Lack Of Multigenerational Planning Negatively Impacts Practice Value

As the industry speeds toward the Great Wealth Transfer, many financial advisory practices will see a rapid decline in AUM, with revenue and practice value suffering as a result.

According to a report from Cerruli Associates, nearly $84 Trillion in assets under management are expected to change hands over the next two decades as the aging population reach end of life and distribute their estate to heirs. Additionally, Baby Boomers – the largest segment of the population – are reaching the precipice of their wealth building years and starting down the path to living off their retirement.

Why It Matters: If not addressed, these two factors will dramatically (and negatively) impact practice financials, which in turn impacts practice equity and monetization of value.

• Client Age Is A Key Driver Of Value: Once the average client age of a practice reaches 70, practice value dramatically declines. This is because the assets are transferred to heirs (who often take assets outside the practice), or drawn down by clients to cover the cost of living and increased health care costs.
• Less Than 20% of Affluent Client Heirs Use Their Parent’s Advisor: Another report from Cerulli found that over 80% of Affluent heirs transfer inherited assets away from their client’s advisor. This attrition risk will rapidly increase as the Boomer generation reach that tipping point age of 70.
• Less Than Half Of Practices Actively Engage In Multigenerational Planning: Despite the attrition risks and impact on practice financials, 50% of advisors aren’t doing any multigenerational planning,with the rest showing a mixed level of commitment to engaging spouses and children.

Take Action: Advisors must be proactive to minimize the risk of dwindling assets and attrition as clients age. Specifically, advisors should:

• Identify and Build Relationships with Client Beneficiaries: Start with top tier clients and work with your clients to make introductions. Family legacy planning meetings, as well as key milestones such as marriages and births, are opportunities to make introductions to children and spouses.
• Employ Strategies and Tactics that Appeal to Younger Demographics: Technology, education, and financial planning are highly sought after by Millennials and GenZ. This is also a great opportunity to leverage your NextGen advisors and staff. They can make peer to peer connections and can identify what younger generations want. They are also eager to take ownership and execute on these new tactics.
• Monitor Impact on Equity with Annual Valuations: Keep a pulse on how the above strategies are impacting your client demographics and practice value by securing a valuation each year. This active approach to managing practice value ensures that you are making the best decisions so that business equity continues to grow.