From the September 2017 issue of Investment Advisor • Subscribe!

It’s Not Them, It’s You: Millennials Demand a New Business Model

Millennial clients and advisors are dramatically changing the advisory business

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In my July 18 ThinkAdvisor blog, “These Millennial Advisors Are Killing it With Younger Clients,” I wrote about how, through my mentoring program, I’ve discovered that millennial generation advisors (ages 25 to 30 years) quietly have created their own business model for their independent advisory businesses. These young advisors are providing what might be called financial consulting for millennial clients for a monthly fee — on average, about $215 a month. And they are attracting young clients in boatloads.

If you’re a baby-boom-aged advisor or even one of my fellow Generation Xers, you’re undoubtedly thinking: “How cute, but this has nothing to do with me or my business.” Wrong-O! In fact, this column is written especially for you because what these younger advisors are doing has everything to do with your business and its future.

I know, most baby-boom advisors, and Gen X advisors, too, don't think much of millennials as client prospects. For one thing, at that age, the vast majority of them don't have much in the way of savings, nor do they even earn enough to be good client prospects. Surveys tell us that most members of the youngest generation are focused on living for the moment, in both their lifestyles and their jobs. The sound-bite example is that they’d much rather save for a great vacation than to buy a house.

But the owners of established advisory businesses are missing two key facts. First, sooner or later, the millennials will grow up and have families and careers, along with all of the challenges that other generations face: paying for children's education, saving for retirement, buying a house, caring for elderly parents, etc. In short, they will become good advisory clients, even if they kick and scream all the way.

The second key point is that millennials actually do want financial advice today — and they’ll pay for it. They just want a different kind of advice, delivered in a different way. The millennial advisors that I work with know this, and have developed a business model that meets those needs. Consequently, millennial clients are flocking to them.

Let's fast forward 10 years or so, to when those millennials’ needs change and they become candidates for more traditional advisory firms. What do you think the chances are that older firms will be able to lure them away from an advisor they’ve been working with for a decade? Not very good, especially considering that their current advisor understands them and their needs way better than older advisors ever will.

Are you beginning to see where this is going? Without an influx of millennial clients to replace their aging baby-boom clients and retiring Gen Xers, today's established advisory businesses are going to have a real problem. I hate to be the one to break it to you, but simply hiring someone to create a marketing plan targeting millennials really isn't going to help — they don't like being sold.

What Can Advisors Do

As far as I can see, the only hope for the survival of today's established advisory businesses is to hire millennial advisors. But — and this is a big “but” — older business owners can't expect the younger advisors to work within their established system. They are going to have to let the millennial advisors do it their way with their clients. Here's a short list of what you’ll need to know and do to make it work:

1. To introduce millennial advice into your advisory business, you have to at least try to understand, and completely accept, the way younger advisors are making it work today. Their business model is based on what millennial clients want and how they want to get it.

As I said, this new advisory model is based on a low monthly retainer. No commissions, no AUM fees. Remember, typically, millennial clients don't have much money. The great news is that they want financial advice and are willing to pay around $215 a month for it.

Just as their payment method isn't traditional, what they want and how they want it aren't traditional either. What millennial clients want is very basic financial advice: a budget, a simple financial plan, advice about a basic investment portfolio and where to get it, what to do with their annual bonus, etc. They see “financial advice” as a separate service from “investment management.”

But even more important to them is being able to talk to their financial advisor on the phone when they have questions or issues come up. They don't want to come to the advisor's office — ever. They want to log on to the advisor's website, schedule a phone appointment and call in. In short, they just want someone to talk to about their finances.

Consequently, millennial advisors don't manage assets, sell securities or even meet with clients or prospects. They just tell their clients what they need to do and how to do it.

This creates two very important advantages to the millennial advisory model. First, they have very low overhead. Working from home or a small office, they don't need fancy furniture or locations or even staff — most millennial advisors are solo practitioners. Because they don't sell anything or manage assets, they don't share revenues or pay custodian fees, or have anything to monitor or follow up on.

Secondly, they can work with a lot of these low-maintenance clients — on average, about 135 per advisor. So, you do the math: 135 clients times $215 times 12 months equals $348,300 per year, with very low expenses. Despite their nontraditional nature and small size, these are very, very good businesses.

2. You’re going to have to put your ego aside and listen to the millennial advisors you hire. This is going to be the hardest part for most older firm owners. Both your business experience and your financial expertise is of little or no value to millennial clients. And you can forget about what you think you’ve learned about social media. Millennials will search online to find an advisor, and then they want to talk on the phone.

So, if you hire a millennial advisor, you have to reconcile yourself to the fact that when it comes to millennial clients, they are the expert and you are not. After all, if you were the expert on advising millennials you wouldn't need to hire a millennial advisor.

Before you hire a young advisor, do some serious soul-searching, and be absolutely sure you will be able to follow their lead in the younger client market. If you don't think you can, do both of you a big favor and don't even try.

3. You can't simply integrate them into your existing firm. As I said, virtually all millennial-owned advisory businesses are low-overhead, one-person shops. As the numbers above show, it's a really good business model, so don't try to screw around with it. To bring a millennial advisor into your firm, create a separate subsidiary just for them, with a separate brand and name, and let them run it, which includes letting them control attracting millennial clients.

A silver lining here is that millennial advisors tend to be way more interested in cash flow than equity ownership. So, if you pay them a substantial portion of the revenues they generate, give them some participation if the business is sold (they aren't stupid), and let them run their business, they’ll be more than happy.

4. You have to change the way you think about sales and marketing. This is one of the key reasons you need a separate business for millennial advice. Millennial advisors are getting clients in two ways: Yelp and online educational platforms like videos and e-books about financial matters. What's more, forget pre-screening and two-day call-backs. Millennial clients won't stand for it. Let them just make an appointment online for a phone call. If they like what they hear, let them engage the firm through DocuSign. Experienced millennial advisors know how to do this. Just get out of their way.

5. Change the way you think about financial advice. This is perhaps the most important step in taking your firm into the future. In this business, we all have preconceptions of what we think “financial advice” is. Some people think it's asset management. Others say it's financial planning. Lots of folks believe it's a combination of the two. The reality is that “financial advice” is whatever clients want it to be and will pay for.

With the maturing of the millennial generation, financial advice is changing, perhaps dramatically. The advisory businesses that embrace those changes today will be the industry leaders tomorrow.

--- Read Millennials Need to Protect Their Income on ThinkAdvisor. 

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