The next great opportunity for investment advisers

Registered investment advisers have had a great run in recent years, but to keep it going, they must engage with the next generation of investors, diversify the talent within their firms, and expand their use of new technologies, leaders of Schwab Advisor Services told advisers at IMPACT 2014.

“Your model has served (clients) so well that I know it’s going to become the model for the next generation, but it will need to evolve to serve the next generation – what we’re calling Generation Now,” said Bernie Clark, executive vice president of Schwab Advisor Services. “This is the next opportunity.”

With $4 trillion in assets under management, RIAs continue to be the fastest-growing segment within the financial services industry, Mr. Clark said during the opening general session of IMPACT 2014.

But nearly 70% of RIA clients either are retired or within 10 years of retiring, “and they’re starting to draw down their portfolios,” Mr. Clark said. With 10,000 baby boomers expected to turn 65 every day for the next 15 years, advisers must engage with Generation Now, which includes people from 30 to 45, to continue the RIA success story, he said.

Few advisers are doing so today, said Neesha Hathi, senior vice president of Schwab Advisor Services. Speaking at an IMPACT 2014 session entitled, “Imagining the Future: Exploring Social and Technology Trends Reshaping the RIA Industry,” Ms. Hathi said Schwab’s research shows just 16% of RIAs are in touch with clients’ Generation Now children. “We think that’s an opportunity missed,” she said. “Those folks are actually very much in need of financial advice.”

Generation Now already controls $3.5 in investable assets, “and that’s only going to grow,” Mr. Clark said. The group also will benefit from an estimated $16 trillion wealth transfer between generations that is expected to occur between now and 2050, he said. “Your opportunity and quite honestly your risk is how many of those assets will you be able to continue to serve?” he said.

Mr. Clark and Ms. Hathi painted a portrait of Generation Now based on Schwab research, including interviews with members of the group in major markets. The research focused on individuals with at least $150,000 in annual household income or $500,000 in investable assets or the expectation of inheriting that amount within the next five years.

The research shows members of Generation Now “don’t know who you are,” Mr. Clark told advisers. Asked to describe their image of a typical adviser, many shared unflattering impressions. “They confuse you with all the Wall Street movies that they’ve been watching,” he said.

To attract Generation Now clients, advisers must diversify the talent within their firms, clearly differentiate their firms and their value propositions, and connect with Generation Now on their terms, using the technology that they use, Mr. Clark and Ms. Hathi said. “We encourage you not to sit still,” Ms. Hathi said. “This is a time to take action.”

Diversifying the ethnicity, gender and age of advisory teams is “so critical,” Mr. Clark said. “People who will work with you will want to see people who look like themselves.” He said 40% of the Millennial generation, born between1981 and 2000, are “ethnically diverse,” compared with 25% of baby boomers. Ms. Hathi noted one-third of today’s U.S. millionaires were born outside the United States or are first-generation immigrants.

Meanwhile, women will control 50% of the projected $22 trillion in private wealth in the United States by 2020 and will receive 70% of the upcoming $16 trillion wealth transfer between generations, Ms. Hathi said. They represent a “huge market opportunity” for advisers, she said, but as Mr. Clark noted, their under-representation in advisory firms is “profound.”

Advisers also must understand the mindset of Generation Now. With generational change already under way at many advisory firms, Mr. Clark urged advisers to glean knowledge and insights about Generation Now from younger members of their teams. Ms. Hathi pointed to the need to recruit and to develop next-generation talent.

Mr. Clark said members of Generation Now approach investing and advice “with great care” after experiencing challenging times as they came of age and entered the business world, including the dotcom crash of 2000 to 2002, 9/11 and its aftermath, and the recession and housing bust that began in 2007. “Fear and insecurity drive their approach to financial planning,” Mr. Clark said. They also prize traditional values more than flashy lifestyles and are “a very altruistic group,” Ms. Clark said. “They want to give back.”

Generation Now needs a “trusted guide” to help them “feel better about their financial futures,” and RIAs are ideally suited for this role, Mr. Clark said. Research shows that Gen Now members are more willing to pay for financial advice and are more interested in the holistic financial advice that many RIAs offer, Ms. Hathi said. But to win the trust of Generation Now, advisers must demonstrate shared values and offer transparency “in everything that you do with them,” Mr. Clark said.

Generation Now will be more involved in their investment decisions, will have a great need to validate those decisions with trusted family members and friends, and will use social media and other technology to obtain validation, Mr. Clark said.

“They will have very high expectations around technology,” he said. “They’re married to their technology. Electronic signatures? E-authorization? Mobile 24/7 access? Not special. Table stakes. They expect it.”
He urged advisers to adopt best-in-class technology, including mobile apps for business. “Clients now and even more so in the future are going to want to do things on their terms, and technology is a big part of that,” he said.

Hathi noted that smartphones and other mobile devices already are “ubiquitous” in people’s financial lives,” with 93% of ultra-high-net-worth investors using mobile devices to check account balances and information and 65% of these investors using mobile devices to research investments.

RIAs must prepare for a future in which technology, coupled with Generation Now’s needs and expectations, will reshape the way advisers connect with prospective clients, win their business and provide ongoing service, Ms. Hathi said.

She showed advisers three animated video vignettes depicting how advisers and clients might interact five to 10 years from now. The vignettes showed people selecting advisers by using a combination of online matching services and social media, and then collaborating with advisers through video chats. In one vignette, a couple selects an adviser online, and they begin working together without ever meeting in person. Technology already is making such virtual relationships more common, breaking down traditional notions of advisers serving only local investors, Ms. Hathi said.

Referrals still will play “a huge part in how you capture clients in the future, but you might get those referrals in different ways,” such as online matching services, Ms. Hathi said. Noting that online match sites account for 30% of today’s marriages, she said: “If people feel comfortable enough to find their spouse on an online dating site, don’t we think they’d be comfortable enough to find their financial adviser?”

Websites seeking to match investors with advisers already have appeared, although “there are complications there because of testimonials and other things,” Ms. Hathi said. “No one’s really cracked the code…. But it does feel like someone’s going to.” Reviews of financial advisers, she added, already can be found at yelp.com. “That online brand, that reputation, is really important,” she said. “And people are trusting websites to make important decisions.”

To cultivate Generation Now clients, advisers will need to maximize the effectiveness of their websites and to embrace social media, Clark said. “Generation Now does their homework, and they do most of it online,” he said.

Research shows that nearly half of all financial advisers — including RIAs and those with wirehouses and independent broker-dealers — use social media daily, Ms. Hathi said. More than 70% of those advisers report that social media has helped them aggregate assets. Yet Schwab has found that only about 30% of RIAs use social media. “You all are using it less than your peers in those captive channels – (that’s) probably something for all of us to think about,” Ms. Hathi said.

As RIAs pursue Generation Now, they also might need to consider adopting flexible service models, including managing only a smaller part of a client’s assets at first and offering multiple fee schedules, Ms. Hathi said. Members of Generation Now often want “to do business a little bit differently,” she said. “They might not want to give you all their business to start. They might want to test you out.”

Generation Now, she added, “might come to you with a lot of misconceptions, having read a lot of that information that’s out there. You have to build that relationship and become the trusted guide…. That might require you to broaden your value proposition in order to build that trust and that holistic relationship that they are looking for.”

This article is part of a special advertising section that appeared in the December 15, 2014 issue of InvestmentNews. It was written by the InvestmentNews Content Strategy Studio and does not reflect the views of the InvestmentNews editorial staff.

Related Topics: Millennials, RIAs