Advisors: 7 Tips to Make Your Practice Multigenerational

Cornelius Vanderbilt was one of the world’s richest men when he died in 1877, leaving a $100 million fortune to his heirs. In just four generations, the Vanderbilt descendants squandered the fortune with reckless spending and declining investments. When 120 Vanderbilt heirs gathered at a 1973 family reunion, not a single one was a millionaire. One direct descendant had died penniless.

The legacy of “the Commodore” imparts an important lesson for financial advisors. Unless there is a solid plan for generational wealth transfer, most beneficiaries will ultimately spend through it. Sadly, 70% of wealthy families lose their wealth by the second generation, according to the Williams Group wealth consultancy. Worse, about 90% of families lose wealth by the third generation.

What many financial advisors have failed to realize is that the same statistics can hold true in their own practices. The wealth that they build for their clients is just as easily lost by failing to build a multigenerational firm. The value of an advisory firm can drop dramatically when key clients die and their heirs are not also clients of the firm.

Here are seven tips for ensuring the transfer of wealth happens with your financial advisory firm from one generation to the next:

— Know the value of a multigenerational firm.

— Put your focus on client retention.

— Understand the client’s relationship to wealth.

— Create a meaningful connection with heirs.

— Optimize the transfer of wealth.

— Prepare for potential problems.

— Ensure a smooth transfer of wealth.

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Know the Value of a Multigenerational Firm

A multigenerational firm is one that is able to build and retain the first-generation wealth necessary to care for clients through their lifetimes, then arrange for the wealth to transfer to heirs without leaving the firm. The heirs become clients of the advisory firm so that the advisor can continue growing their wealth after making the appropriate legal transfers of the accounts.

Given that the majority of financial advisors are paid a percentage fee based on assets under management, or AUM, being able to keep wealth from leaving the firm is paramount. AUM is also a key component to establishing a firm’s value for succession planning, so a multigenerational firm can command a higher price than others.

Put Your Focus on Client Retention

Financial advisors understand that new-client acquisition is an important part of increasing their firm’s value. Too few recognize that maintaining existing clients is a more profitable way to scale their practice. In order to have a viable multigenerational firm, financial advisors must create flawlessly repeatable processes that focus on client retention.

The battle for client retention is won or lost in the earliest years of an advisor-client relationship, according to an E-Trade Advisor Services study. In an analysis of 180 registered investment advisor, or RIA, clients, the study found that 20% of clients leave within the first year and 25% leave by the end of the second year.

Further, in a 1990 Bain & Company study that has become an industry classic, Frederick Reichheld determined that increasing customer retention rates by just 5% increases firm profits from 25% to 95%.

Understand the Client’s Relationship to Wealth

Money impacts almost every decision a client makes. As a result, it is important for advisors to have a deeper understanding of the relationship clients have with their funds. One way to gain this insight is through financial behavioral analytics: the study of the communication styles each client exhibits to their advisor, their spouse or partner, and to their children and other heirs.

Financial literacy is more than knowing about the basics of money and investing; it is also learning how to talk about money responsibly as a family. A financial advisor can take a lead role in facilitating these conversations if the client’s communication style and relationships to wealth and family are well understood.

Create Meaningful Connections With Heirs

When it comes to communicating with heirs about wealth, remember that generational changes are in play. Younger generations may have witnessed the terrorism of 9/11, the COVID-19 pandemic, the Great Resignation in employment, and the crushing inflation currently prevailing in energy and food supplies. But they also have not seen a major stock market correction since 2008, and they have witnessed some of the greatest amounts of government spending in modern times. Thus, they have yet to be able to form their baseline financial principles during a time of relative calm, in normal market cycles.

Add to that the proliferation of robo advisors and do-it-yourself investment tools, and not all young adults understand the value of a financial advisor and may believe that they can invest on their own.

Remembering the differences in how generations approach wealth forms the basis for more meaningful discussions with heirs.

[Read: 6 Conferences for Financial Advisors in 2022]

Optimize the Transfer of Wealth

When heirs wait to deal with assets until after they have inherited them from their parents, they often lose valuable flexibility. For example, assets may have been placed in a trust, which has strict guidelines to maximize tax benefits.

Some assets can be optimized for tax purposes if the planning is completed before a parent’s death occurs. However, the formal steps to take can be complicated, laced with industry jargon and challenging for parents to convey to their heirs. When parents and their heirs are able to hear from an independent third party together why certain steps are necessary to maximize the amount of wealth transferred, it can reduce the angst many families feel during money discussions. It can also provide a valuable understanding of what the parents’ intentions are in giving funds to their heirs.

Prepare for Potential Problems

Among the myriad lessons of the COVID-19 pandemic are two important planning factors that are receiving greater attention: mental health and longevity. Mental health is more a part of the national conversation than ever before, and its effect on finances is also taking center stage. In a 2020 Harris Poll, as the pandemic unfolded, nearly 90% of Americans said they were facing financial stress. And according to the Money and Mental Health Policy Institute, 46% of people with problem debt also have a mental health diagnosis.

When people are stressed, they may experience disruptions in their sleep, eating or drinking habits, career effectiveness, and relationships. As a result, some beneficiaries may not be equipped to handle a large inheritance responsibly. Clients can use trusts to structure payments and avoid creating new distress in their beneficiaries’ lives.

The Centers for Disease Control and Prevention has reported that longevity declined by one year, to 77.8 years, in the first half of 2020 for the total U.S. population. However, the United Nations still predicts that the population living to 100 and older will grow to nearly 3.7 million by 2050.

While longer lives are in the cards, health and quality of life in later years remain questionable. According to the Administration for Community Living, a 65-year-old today has a 70% chance of needing daily-care services in their final years. Long-term care is expensive, and even an overnight caregiver can drain a fortune quickly. Although the Cleveland Clinic says many factors can make healthy aging an achievable goal, financial advisors will still need to help their clients prepare for unexpected situations that can affect the transfer of wealth to heirs.

Ensure a Smooth Transfer of Wealth

No matter how well clients prepare, though, there is always the possibility of an unexpected event that disrupts the best-laid financial plan. This is where life insurance can be invaluable. Not only can it ensure an equitable distribution of the estate and potentially reduce estate taxes, but it also reinforces the family’s faith in the financial advisor in the event that something does go wrong.

Creating an environment that provides the best financial planning advice to your current client, relieves money-related tension within the family and simplifies the lives of heirs will set your firm apart. Many advisors believe that aging clients are a detriment to their firm’s valuation because they are drawing down on their assets for their basic living needs. However, the astute advisor understands that they are actually the key entry point to a more comprehensive and profitable practice.

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