Advisers' business booming, but dark clouds looming

Firms lagging in long-term planning, standing out from the crowd and connecting with young investors

Apr 10, 2014 @ 11:58 am

By Carl O'Donnell

investor satisfaction, advisers, clients, gen y, younger clients, retirement, assets under managment
+ Zoom

Thanks to a five-year bull market, advisers are enjoying the highest levels of assets under management and compensation since 2007.

About 95% of advisers saw increased business in the past 12 months, with average assets under management at $62 million, and average compensation at $240,000, according to a study released Thursday by Fidelity Investments.

“This isn't surprising,” said David Hultstrom, an adviser at Financial Architects. “The market is at record levels and is larger in size. Meanwhile, there are fewer advisers in the industry.”

The typical practice, however, is lagging in several areas, including long-term planning, standing out from competition and connecting with younger advisers.

Two-thirds of financial advisers have no multiyear plan in place and nearly half have not set formal career goals, according to the Fidelity report. This lack of long-term vision can be a drag on growth and efficiency, according to the survey.

When it comes to differentiation, most advisers — 66%, according to the Fidelity study — have been lulled into a false sense of security by assuming that “personal client attention” is enough make their firm stand out. The study recommends advisers identity additional means of differentiation that aren't quite as ubiquitous.

Finally, a large number of advisory firms stand to lose out in the race for younger clients. Forty-three percent of advisers are not focusing on meeting the needs of younger investors, which could mean trouble as the typical adviser's client base continues to age, the report said.

But there's at least one good reason why some advisory firms have a paucity of young clients.

(Don't miss: Millennials: Young and poor now, but your mainstay clients someday)

“Young people typically don't have any money,” Mr. Hultstrom said. “What savings they do have are often in 401(k) plans, which usually aren't managed by an adviser. Their financial lives simply aren't that complicated.”

Craig Martin, director of investment services at J.D. Power & Associates, echoed Mr. Hultstrom.

“Understandably, firms are going to place added focus on the clients and prospects with the greatest wealth,” said Mr. Martin said in a statement accompanying J.D. Power's annual investor satisfaction study. “But often the time and effort that is spent trying to engage with younger investors is not productive because it fails to demonstrate an understanding of their unique needs and wants.”

One way firms could increase exposure to younger clients is through financial planning rather than asset management. Even if young people don't have investible assets, a brief financial planning session — even on a pro bono basis — could build a valuable relationship. This could come in handy later on, when that young person gains more assets, Mr. Hultstrom said.

The J.D. Power study found that less than half of young investors — only 44% — say they “strongly agree” that their adviser understands their investment goals, dramatically less than the 71% of retirement age investors who feel that way. J.D. Power defines young investors as those 35 and younger.

In addition, just 39% of young investors “strongly agree” that their adviser makes an effort to ensure they understand where their investments are made and why, compared with 66% of retirement investors.

The biggest reason for this disconnect could be communication. Advisers need to be sure to be accessible by e-mail, the survey said. Some young people may even expect an adviser to be responsive to a text message, Mr. Hultstrom said.

“The biggest problem may be the generation gap,” Mr. Hultstrom said. “It's not so much that advisers don't understand what young people need, but that communication styles differ, so young people feel that 'they don't understand me.'”

The J.D. Power study is based on survey responses from more than 4,400 investors who make some or all of their investment decisions with an investment adviser. Participants in the Fidelity study included 813 advisers from across multiple firm types who work primarily with individual investors and manage a minimum of $10 million in individual or household investible assets.

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