Ramifications of Aging on the Client and Advisor

Financial advisors and their clients tend to skew older for several good reasons. Advisors seek out the assets that senior clients have spent a lifetime accumulating, while many clients value the relevant experience that mature advisors bring to the table when investing their valuable nest eggs.

And a trend toward aging isn’t just taking place in the advising industry. The global population is getting older. Research from the World Economic Forum shows that the global aging population will rise from 7% to almost 20% over the next few decades. Fortunately, this unprecedented growth represents significant opportunities in all facets of the global community, particularly for financial advisors.

So while some advisors may see warning signs when handling clients who are on the cusp of withdrawing from their nest eggs, astute advisors will recognize opportunities in this maturing market.

Here’s what to know about the ramifications of aging on clients and advisors.

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Advisors Concerned by Aging Clients

Advisors face a complicated Catch-22: While most financial advisors are taught to seek middle-aged clients with robust liquid assets, once those clients move into retirement and start drawing down their accounts, they can imperil a firm’s financial valuation.

According to a paper published jointly by Focus Financial and J.P. Morgan, 44% of registered investment advisor, or RIA, clients are 60 or older. While Cerulli Associates reported in 2018 that baby boomers are poised to transfer $48 trillion in wealth to their children and charity over the next 25 years, these aging clients pose a conundrum to financial advisors due to the way their assets and planning needs conflict.

Most financial advisors are taught to prospect for middle-aged or older individuals with liquid assets in the $1 to $5 million range. There is often intense competition for preretirement clients with large accounts, as well as for business owners who will come into significant cash when they sell their company. These large transfers of money are important to an advisor because they increase the firm’s assets under management, or AUM, which is a leading indicator of a healthy, growing firm, and results in a higher valuation.

These same clients will ultimately need to begin drawing on these assets to fund living and travel expenses and to purchase vacation homes, boats and other pleasure vehicles. They also may want to pay for children’s or grandchildren’s tuition and weddings. Funds may also be needed for family medical needs.

These withdrawals will cause AUM to fall, with low to no expectation of new cash inflows. Decreasing AUM lowers the valuation of a financial advisory firm at a time when the advisor may be seeking to sell the practice. Older advisors may not have the marketing wherewithal and new client acquisition processes to replace this AUM as quickly as it is falling.

Additionally, senior clients raise the firm’s overhead expenses due to their higher servicing needs. Advisors may also be concerned about their legal liability in working with clients who begin demonstrating diminished mental capacity.

Thus, while these clients can be among the most lucrative for a financial firm when first brought aboard, they can quickly turn detrimental for the firm’s continued success. Client retention is important for firm profitability, but the AUM compensation structure can make a long-term professional relationship challenging to achieve with older clients.

While many financial firms operate as a fiduciary, few discuss the potential conflict of interest inherent in these competing needs of senior clients.

[Read: What Is a Fiduciary Financial Advisor?]

Turning Conflict Into Opportunity

Although many advisors see aging clients as a potential detriment, insightful advisors can sense new opportunity to boost the value of their firm and plan for succession.

Sharp advisors can turn this conflict into a tremendous growth opportunity for themselves, securing their professional legacy and personal heirs’ well-being as well as creating an enduring firm to serve their clients. They can start by taking the following steps to ensure their firms are valued properly and a succession plan is in place:

— Get a current valuation of the firm and give it a baseline to guide growth.

— Implement a written and funded succession plan and provide direction for the firm’s clients and advisor’s heirs.

— Identify next-generation advisors, creating multigenerational opportunities for the firm and its clients and raising firm value.

— Include valuable services for estate and charitable planning and offer risk-management products such as life insurance and long-term care policies to add nonrecurring revenue to offset lost AUM fees.

[Read: What to Know About Financial Advisor Fees and Costs]

Risks for Clients

According to a 2019 J.D. Power study, the average age of a financial advisor is about 55 years old, with about one-fifth of industry professionals being 65 or older. Over the next 10 years, Cerulli Associates estimates that more than 111,500 advisors will retire, which represents more than one-third of the workforce and assets.

Advisors are not immune to unexpected events. They can experience a skiing accident, have an out-of-state parent who suddenly needs elder-care services or receive a life-altering medical diagnosis. Unfortunately, a significant number of advisors have not created a succession or business continuity plan.

When these events occur, and the financial advisor has not prepared a contingency plan, clients may experience significant anxiety if they do not understand where their money is invested. The advisory firm’s staff can get easily overwhelmed with a surge of client inquiries. Slow response time can cause clients to react hastily when they cannot get their questions quickly answered.

Clients may miss significant investment opportunities because their portfolios and financial plans are on hold awaiting a replacement advisor. And clients may not be able to easily move to another firm without incurring transfer costs or surrender fees. Advisors can enhance their relationships with mature clients by addressing these potential concerns in advance.

Often, clients often like to work with advisors their age or older. Older advisors bring a wealth of professional and personal experiences to the table, which can provide comfort. They have experienced a wider array of market conditions and have seen firsthand the outcomes of different actions. Additionally, clients and advisors often bond over common life experiences, such as having raised children, paid college tuition, funded weddings and experienced the joys of grandchildren.

Society may present aging as a negative. However, with just a few proactive steps, a savvy planner can capitalize on this growing market segment to provide invaluable services to their clients for as long as they choose. Aging clients can happily engage their peer generation with confidence and continuity.

More from U.S. News

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Ramifications of Aging on the Client and Advisor originally appeared on usnews.com

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