advice and investing platforms. Oh, and there are fewer and fewer advisers left around to help them.
What needs to be done? The scenario as described here may seem overwhelming - insurmountable, even - but that doesn’t mean there aren’t ways to prepare for the changes ahead.
As per recent research from Business Health, one of the biggest - and simplest - reasons a client’s children tend to seek new advice following a wealth transfer is because they have no relationship with the existing adviser. This is a problem given that over half of advice clients in Australia are now over 60 years old.
Business Health principal Terry Bell explains: "They’re moving into retiree drawdown mode. Most advisers don’t have a strong connection to their clients’ children if they even have one at all. That’s the big risk advisers face today: they don’t know the children."
The way to change this might be through designing a new advice model - one that takes inspiration from the family office/private wealth services which are traditionally the purview of the ultra-wealthy. This isn’t an entirely new idea in Australian advice - back in 2016, for example, Findex launched a family office-style offering where the adviser operated as the single point of contact for a range of services and service providers.
According to Terry, though, businesses with this kind of offering are “few and far between”. In fact, Business Health’s CATScan client survey tool has found that “range of services” has slipped to the overall third-lowest ranking in terms of client satisfaction.
If you were looking to address this, especially with a view to generational client retention, where would you start?
“The obvious crossover is estate planning,” Terry says. “Clients have worked hard to create an estate and pass it to their children. And we know those children usually don’t have a good relationship with their adviser. But estate planning is one area where the children have an inherent interest. In most family office-type arrangements, estate planning is almost the first thing you talk about.”
Outside of traditional family office arrangements, though, it seems to be a much lower-priority conversation. As evidence for this, Terry notes that one in three l advice clients don’t have a will.
Broadening your services
“It’s really staggering,” he says. “But it’s one of the most obvious ‘ways in’ to the next generation. The parents understand it, the kids understand it and the adviser can sit in the middle of that conversation.”
Other entry-points Terry suggests include aged care and adding connections to buyer's or seller's advocacy programs for when clients decide to sell their family home. In all cases, though, he acknowledges incorporating these services won’t be easy.
“You have to have the skills and commitment to do it,” he says. “I understand it’s been a pretty disruptive couple of years, and maybe, as an adviser, I’m more worried about COVID or my educational requirements or my licensee changing.
“But at the end of the day, even if you can’t do anything about those changes, you can look after your business. Introduce training sessions and tools. It’ll take time; you won’t just close up on Friday and on Monday morning you’re an expert, but you can work towards it.”
And as Terry explains, working towards these changes just makes good, long-term business sense: “In any business, you’re faced with the inevitability of clients leaving for one reason or another. Any business owner needs to replace that revenue, so how do you do that? You go to your warmest source, which is the children of the parents you know. Unless you start doing it now, they’ll be gone.”
As we’ve established above, time is definitely running out for those advice businesses looking to retain their client-base over successive generations. The opportunity is here, now, for advisers to position themselves as the partner for and facilitator of the intergenerational conversations that will have to happen over the next decade or so.
Given the shifting attitudes towards communications channels and growing preferences for frictionless financial management in younger generations, your technology strategy may require a review as well. After all, getting to know a clients’ family - along with their needs and long-term goals - is only the first step. Beyond that, you’ll need ways to demonstrate ongoing value - on their terms.
None of this will happen overnight, as Terry said. But with the intergenerational tsunami upon us, there’s never been a better time to start paddling.
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