From the November 2012 issue of Investment Advisor • Subscribe!

Successful Wealth Transfer Demands Strong Relationship Management

A strong plan is essential to retaining family members as clients when wealth is transferred

Beyond the obvious financial connection between advisors and their clients is the often-overlooked personal connection. While an advisor may have a long-standing relationship with a client, it’s crucial to establish a similarly strong connection with the client’s family members. According to a PricewaterhouseCoopers survey, 98% of children who inherit assets from their parents jump ship to another financial advisor soon after the transfer of wealth. However, by fostering multigenerational relationships before a transfer of wealth, advisors can work to ensure a seamless transition that will retain members of the family as clients (For more on retaining assets of Gen X investors, see “Advisors and Gen X”).

Advisors who adopt a forward-looking approach to the relationship process lay the groundwork for successful multigenerational relationships. Communication—the type, quality and frequency—is paramount during each stage of the relationship. According to the 2008 Financial Planning Association white paper “Communication Issues in Life Planning,” clients whose wealth managers regularly communicate with them and their family are two to three times more likely to stay with that wealth manager, two to four times more likely to recommend that wealth manager and up to 26 times more likely to accept that wealth manager’s recommendations.

The Process of Relationship Building

Financial planning is a collaborative process involving all adult members of the family. Advisors must encourage this collaboration in order to successfully bring all family members into discussions and ensure that goals and objectives are clearly defined. From there, custom strategies can be developed to reflect each member’s individual risk tolerances, investment objectives and reporting preferences.

A strong plan is essential to retaining family members as clients when wealth is transferred because the transition period is often when the relationship between the wealth manager and the heir dissolves. The Institute for Preparing Heirs (IPH) found that 70% of heirs lose their money, assets and family harmony after estate transitions. Of this number, the IPH reports that 60% collapse due to breakdowns in trust and communication while 25% turn sour because of a failure on the part of the advisor to prepare heirs for handling new assets. If the advisor hasn’t taken the time to build a relationship with the next generation of the family while the original client is still alive, those heirs are much more likely to turn to a professional, such as an attorney or accountant, with whom they already have a trusted relationship.

To avoid breakdowns in communication, advisors must provide the same consideration to each member of the family as they would to the head of the household. Because younger generations are increasingly tethered to technology, advisors must incorporate relevant technologies and on-demand access to the client’s information. However, advisors must also be cognizant that each member of the family may have different financial goals and risk tolerances. The ability to create customized plans to meet those goals enhances the advisor’s expertise and value, while laying the foundation for deeper relationships into the future.

The Value of Premium Reporting

Due to their technological biases, younger clients have higher expectations when it comes to on-demand access than older generations. Reports that are easily accessible whenever, and in whatever format, clients want them contribute greatly to satisfying the needs of increasingly sophisticated and demanding next-generation clients.

The significance of service and trust cannot be overstated. A Chatham Partners survey of 120 institutional investors found that performance only accounts for 60% of overall client satisfaction, while 40% relies on client service. Periods of negative performance are a reality that affects all investors, but by establishing a standard of direct, honest and transparent communication, advisors can help their clients better understand and weather times of turmoil.

While trust can take years to build, it can be extinguished quickly if advisors fail to contextualize investment performance. Advisors who make a commitment to communication, education and reporting will find that focusing on multigenerational client relationships pays dividends.

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