Client of the Future

We spend a lot of time thinking about what will drive success in the future of the advisory business. Financial performance studies reveal that advisory practices are managed better today than they were just a decade ago. We also know that firms today are larger, often more sophisticated, more independent and more reliant on technology. Yet something has been nagging at us about the way in which most advisory firms are oriented.

The epiphany came when we realized our view was more about the advisor of the future than the client of the future.

It seems the average advisory practice model has been built around the baby boom generation. Trade press and industry advertisements often emphasize retirement planning as the cornerstone of a thriving practice, especially if your market is the mass affluent. While the wealth created by those born after World War II is substantial, the growth phase for boomers is subsiding as investors start to draw on assets for retirement. While advisors once enjoyed rising fees for the management of these assets, funds are now being repurposed to support retirement, with the hope by clients that their last check goes to the funeral home—and that it bounces.

Retirees and pre-retirees can be a great catalyst for advisors building assets under management, but relying too heavily on this client base ultimately may curb a firm’s organic growth. Consider two commonly cited statistics: First, many estimate that real rates of return on client portfolios will be close to 4% for the foreseeable future. Meanwhile, the required withdrawal rate for people financing their life in retirement will likely exceed 4% on average. I defer to the financial planners on their confidence in these assumptions, but few will argue that the current environment is yielding lower returns, and requiring higher withdrawal rates, than predicted. For advisors, a stagnant or declining income coupled with the rising cost of doing business threaten to squeeze profit margins and depress business value.

Times are changing. Advisors grew up with boomers and built their businesses on the assets and market appreciation generated by ranks of fellow workers in their earning prime. Heck, most advisors are boomers themselves, so they can relate to their clients’ issues. Take a moment and examine your current client base as a laddered portfolio. You may discover that the boomer category will reach “maturity” earlier than you desire. Like the retirees themselves, your firm needs a functioning earnings generator. Where will new assets come from?

Let’s widen the lens and take a look at the demographics. Boomers were born between 1946 and 1964; Generation X clients were born between 1965 and 1979; millennials were born from 1980 to 2000. Are younger investors adequately represented in your client portfolio? To help advisors diversify their practices to include Gen X and millennials, Cam Marston of Generational Insights recently wrote a new e-book titled “The Gen-Savvy Financial Advisor.” Marston’s central thesis is that everyone sees the world through his or her own generational filter. In some cases the age differences are mitigated by commonalities such as religion or background, but in many other cases the generation gap is wide and deep.

Marston’s helpful book outlines the financial traits of each generation, suggests ways to connect with younger investors and shares strategies for positioning your business to serve each demographic. While Marston acknowledges the staying power of the boomer generation, he urges advisors to consider targeting their clients’ children and grandchildren. Did you know:

• Twenty-nine percent of wealthy investors are under age 50 and control 37% of potential investment assets.
• Investors between ages 18 and 50 will inherit more than $41 trillion by 2052.
• Eighty-six percent of heirs say they will not use their parents’ advisors.