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Practice Management > Building Your Business

X + Y = Greater Value

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If I were buying a financial advisory firm, I would discount the firm’s value based on the number of clients and staff over the age of 55. Why? In my mind, the value of a business is based on its future prospects—and aging clients and staff will have a diminishing impact on the firm’s future growth.

Considering that almost every seller is a baby boomer or older, my opening statement is like rolling a stink bomb into the middle of a retirement party. Many advisors have latched onto the concept that their practice’s value reflects the trailing 12 months of revenues, with a premium added for the amount of pain and suffering they have endured over their careers. So to suggest that a firm’s value should be based on the future outlook may seem like heresy to sellers (while logical to buyers).

But is that far off from the way in which you make investment recommendations to your clients? Do you recommend a mutual fund or stock because of how it performed in the past? Or do you premise your recommendations on what you expect it will do in the future? For the purpose of my argument here, I’ll presume you are viewing the road through the windshield, not the rearview mirror.

Take a look at the demographics of your client base. What do the numbers tell you about the rate of addition versus the rate of attrition? And assuming you agree that we are operating in a low growth environment for the average portfolio, how many new clients will you need to generate in order to avoid absolute shrinkage in your business? Consider too the mortality of your client base and what will happen to those assets once your clients have ascended to the Pearly Gates.

It’s dangerous to generalize because some very strong and growing practices are doing great things around the pre-retirement and retirement market. In other words, for many advisory firms, the boomer market can be an engine for growth to the extent that they are systematically adding more clients, IRA and 401(k) plan rollovers and proceeds from the sale of illiquid assets. But research shows that most successful practices run by mature practitioners reach a stagnant phase in business development at some point, only adding new clients incidentally.

Compounding the baby boomer dilemma, not only are your clients aging, but your partners and employees are also in your age bracket. Every time you contemplate adding a young person, you grow resentful that they want to get paid a fair market wage when they will depend on you to generate new clients and strategically guide each decision. “Who do they think they are to demand compensation when the survival of this business is so dependent on me?” You also question their work ethic, their commitment to your business, their cynicism about institutions you revere and their incessant use of texting and ear buds as a way of tuning you out. These negative and often condescending attitudes turn away young professionals seeking a dynamic work environment.

Unfortunately, as an industry, we’ve done a poor job of recognizing that the future of this profession and each advisory firm will depend on how well we recruit Generation X and Y advisors. According to Cerulli, only 22% of the advisory population is under the age of 40 and 5% is under the age of 30. That is a disturbing statistic when we consider how compelling a career opportunity this could be, especially at a time when so many college graduates face huge student loans and a challenging job market. How did we manage to discourage an entire generation from choosing financial advice as a positive, productive, intellectually stimulating and financially rewarding career?

The Client Point of View

While hiring the right people is important, the future of this business will be dictated by the clients it serves and how it serves them. Because boomers and their parents control the majority of the country’s wealth, there is a natural tendency to “go where the money is,” as notorious bank robber Willie Sutton famously said.

This strategy is not necessarily supported by the facts in 2012, however. A survey conducted last year by Cisco Systems found that wealthy investors under 50 years of age represented just 29% of their survey respondents, yet held a high percentage of all assets: 37%. Their study concluded that investors under 50—Gen Y and X—represent an $18.6 billion opportunity. And not to belabor the point, but all of these investors are in their accumulation years and quite a distance away from withdrawing assets.

Many of these potential clients also stand to inherit vast sums in the coming years. Yet a study by Rothstein Kass reported that 86% of the heirs of wealthy families will fire their parents’ advisors once the money flows to them.

A recent guidebook produced by Pershing, “Generation X and Y Investors Are the Future of Your Business,” reveals big changes that advisors who desire to endure beyond their firm’s founders should know. (For a copy of this study, e-mail me or go to

The guidebook points out that younger investors have unique behaviors and preferences. First, and the most obvious, is that they are more influenced by the use of technology than their parents. This has spawned a do-it-yourself attitude and a frustration with complicated communications.

Second, they tend to be wary of experts and to question the value of anyone occupying a middleman role. However, they do tend to make decisions after validating their ideas with others whom they trust, such as their friends and parents.

These two factors may help advisors restructure their businesses and orient their systems, training and relationship building to serve younger clients. Eventually, as younger investors’ lives become more complex, they will need to seek professionals to guide them through the maze of choices. Likely they will research these choices in advance before seeking a sounding board for their conclusions. The fact that so many investors between the ages of 25 and 34 are regarded as “validators”—54%, according to The Sullivan Trust Study—indicates that there may be room to introduce yourself to these relationships early.

Other interesting data points have emerged from these studies, proving that young investors need help managing their money—on average, they had 34% of their assets in equity and 30% in cash. And they are accumulators!

The Pershing guidebook mentioned earlier outlines five tactics that will help advisory firms position themselves effectively to serve the next generation of clients:

  • Gain access through trusted counselors. Gen X and Y prospects rely on parents and friends for validation.
  • Invest in a more powerful Web presence. Younger clients expect a dynamic and interactive website, not one that looks like an electronic brochure.
  • Deliver information in a customized electronic form. Don’t rule out making contact via mobile devices.
  • Welcome younger advisors onto your team. Trust them to work closely with younger clients, under your tutelage and mentoring.
  • Build flexibility into your strategies. Be ready to modify how you work and communicate with Gen X and Y clients as your understanding of their needs evolves.

There is a natural discomfort in changing what has worked for so many years. But advisors who wish to build an enduring business with transferable value need to rethink their direction for the future. A big element of growing your business in the future will revolve around the next generation of clients and staff.


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