Financial advisors may be focusing too much on their less profitable clients, according to a report on a recent study by PriceMetrix Inc. in Toronto. By focusing on clients who are retired or close to retirement, says Patrick Kennedy, chief customer officer with PriceMetrix, advisors may be neglecting activities that are necessary for their long-term profitability.
“What the data suggest is that if you’re not ‘replenishing your book’ with younger clients, as we describe it, be prepared to get old with your book,” Kennedy says. “You’re not building something that’s going to be worth very much at the end of the ride.”
The PriceMetrix report, entitled The Fountain of Growth: Demographics and Wealth Management, analyzed the effects that aging advisor and client demographics have on the retail wealth management business. The study found that clients in their 40s and 50s are more profitable over the long term than retired clients. Yet, most advisors of all age groups focus on older clients.
The return on assets (ROA) is 27 basis points higher for books in which the average client age ranges between 50 and 55 than for those books in which the average client age is between 65 and 70, the report says. This gap is due partly to the younger clients’ portfolio construction, which usually includes a higher concentration of equities. Equities generally provide greater ROA than fixed-income products, which dominate retirees’ portfolios.
But advisors are cultivating more relationships with older clients, according to the report. In 2014, 30% of advisors’ new client relationships began with individuals older than 65. The second most popular market of new clients, at 27%, were between the ages of 55 and 65; 20% of new clients were between 45 and 55; and the youngest group, under 45, acccounted for 23% of clients.
Further, the ages of advisors span several decades, while the ages of their clients are relatively similar. The median age for the clients of a 30-year-old advisor is 59, while a 75-year-old advisor’s book’s median age is 65.
The PriceMetrix report recommends that advisors create a balanced mix of older clients, who provide higher revenue, and younger clients, who are good for long-term revenue growth.
A client base centred on those in the de-accumulation stage does not bode well for an advisor looking to sell his or her book soon, says Julie Littlechild, founder of Toronto-based If Not Now Research: “If you’re trying to sell your business and it’s built around a declining asset, the value of your business will decline.”
A young advisor aiming to fill a practice with clients in their 50s also will face problems, according to Sara Gilbert, founder of Strategist Business Development in Montreal. “In 20 years, you’re going to have only estate accounts,” Gilbert says, “so you need a good balance between [current] revenue, with 50-year-old clients, and future revenue, with younger professionals in their 30s and 40s.”
The PriceMetrix report also notes that a higher ratio of clients in younger books are in fee-based accounts, which indicates that younger clients may be more interested in longer-term and advice-based relationships.
Further, the study found that advisors whose books have an average client age of 50 to 55 have, on average, 139 clients, vs books with an average client age of 65 to 70, which have 185 clients.
“One of the hypotheses we have,” Kennedy says, “is that if you’re continuing to focus on older [clients] and, as your book becomes a little less efficient, you have to start to take on more clients to meet your revenue gap.”
Advisors must work to build connections with individuals who are in middle age or younger. Clients between the ages of 45 and 55 are a lucrative market, Littlechild says, because they actually have money to invest and still require financial planning and insurance services.
An advisor who focuses on clients in their 40s would be serving people who are reaching the peak of their career incomes and have more time in their investment careers, according to Gilbert.
Advisors do not necessarily have to start from scratch in seeking these younger clients; they can make connections with the children of their retired clients. By doing so, Kennedy says, advisors could be saving their business.
The report notes the large wealth transfer expected to occur within the next several years, and that clients older than 65 own 53% of assets held in advisors’ books. Investors now in their 40s and 50s will inherit that wealth, says Kennedy. And the advisors who have not “laid the groundwork with that generation, he adds, will [see] how quickly their business starts to expire.”
For more on younger clients, see page B6.
© 2015 Investment Executive. All rights reserved.