5 disruptors that will transform advisors’ businesses

3. The Longevity Trend

Signing up younger, less wealthy clients through online platforms not only meets the needs of those clients, but also solves a serious problem for advisors: Their clients are older. It’s not just that older clients are more likely to, well, die, they’re also drawing down their assets rather than accumulating wealth. While some advisors are addressing the aging client issue by instituting revenue models that do not rely on managing assets for a fee, the longevity trend poses broader issues for advisors.

Life expectancy in developed countries has been increasing at a regular pace since the mid-19th century, helped along by improvements in sanitation and medical science. In October 2014, the National Center for Health Statistics reported that average life expectancy for Americans aged 65 as of 2012 had risen to 19.3 years—20.5 years for women; 17.9 years for men. Robert Anders, NCHS chief of mortality statistics, told The New York Times that “there’s been a fairly substantial increase just in the past decade” in Americans’ lifespans.

How long increases in life expectancy will continue is impossible to predict because scientists studying longevity have yet to discover why some people live very long lives. While many correlations have been found with longevity—the wealthier a person is, and the more educated—finding the cause of longer lifespans is proving difficult.

One of the challenges for advisors and their partners is to find the right ways—through medical savings accounts, new insurance products and effective retirement income planning—to make those extended golden years enjoyable to the end. 

But advisors aren’t in the business of predicting whether average longevity will increase slightly, dramatically or stay the same; they’re in the business of accommodating a range of possible outcomes. Most financial planners assume their clients will live at least into their 90s; some go even further. The Census Bureau reported in 2010 that there were 53,364 Americans aged 100 or higher, or 1.73 percent of the total population. Consider that the average life expectancy of a person born in 1910 was 48 years for men and 51 for women. Life expectancy for someone turning 65 this year—born in 1950—was 65.6 years for men and 71 for women. For people born in 2014, life expectancy is 81.2 years for women and 76.4 years for men.

There will be many older people as each year progresses. While some advisors use individual and family medical histories to project the likely life expectancy of individual clients for purposes of a financial plan, the simple truth is that we can’t accurately predict when someone will die.

4. The Politics Trend

In May 2009, Mohamed El-Erian of PIMCO began his speech at Morningstar’s Investment Conference by bluntly saying, “Get used to the government being your partner.” While he was referring at least partly to the Federal Reserve’s then nascent TARP program, El-Erian was also voicing a broader truth: that the environment in which advisors operate is more political than ever.

Just as the Great Depression led to unprecedented government oversight of the country, the Great Recession inserted legislators and regulators permanently into the markets. Only advisors and associations who can wield influence with regulators and legislators on behalf of their clients will succeed.

If you are an advisor, your interests and those of your clients should be made clear to the legislators and regulators. The only way to make those interests known is to become political. That means not simply contributing to election campaigns, but also supporting the broader advisor associations and groups that speak on your behalf. There’s no direct quid pro quo to making political donations. Rather, donating gets you a place at the table with lawmakers through which you can exert influence.

There’s another angle to politics: who votes and who doesn’t. In the 2008 presidential election, 58.2 percent of the 235 million eligible voters cast ballots, the biggest turnout since 1968. However, according to the Census Bureau, only 48 percent of U.S. citizens aged 18-24 voted in 2008, compared to 72.4 percent of citizens aged 65–74.

The last of the baby boomers will have turned 65 by 2030—only 15 years away—and 18percent of Americans will be 65 or over then, compared to 13percent now. There are now 2.8 workers for each Social Security beneficiary; by 2033 there will be 2.1 workers for each beneficiary, the Social Security Administration projects.

Social Security’s costs exceeded its income from payroll and other taxes in 2013 as it has since 2010, the SSA trustees reported in 2014, and are expected to continue to do so through 2023, when Social Security’s “reserves will be depleted.” So as we approach 2033, the needs of which part of the electorate will be satisfied—voters or non-voters?

It’s not just lawmakers that politics affects. The Financial Services Institute has had much success in marshaling its thousands of FA members to derail or soften state legislation threatening BD reps’ independent contractor status and efforts to tax the provision of financial advice.

As Washington Bureau Chief Melanie Waddell reported in these pages just last month, the SEC has become more dysfunctional over the years due to greater interest in Congress over the securities laws. According to former SEC commissioner Steve Wallman, lawmakers now evince “far greater activism and deeper immersion” in matters that impact the agency, resulting in Congress now becoming a “major and continuous player” in SEC matters.

The government will remain a partner for some time to come, not only as Dodd-Frank is implemented (or scaled back), but also as major political issues like Social Security funding and the long-term federal debt ferment.

5. The Generations Trend

Advisors are old: Their average age is in the mid-50s, while top producers at wirehouses average 60 years of age. Current clients—the baby boomers, mostly—match their advisors’ age. Advisors tend to be white males, reflecting their brokerage house and insurance company lineage. Boomers won’t live forever, and the country’s ethnic and racial composition is changing rapidly. To succeed, the advisor community must become more female and brown so it can serve the next generation of clients, whose expectations and preferred methods of communication are far different from the boomers.

The advisor talent shortage has been well documented, and those who train advisors are all making efforts to attract more younger people, women and minorities to meet the need. In February 2014, Cerulli reported that more than one-third of advisors plan to retire over the next decade, resulting in the need for an additional 200,000 new professionals.

But the generations trend goes beyond advisor demographics; there are broader demographic trends at work that will affect how advisors plan for individuals and their families, which will increasingly be multiple generations. According to Pew’s Taylor, more than 50 million people in the U.S. are now living in multigenerational households, a record.

How will an advisor make an estate plan for a client when three, four or five generations of a family already exist? Which set of grandparents or great-grandparents will contribute to a 529 plan? How will clients draw up trusts to keep a business or the family wealth in multiple generations’ hands?

While Taylor found that only 29 percent of Americans say there is a “strong conflict” between the young and old, 58 percent say there is such a conflict between the poor and the rich. There are deep divides between the old and young on some hot-button social issues: only 38 percent of the “Silent Generation” say they favor allowing same-sex marriage, while 68 percent of millennials say they do. The generations also divide on traditional American practices like church membership, though (luckily for boomers and silents) there remains strong multigenerational support for funding Social Security and Medicaid.

It’s certainly true that people younger than the average advisor like to communicate in different ways, and perhaps (as the robo-advisors suggest) they may even want to work with their “financial advice provider” in different ways. They certainly have higher expectations of their advice givers when it comes to expecting access to their advisor and their own financial data that is mobile and direct, unhindered by geography or time of day or intermediaries.

Summing Up

Speaking at the Junxure annual user conference in October, Pershing’s Tibergien presented a number of reasons why he believes “the golden age of the advisory business is just beginning.” To participate in that golden age, he said, advisors have to ensure that their firms have consistent profitability, transferable value and loyal clients, and must provide career growth for firm employees. He urged advisors to look ahead 10 years, to ask themselves what they’ll be doing then, what their clients will look like and which of their colleagues will still be around. “Are you planning for your destiny,” he asked, or for “your exit?” The advisory profession, he said in a late October speech at Pershing’s Discover conference in New York, “is a business created by boomers for boomers; that has to change.”