New report sounds alarm over demographic changes facing advice industry

Within five years, TD Ameritrade report shows client pool will tip toward younger generations

May 9, 2018 @ 6:58 am

By Jeff Benjamin

The inability of financial advisers to look beyond the baby boom generation to younger clients and colleagues could be hampering the growth potential of the financial planning industry.

According to a report out Wednesday from TD Ameritrade Institutional, 23% of registered investment advisers don't have a strategy in place for soliciting younger clients, and 44% of RIAs are not doing anything to recruit next-generation advisory talent.

"We've been talking to them about this for more than five years," said Kate Healy, managing director of Generation Next at TD.

"The thing we're trying to get through to advisers is there is a generation of accumulators out there, and if they want a sustainable firm they need to engage with these people now," she added. "Hiring younger advisers is something they can do" to help the effort.

While older clients continue moving toward retirement and the decumulation phase of their portfolios, Ms. Healy said a lot of RIAs are missing the mark by not having a plan for working with the younger generation.

Often, the primary stumbling block, she explained, is that advisers haven't taken the time to figure out how to serve and work with the next generation of clients.

But keeping an advisory firm vital and thriving means adapting to industry changes, which include a more commoditized investment management marketplace, clients with more debt than in he past and flexible pricing models that are not solely based on investible assets.

The threat to the traditional financial advisory space shows up as simple math.

Over the next five years, baby boomer clients are expected to drop to 43% of all advisory firm clients from 46% today, while senior clients will drop to 14% from 23%.

Meanwhile, Generation X and millennials will combine to represent 41% of clients compared with 30% today.

Douglas Boneparth, president of Bone Fide Wealth, describes his focus on next-generation clients as part of his "long game."

While he has $80 million under management, he also works with some clients for an annual flat fee, starting at $1,950.

"The first thing I do when a young person comes to me is I try to figure out if they are financial planning ready," he said. "Is there enough going on in their lives that I can provide enough advice to justify charging anything? And if the answer is no, I provide free content, because I'm playing the long game."

Mr. Boneparth said that long-game mentality is lost on too many advisers who only focus on the short-game of older clients with money.

The challenge, according to Ms. Healy, is evolving the traditional advisory firm that might have been built around an investment-focused and asset-based pricing model to something that includes a lot more flexibility and creativity.

"Younger generations are looking for different experiences, and they often have lots of (college tuition) debt," Ms. Healy said, underscoring the difficulty in working with them on an asset-based fee structure.

The report, "NextGen Challenges for RIAs: Meeting the needs of future clients," is based on the results from a survey of more than 300 RIAs late last year.

The RIA respondents ranked among the top challenges facing the advisory business as aging clients, succession planning, hiring and retaining talent, and wealth transfer to non-clients.

Among those advisers that are taking action, 42% said they are changing their networking and marketing strategies, 39% said they are starting to offer advice on 401(k) plan portfolios, 30% said they are hiring younger advisers, and 29% said they are managing 401(k) plans.

Kristi Sullivan, owner of Sullivan Financial Planning, said she is able to work with younger clients because she charges by the hour.

"There is no investable asset minimum needed to work with me, so I can help people regardless of age or net worth to prioritize goals, become educated on investments, and solve financial dilemmas" she said.

Even though younger generations might come saddled with debt and virtually nothing to invest, Ms. Healy said they represent opportunity because they are "more likely to ask for advice."

"Millennials want advice and they are willing to pay for it," she said. "They might need advice on where to take a job based on cost-of-living factors, or whether they should buy or rent a house, or whether it makes more sense to use a Roth or traditional IRA."

With those kinds of factors in mind, she said advisers must "differentiate by looking at holistic planning and different fee models," which might include charging, hourly, retainer or flat fees, as opposed to a percentage of assets under management.


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