It’s a multi-trillion-dollar conundrum. In the coming decades, trillions of dollars in personal wealth will be transferred from older to younger generations, experts say.
The problem is that as financial advisors have cultivated relationships with baby boomers, they have often left younger individuals under-served. Advisors thus risk missing out on the next generation of clients, says Ned Dane, head of private client group at OppenheimerFunds in New York.
“It’s probably one of the most important issues facing the advisory world today, and it’s a global phenomenon,” he says.
If advisors don’t have a seat at that table, he says, "someone else will create that relationship.”
Exacerbating the problem is that millennials are increasingly attracted to technology-based investing products that are easy to use, low-cost and marketed to their demographic.
Robo-advisors and do-it-yourself (DIY) options such as online brokerages top the list and stand in stark contrast to the traditional advisor/mutual-fund model, says Kyle Prevost, author of More Money for Beer and Textbooks: A Financial Guide for Today’s Canadian Student, as well as co-founder of the personal finance blog Young and Thrifty.
When you look at the classic mutual-fund investing model and compare it with opening a discount brokerage account and purchasing a few exchange-traded funds (ETFs), "there is no denying that the compounded costs [savings from lower ETF management fees] add up to a massive amount of money,” Mr. Prevost says.
Consequently, passive investment strategies and products built around them, like robo-advisors, are resonating with younger investors.
That’s not to say the advisory model is entirely broken, says Mr. Prevost, a financial literacy advocate based in Manitoba. “But advisors now must justify their fees by providing elite-level service.”
Shannon Lee Simmons, a fee-only certified financial planner with New School of Finance in Toronto, says the advisory industry struggles to win over younger clients because it has been making the wrong sales pitch.
“I still think there are lots of people who want to work with an advisor, but advisors have to focus on the service they’re providing rather than the promise of investment performance,” says Ms. Simmons, who is also a certified financial planner. That’s why a fee-for-service model is attractive to millennials, the demographic her firm serves most.
Paying a flat fee for a financial plan has broad appeal. “We have some clients who are swimming in debt, and others who are high-net-worth investors, and then we have everything in between,” she says.
In the sweet spot are clients building wealth. “Often we’re seeing a rise in fee-only financial planning paired with DIY investing or robo-advisors for those individuals who don’t have significant assets under management just yet,” she says.
“So with fee-only financial planning, [as an advisor] you’re building that relationship and your clients are still getting advice they want and need.”
One way to foster new ties with younger clients is to ensure your firm is using technology to its – and millennials’ – advantage, Mr. Dane says. “When we talk to advisors we say, ‘It’s not you versus technology; it’s you powered by technology.’”
Software should allow clients to check balances and engage their portfolios from their mobile phones, for instance. It may also mean meeting with them via Skype rather than in person. He also argues younger generations tend to be more interested in thematic investment strategies more than older clients.
“They think about themselves as global citizens,” he says. Socially responsible investing strategies are generally important. “As an advisor serving younger clientele, finding things they care about is often the key to really building a deeper relationship.”
Another winning strategy is to work with older clients’ adult children as part of the service offered to those older clients, says Ayana Forward, a fee-only certified financial planner with Retirement in View in Ottawa.
Aging clients are usually open to this concept, she says, and “sometimes that’s driven by them not wanting their kids to move back home,” she says with a laugh. “But the assumption is on our end that we are receiving compensation at some level because the parents have their tax planning or investments done through us.”
What’s truly important, she adds, is that financial advisors tailor services for younger clients, recognizing the need to offer low-cost planning and advice models for individuals who likely require basic advice. This might mean helping them build a budget, develop strategies to pay down debt, and decide whether they should save in a registered retirement savings plan (RRSP) or tax-free savings account (TFSA).
“Relevance is the key,” she says. “If you want to attract millennial clients, you have to make sure you have a good service fit for their needs.”