Why advisors should worry about generational wealth
My sixteen year-old son has begun to roll his eyes at my taste in music. My predilection for bands like the Red Hot Chili Peppers and Foo Fighters is met with a somewhat dismissive head shake and a barely audible sigh, signaling my clearly misguided musical appreciation. Come to think of it, I’ve seen that expression before, about 30 years ago, as I looked in the mirror while the sounds of Tony Bennett and Mel Torme drifted up from the basement where my father was relaxing.
Let’s face it; it’s a generational rite of passage to rebel against your parent’s taste in music. So, why would their taste in financial advisors be any different?
Over the years, I’ve written countless white papers, advisor presentations and brochures about the “impending intergenerational wealth transfer” citing numerous studies that point to the magnitude of the opportunity, and what advisors need to do to position their practices to take advantage of the coming deluge. Not once, however, did I ever sit back and think about the visceral behavioral impetus for change associated with wealth transfer, and the monumental challenge advisors will face holding on to assets as the next generation takes possession of them.
80% of heirs switch advisors once they take possession of their inheritance.1
In the November 7th issue of InvestmentNews, Lavonne Kuykendall addresses this challenge and offers insights into tactics many advisors are implementing to try and establish a connection and a rapport with their clients’ heirs and beneficiaries.
While I applaud the effort to bring the topic to the forefront of the practice management dialogue, I can’t help but question the tactical solutions proposed by many advisors. In my considered opinion, more often than not, no amount of face-to-face interaction between you and your clients’ children is going to offset or overcome their innate desire to fire you and chart their own course.
Think back to the rock and roll analogy. Do you honestly believe that simply by sitting you down to repeatedly listen to “his music” and explaining to you the quality of it, that your father could have somehow quelled your desire to forge your own path musically? Would you have ditched The Who and instead be listening to Petula Clark singing “Downtown?” I didn’t think so!
There’s just no getting around the fact that the deck is profoundly stacked against you. So what do you do?
While alluded to in the InvestmentNews article, the fundamental key to generational asset retention isn’t identified as such. At FWG, we’ve coined the phrases “inter-practice client migration” and “intra-practice client migration” to describe what we believe to be the only two viable strategies. Simply put, your best opportunity for holding on to the next generation is to introduce them to “a new music” in the form of an advisor they can call their own.
This individual will likely be a junior advisor in your firm, someone not only close in age to your clients’ heirs, but ideally with an approach and style that’s different from your own. The goal is to create maximum separation between you and your clients’ offspring in an effort to foster a sense of independent decision-making.
For sole practitioners, you may want to contemplate forming an alliance with a young emerging practice where you can receive ongoing compensation on the clients and assets you refer. While obviously it’s not an optimal solution for your firm’s revenues, given the aforementioned 86% statistic, it just may be your best available option. What’s more, it’s an approach that establishes a beneficial working relationship with a partner firm – one that may offer an ideal succession plan for realizing the maximum value of your business when you ultimately decide to transition.
Granted, the tidal wave of generational wealth transfer hasn’t materialized as quickly as most pundits anticipated. But it IS occurring and will continue to gain momentum for years to come. Understanding and addressing the behavioral issues associated with this phenomenon will be paramount to the long-term viability of your business.
1Source: CEG Worldwide, Survey of 334 Inheritors