If you remember nothing else from reading this piece, remember two numbers:
These are two key figures that will reshape the investing community by mid-century. In the coming years, $41 trillion will flow through to 92 million heirs. It is safe to state millennials and generation Z will disrupt the entire financial community. This will impact everything from insurance products and pricing to the creation of new financial derivatives that do not exist today. All to meet the changing landscape of future investor demand.
What are most advisors doing about this forthcoming financial meteor? Just about nothing. Some will plus or minus the stats above, but all will agree our future clientele is the next generation. The time is now for the industry and its advisors to commence adaption. This lacking effort is not going unnoticed. A 2017 JD Power survey claimed half of millennial investors will leave their current broker.
The next generation is like those passing the wealth in a couple of ways. First, they value advice. Second, they find planning and savings a necessity given the fallacies and market movements that severely impacted generations before. Although there are commonalities amongst givers and receivers, heirs have weighty aspirations for their new wealth.
Contrary to some beliefs, the receivers are not sit-back-and-watch generations. They desire impact within financial planning. This includes social responsible investing and giving, and the creation of junior boards to work with other next generation investors to optimize strategies.
Given their demands and desires, the time for reconstruction of current models and firm-wide offerings is now. The market experienced a piece of this with the establishment of robo-investment platforms. Deemed the solution for next generation investors who love all things technology and demand instant gratification, many advisors reviewed and added select technology models for specific next generation investors. Even with recent market volatility and poor performance, robo models are holding through their first major market mayhem well.
Robo models are here to stay and will continuously improve over time with vast developments on the horizon before the mass wealth hits brokerage accounts. Even with forthcoming advancements and additional years of performance credibility, robo investment technology is only the beginning.
Like their wealth transferors, next generation wealth recipients face complex challenges in their lives. This mandates similar amounts, but different focuses in planning. A strong comparison to the interpreted and actual amount of output needed exists in the life insurance planning marketplace. Take Term insurance versus Permanent insurance.
Most believe it is far simpler to underwrite Term insurance. After all, Term variables are miniscule vis-à-vis Permanent inputs. However, the underwriting and case management processes are grossly similar especially the timing to issue. This common mistake leads many advisors to discount Permanent insurance for interpreted ease in issue with Term.
In considering planning needs for next generation clients consider all the current and future complexities involved in their lives. This includes current issues such as collegiate debt and job stock option plans, all the way to desired impact investing goals and how to leverage insurance and investing to promote these goals through their legacy.
Integrated planning for the heirs of your clients will begin earlier and end later than the planning done for patriarchs and matriarchs. Current client planning oftentimes did not begin until late in the job cycle, or near/at retirement. Many advisors begin planning at retirement and did not have the opportunity to work with clients before then.
Next generation clients will face what we label cycle complexities. Cycle complexities exist when change patterns begin or erupt. Graduating advanced training school, managing the financials of multiple jobs at once, taking care of aging parents, and even annual changes in urban apartment leases are each examples of cycle complexities. With next generation clients the days of invest and forget are over.
What to do about these coming changes? There are three areas of interest every next generation financial professional must investigate intra-firm.
First is offering and service. Next generation investors need more than annuities and model portfolios. They need integrated planning and expect the firm they work with to offer such. They demand firms to continuously discover new product capabilities over their cycle complexities. Service is a must. It is no longer a buzz-word or unique offering, rather it is like breathing. Not even thought about but mandated. One change for many firms will be a sublet of service; instant gratification. They will not wait two days for you to call them back.
Second is technology. Why not technology first? Technology is expected. It is assumed at inception you offer technology platforms that allow the next generation investor access to planning, markets, and research at all times. This is far-more advanced than robo investing options. This is key education chambers, social media collaboration with other next generation investors, virtual quarterly meeting, and artificial intelligence planning tools to allow instant adjustments to cycle complexities.
Lastly firms will need to examine fee models. All of the above will be expected with a small or large transfer of wealth. Firms that decide to be agnostic or selective to initial minimum investment amounts will need to ponder fee for service, monthly and annual retention fees, and ala-carte basis point fee models.
Many advisors mistake low current investment amounts with next generation clients as a signal heirs have not reached a need for integrated planning. Rather than opening the door to basic planning beginnings, advisors stick these clients into low-cost robo platforms or basic ETF models. This assumption and outcome is often interpreted by investors as; “my problems are not worth the attention of my family advisor”. When they finally do feel parallel levels of attention, they leave because of past experiences. With proper focus and forecast the three areas of interest will solve this and other next generation firm adjustments.
Firms that make the decision to adjust the foundation to on-ready for the passing of wealth stand to inherit financial growth as well. This may be the best bet in asset growth possible, far outperforming any future marketing plans. And the adjustment may be done gradually versus a firm about-face.
A starting point is in the creation of two boards, one internal and one external.
Internally, collaborate with staff on a consistent basis about the firms current and future needs to serve next generation clients. This should include examining home base offerings, but also strategic alliances such as; IMOs, RIAs, clearing and custody partners, and all outside technology vendors.
The external board is where it gets fun. Select several families and invite their heirs to be a part of your next generation advisory council. Do not only select those nearby, reach out via technology to include children that may be in school or have jobs thousands of miles away. This will serve the purpose of diversity, but also an instant display of your desire to use technology for all things.
Allow this board transparency into what it is you plan to build. Ask constant advice. Next generation advisory council members will be your future advocates and referral sources. Excited to share the story they found a home that gets what they need.
$41 trillion, 92 million, coming soon to those firms ready and adapted to manage it.
Surge Business Consulting
April 2018. Contact firstname.lastname@example.org for additional information. Sources: Surge Business Consulting, Barron’s PENTA, J.D. Power & Associates,. This is not tax or legal advice and is the opinion of its authors, Surge Business Consulting.