What's your client account minimum?
If you're like the majority of advisory firms and teams I speak with every week, your answer is somewhere in the ballpark of $500,000 or higher. High net worth clients are definitely where the business is at. The complexity and importance of investors' money increases in proportion to the amount of their assets. Higher net worth investors can better benefit from the planning, wealth advisory, estate and tax planning, and other services that many advisory firms provide. Focusing on clients with larger pools of assets makes perfect sense..or does it?
Here are 3 reasons why ignoring lower-asset investors could be detrimental to the long-term health of your advisory business:
1. Current clients' assets will be inherited by today's lower-asset investors.
Client retention is a significant statistic that most firms trumpet, rightfully so. Keeping as much of your existing client business as possible every year makes organic growth that much easier. The "next generation" accounts of your existing clients are your future client retention. When mom and dad pass away, or choose to begin passing on their assets, where is this money going to go? To their children and grandchildren, these "next generation" accounts. Depending on which survey you read and believe, somewhere between 80% and 98% of inherited assets leave the existing advisor. Why is that? Because the existing advisor focuses on the high net worth client - the parent - and ignores the children and grandchildren.
I know, I know, you employ a family service model. You get to know your clients' children - and sometimes, grandchildren - and offer to handle their accounts as part of your family service strategy. How are you doing with these "next generation" accounts? Be honest with yourself, this is not the time to spit-ball a guesstimate. The future of your business truly hinges on how well you do with this issue. What percentage of your existing clients do you have "next generation" accounts for their children? In these cases, how confident are you that you are handling the majority of the children's personal assets, not just the money that has already been transferred by mom and dad? Incorporating children into a family service strategy and actually treating them as full-fledged clients are two different things. The advisor who treats them as a client today, before they have significant assets, will most likely be their advisor in the future when they inherit your current client's assets.
2. They can provide insight into where the market is going.
Lower-asset investors are often younger investors. Each generation of investors tends to bring with it new challenges, new opportunities, and new ways of engaging with the advisory community. Focusing solely on the high net worth end of the market can cloud your vision of what investments, services, and engagement models will be important to develop in the future. How many advisory firms were thinking about engaging with clients in a fully, or primarily, digital model prior to the introduction of robo-advisors a few years back? Very few. Because it wasn't the older, high net worth clients who were demanding that capability. Now, the majority of firms are either making plans for or thinking about incorporating digital advisory capabilities in their existing business model.
So what's next? Block chain asset transfer? Virtual reality meetings? Your guess is as good as mine. One thing's for certain. The future iterations of service needs and offering demands will NOT come from your existing high net worth clients. Finding a way to truly engage with the next generation of investors, with lower asset balances, will allow you to stay ahead of the curve. Otherwise, you will be playing a perpetual game of catch-up.
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3. These lower-asset investors provide the best growth opportunity for your younger advisors.
The future of your business is not going to be built on adding more 55- to 60-year-old advisors. It is the younger advisors, those in their 20s, 30s, and 40s, who will be your business growth engine going forward. But, who are these advisors going to bring in, or serve, as clients? While not scientifically proven, it does ring true that most advisors' books of business are with people who are plus or minus 5 years of the advisor's age. So, no surprise that for most advisory firms the average age of their advisors is near 60 years old AND the average age of their clients is around 60 years old.
Back to the younger advisors. If most of the investors they will attract are within +/- 5 years of their age, and most of these investors typically have lower asset balances, then logic states that with a high net worth focus to your business these advisors will struggle to build a meaningful book of business. Not the recipe for successfully helping grow your next generation of advisors. Interestingly, many young advisors are gravitating to firms of other advisors around their same age. While there are not a lot of these firms in the industry, many of those that exist are experiencing dramatic organic growth. Not surprisingly, these firms also have lower asset minimums for new clients.
As advisors built their books over time, and firms have built their businesses, moving up-market and focusing on high net worth clients made great sense. However, as the advisory business has matured, and we are at the leading edge of a significant asset transfer to "next generation" investors, ignoring lower-asset clients could have significant adverse effects on these long-standing advisory businesses.