It’s transition time in the world of wealth management. An estimated US$68 trillion will move between generations within 25 years according to Cerulli Associates. Indeed, ‘the great wealth transfer’ where baby boomers, born between 1944 and 1964, are passing on their holdings to younger generations, is a watershed event for the industry.
While this is a gradual process, it’s important that RIA leaders keep this in mind. Any changes financial advisory firms make in the coming years should be made not only to address current business needs but also to anticipate changing client demographics. Advisors will need to adjust their models to evolve and ultimately retain assets once they pass to a new, younger client base.
What does this mean in practice?
Going forward advisors will need to offer a service that supports the transition period itself and is also more closely aligned with those that have inherited. The risk of the new generation going elsewhere is too big to ignore. This is all the more important because younger clients tend to be more aware of what is on offer and actively shop around to find the best fit, including self-direction. When wealth is passed down it is often divided as well, posing a risk to AUM even if just some of those assets end up elsewhere.
Capturing the hearts and minds of the new client base will be a key factor when it comes to attrition rates. Advisors must be more attuned to their clients’ opinions, values, and affiliations than ever before. These factors will increasingly shape investment decisions. And while advisors previously tended to guide their clients’ investment strategies, the new wealth holders are often looking for something different - validation, rather than direction. These clients often do preliminary research themselves before taking their plans to advisors for a yes or no. Advisors will have to adapt to these preferences.
Technology’s role
Happily, technology has a role to play in that it can significantly enhance the service proposition that the advisor can offer. Digital systems have a clear client-facing role in the modern financial advisory space, reflecting the desire for more self-guided research and decision-making.
Client-facing planning apps that require an advisor’s input before making a final decision can be an effective hybrid option, empowering young wealth-holders while also keeping them in the financial management ecosystem. These advisory tools can prove to be especially popular among mass-market investors, capturing them before they inherit and move up the wealth scale. And when wealth management firms offer these solutions themselves, they can take value from the clients’ desire for self-service, rather than choosing to fight against it and treating consumer technology as a threat.
And advisors can play into these preferences by changing their fee structures. Using a fee-for-service model, rather than charging an asset-based rate, can cement these changes.
Forward-thinking firms can make technology work for them internally by making sure that advisors have access to client data, making hyper-personalization possible.
In particular, a modern, cloud-based customer relationship management (CRM) system can ensure that visibility around data is assured. Customer data can deliver the experience young people want. Just as it’s easy to lose a client’s esteem by giving the wrong information or a recommendation that clashes with their values, firms can win loyalty by creating hyper-personalized strategies.
Accessing detailed client data stored in CRM software can become the fuel for on-target plans that will please investors. However, firms will have to modernize the way they integrate and store customer data to make this strategy work for them. Customer records should be comprehensive, centrally stored, and actively updated.
This approach means that wealth managers deliver meetings better suited to today’s market conditions. Short sessions at flexible times to accommodate busy schedules may be especially helpful for educating potential and present clients. Even pre-Covid, virtual sessions were productive due to their low barriers to entry. Now that video meetings have gone mainstream, they are an even more powerful tool for financial advisors but are less powerful if the adviser cannot instantly access data and other information to enrich the meeting.
Advisor retention
Another important feature of updated technology is its role in attracting and retaining advisors. This is important given that as clients retire, so too will many of their advisers in the same age bracket.
When an advisory firm operates without comprehensive digital tools, it becomes hard for that organization to keep top-performing advisors engaged. These professionals want to have the best possible chance to succeed in their roles, and they will expect more than physical filing cabinets and Rolodexes.
And in fact, unlocking institutional knowledge will be central to continuity – from both an advisor and client retention viewpoint alike. Principal advisors often have close relationships with clients, having served them for decades - but the resulting knowledge is locked within that advisor’s mind. Making sure this information is entered into CRM systems should factor heavily into succession plans. Data points regarding important client accounts, as well as information relating to heirs, should be easily accessible by incoming managing advisors.
Leaving the era of continuous, steady relationships between advisors, clients and their heirs represents a big change. The movement is inevitable. But younger investors do still want to work with advisors. Being able to evolve and exceed expectations around trends such as personalization matter. If RIAs can evolve to meet the challenges and opportunities of the occurring wealth transfer, their efforts will be rewarded. The key is to treat this era of generational wealth transfer as an opportunity, not just a risk, and prepare accordingly.
This article is from The Wealth Mosaic's US RIA WealthTech Landscape Report 2022. Access the full report here