X + Y = greater value

If I was buying a financial advisory firm, I would discount its value based on the number of clients and staff over the age of 55. Why? In my mind, the value of a business is based on its future prospects – and ageing clients and staff will have a diminishing impact on the firm’s future growth.

Many advisers have latched onto the concept that their practice’s value reflects the trailing 12 months of revenues, with a premium added for the amount of pain and suffering they have endured over their careers.

So to suggest that a firm’s value should be based on the future outlook may seem like heresy to sellers (while logical to buyers).

But is that far off from the way in which you make investment recommendations to your clients? Do you recommend a mutual fund or stock because of how it performed in the past? Or do you premise your recommendations on what you expect it will do in the future? For this argument, I’ll presume you are viewing the road through the windscreen, not the rear-view mirror.

Take a look at the demographics of your client base. What do the numbers tell you about the rate of addition versus the rate of attrition? And assuming you agree that we are operating in a low-growth environment for the average portfolio, how many new clients will you need to generate to avoid absolute shrinkage in your business? Also ?consider the mortality of your client ?base and what will happen to their ?assets after death.

Boomer market

It’s dangerous to generalise because some very strong and growing practices are doing great things around the pre-retirement and retirement market. In other words, for many advisory firms, the boomer market can be an engine for growth to the extent that they are systematically adding more clients. Research shows that most successful practices run by mature practitioners reach a stagnant phase in business development at some point, only adding new clients incidentally.

Compounding the baby boomer dilemma, not only are your clients ageing, but some partners and employees are too. Perhaps when recruiting a young person, you grow resentful that they want to get paid a fair market wage when they will depend on you to generate new clients and strategically guide each decision.

You may question their work ethic, their commitment to your business, their cynicism about institutions you revere and their incessant use of texting and headphones as a way of tuning you out. These negative and often condescending attitudes turn away young professionals seeking a dynamic work environment.

Unfortunately, as an industry, we’ve done a poor job of recognising that the future of this profession and each advisory firm will depend on how well we recruit generation X and Y advisers.

In the US, according to research firm Cerulli, only 22 per cent of the advisory population is under the age of 40 and 5 per cent is under 30. That is a disturbing statistic when we consider how compelling a career opportunity this could be, especially at a time ?when so many graduates face huge student loans and a challenging ?job market.

How did we manage to discourage an entire generation from choosing financial advice as a positive, productive, intellectually stimulating and financially rewarding career?

Mind the gap Five tactics that will help advisory firms position themselves effectively to serve the next generation of clients: Gain access through trusted counsel. Gen X and gen Y prospects rely on parents and friends for validation. Invest in a more powerful web presence. Younger clients expect a dynamic and interactive website, not one that looks like an electronic brochure. Deliver information in a customised electronic form. Don’t rule out making contact via mobile devices. Welcome younger advisers onto your team. Trust them to work closely with younger clients, under your tutelage and mentoring. Build flexibility into your strategies. Be ready to modify how you work and communicate with gen X and Y clients as your understanding of their needs evolves.

Client view

While hiring the right people is important, the future of this business will be dictated by the clients it serves and how it serves them. Because boomers and their parents control the majority of wealth, there is a tendency to go where the money is.

This strategy is not necessarily supported by the facts in 2012, however. A survey in the US by Cisco Systems found that wealthy investors under 50 represented just 29 per cent of their survey respondents, yet held a high percentage of all assets: 37 per cent. Their study concluded that investors under 50 – gens Y and X – represent an $18.6bn opportunity. And not to belabour the point, but all of these investors are in their accumulation years and quite a distance away from withdrawing assets.

Many of these potential clients also stand to inherit vast sums in the coming years. Yet a study by Rothstein Kass reported that 86 per cent of wealthy family heirs will fire their parents’ advisers once the money flows to them.

Younger investors have unique behaviours and preferences. First, and the most obvious, is that they are more influenced by the use of technology than their parents. This has spawned a do-it-yourself attitude and a frustration with complicated communications.

Second, they are often wary of experts and question the value of anyone in a middleman role. However, they do tend to make decisions after validating their ideas with others whom they trust, such as their friends and parents.

These two factors may help advisers restructure their businesses and orient their systems, training and relationship building to serve younger clients. Eventually, as younger investors’ lives become more complex, they will need ?to seek professionals to guide them through the maze of choices. They will probably research these choices in advance before seeking a sounding ?board for their conclusions.

The fact that so many investors between the ages of 25 and 34 are regarded as “validators” – 54 per cent, according to The Sullivan Trust Study – indicates that there may be room ?to introduce yourself to these relationships early.

Other interesting points have emerged from these studies, proving ?that young investors need help ?managing their money. On average, ?they had 34 per cent of their assets in equity and 30 per cent in cash – and they are accumulators.

There is a natural discomfort in changing what has worked for so many years. But advisers who wish to build an enduring business with transferable value need to rethink their direction for the future. A big element of growing your business in the future will revolve around the next generation of clients and staff.