Research: What's happening to the way Americans are structuring their financial relationships?Cohen: People have an innate desire for simplicity in their financial service relationships. About 80 percent would like to do business with one financial institution, and a comparable proportion would like to do business with a single financial intermediary. That doesn't vary by age or income; it's what we call a financial universal.
Is that even possible today?I'm afraid that's the fantasy. We all live in the same ether of 24/7 media bombardment where everything in the mix is competing for our valuable resources of time and attention. In the 1990s, there was this sense that you could just add another credit card, mutual fund, relationship. That's hit the wall and our willingness to add new relationships has hit a plateau and actually seems to be on the decline.
Meanwhile, people are finding themselves more responsible for their financial futures than they used to, and simplicity has become very difficult as they ramp up more and more financial relationships and more and more products -- and more and more self-reliant situations where they have to figure things out for themselves. In the 1990s, everyone thought they were really good at doing it for themselves, but the end of that era really pointed out to all of us that we may not be the best at picking out the right investments. That gives advisors something to aspire to.
Is there a demographic angle to this?Financial relationships tend to ramp up when you're getting started, when household formation is starting and through until the oldest child is around 18, then tend to ramp back down again until you're back down to one or two parties helping to settle the estate. With generations older than the boomers, you could predict where they were in their financial arc by their age, but with the boomers, age lost its crispness. Life used to be nasty, brutish and short, but as life expectancy expanded over the last century from almost 50 to almost 80, people are more able to wait to have children. It's still somewhat age-dependent, but think about it: I'm 55 years old. I have a 12-year-old and a 15-year-old. One friend's kids are over 30; another is completely retired and never had kids, never got married. A fourth recently died of lung cancer. Age has lost its crispness.
So will the boomers actually simplify their lives? You can predict that the number of relationships they're utilizing will shrink. In the last 30 years, they've led what's been characterized as a period of conspicuous consumption that made sense when they were in the life stages when they were growing their families and their careers, but for the remaining life stages, it's the opposite. Boomers notice this when they look at their parents, who went from the big houses to the small houses to the retirement condos to the very small room, the final stage. Likewise, the boomers are going to be shifting to what I call conspicuous conservation, the opposite of conspicuous consumption. I think the next 30 years will reflect a tendency to try to simplify.
Simplifying even the idea of retirement?Retirement is what I like to call a 20th-century anachronism. Unless your name was Carnegie, Mellon or Rockefeller, it didn't really exist before the 20th century because you didn't have enough money to retire in today's sense of being an entitlement. You quit working when your body gave out. Today, it makes very little sense when people live an average of almost 80 years to spend an average of 15 years in this "retired" state. I can imagine 20 years and 30 years down the road where we might be in a place where median life expectancy is 100. What will retirement look like? We're stuck with the word "retirement," but what it means is going to shift. And what happens when you get older and your clientele get older? One thing that gets very important in this industry is the transfer of the book; when you're a very wealthy advisor to very wealthy people, you tell them you need to meet their heirs. The smart intermediary has the junior advisor sitting in that meeting because that person will inevitably be the one working with these next-generation clients in the future.
How can today's advisors prepare for this new world?I think the type of advisor best suited for this has expertise at his or her beck and call, but is more of a generalist who can understand what the boomer is trying to do. The financial services intermediary of the future has a robust group of products on the shelf, but has a delivery mechanism that can handle the varied needs of a mass-affluent clientele.
Can the advisory model scale to serve this broader client base?The wealthy will continue to retire because they can afford to do so. The poor have no problem with retirement, basically because they can't. It's in that big group in the middle where there's uncertainty, and that's where the financial industry can actually help them manage risk and provide for future needs. That's where the biggest opportunities are, but it requires simplifying the way intermediaries do business. Have you ever had someone sit down and try to sell you an annuity? It's really not a pleasant process.
Financial advisors will have to serve a much broader role for a larger population. If they adopt a generalist orientation and look for like-minded people when building their clientele, they should be able to suggest products and services suitable to that clientele. They say that people often sell to people like themselves. Advisors should seek out people in a similar general life stage and with similar general interests.
This seems critical to survival if even those rare UHNW clients really want to pare down their financial relationships.I think one tremendously successful strategy would be to develop a really simple way for people to retire. The mass market is critical because it's so large, and as we all live longer, we all have more assets. The wealth pyramid used to be this long spindle where it would come down from the king and a duke to all the serfs. It's turning more into a diamond pattern, no longer supported on the base of the very poor but on a broad population in the middle. If you simplify the products and the channel, there's a lot you can do for that big market -- the 80 percent of the population you could be serving on a scale that allows you to do an awful lot with not as much.
Can advisors streamline their businesses enough to deliver that kind of relationship to the mass market?The goal here is to learn enough by serving the high-end clients to figure out how to deliver the simplified products and services to the mass affluent and then the mass markets. The first car was really expensive; the second cost half as much and the millionth Model T cost maybe about $1,000. That's not a small amount, but it had become comparatively affordable.
Any other advice for advisors trying to compete for investors' time and attention?Take the best advice you give your best clients. Prepare contingency plans for your own practice, continue to expand and grow your interests and understand that the marketplace can offer simplicity and convenience as well as relationships. Instead of trying to become more of a specialist, veer in the other direction and become more of a generalist. When you fill one of a client's needs, even if it's not a financial need, you're bonding that client to you.