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Understanding the Risks Financial Advisory Firms Face in the Generational Wealth Transfer

BY team practifi

In generations past, wealth moved in a relatively straight line. When an owner of properties and investments retired, those holdings were usually handed down to a single (typically male) heir, who would usually keep up the same business arrangements. 

This legacy approach suited wealth management firms, where new generations of clients continued on with the same organizations that had served their parents. With that said, the present, ongoing wealth transfer is different. 

The millennial and Gen Z heirs taking over for retiring baby boomers aren’t just more complex to deal with because investors are splitting their bequests among more than one person. They have different priorities than previous generations of wealth holders. This naturally raises challenges for financial management firms accustomed to dealing with simple lines of succession. 

Change is simply a part of life, and it’s not all bad from a wealth management perspective. But while working to unlock all the possibilities that come with a new generation of wealth owners, financial advisory firms will have to put time and effort into overcoming the challenges brought on by the new normal. 

Risks for financial advisory firms to manage

The first step in weathering the complex new investment environment is to understand the most prominent risk factors for advisors to work around. With this knowledge, advisors can develop strategies to keep a strong position while the field of wealth management changes and evolves around them. 

More heirs may mean loss of asset control 

 The classic model of assets being handed down to a single person made life easy for financial advisors. To continue managing a client’s investments, the advisors would only have to reach out to a single person. Researching what the likely heir would want or need from an advisor was a relatively simple process, and after the handover there would still be just one portfolio to manage. 

Now, it’s more likely than ever that your clients will divide assets between multiple heirs. This means advisors will have to split their attention to hold onto the new generation of potential clients. For example, if a $300 million portfolio is divided equally three ways, wealth managers must try to secure all three new accounts or else lose control of $100 million for each heir who decides to go with a different firm. 

The primary way to overcome this trend is to anticipate it and get started researching what all prospective heirs will want from a financial advisor. Rather than assuming these younger wealth owners will prefer to stay with a firm for simple continuity’s sake, it’s up to advisors to show how they can provide a positive investing experience. They need to show they will make choices that are aligned with heirs’ values and interests. 

Young generations come with new priorities 

When it comes to causes and interests, millennial and Gen Z wealth owners have shown a willingness to align their investments with their social values. This may mean an heir does not want to put money in specific types of companies — such as fossil fuel refiners, arms manufacturers or tobacco producers. 

Wealth management firms that don’t take evolving preferences into account may find themselves struggling to connect with a younger generation of clients. Empowered by widely available information and a wide variety of options regarding who to invest with, millennial and Gen Z wealth owners may not hesitate to stop working with specific advisors, even firms that have been working with their respective families for generations. 

Dealing with willful, value-driven investors isn’t necessarily complicated. Wealth managers must do research to understand their younger clients’ priorities and focus on those when making recommendations. This can come directly from conversations with heirs or indirectly through public channels such as social media (where you can often get an idea of an individual’s values, priorities and preferences). 

Many firms don’t share client data effectively

When it’s time to think about targeting the next generation of wealth owners, many financial advisory firms do themselves a disservice — they don’t store information in a centralized, accessible way. A modern digital platform for keeping and sharing robust client data is a fundamental piece of infrastructure for wealth management firms, but many don’t have such a system in place. 

Storing information in old-fashioned filing cabinets — or trusting advisors to remember it — is a major risk. Firms must think about longtime advisors’ retirements as much as their clients’. When these wealth managers retire, they may take all their accumulated client knowledge with them. This leaves the firm at a disadvantage, scrambling to learn about account holders and their heirs as they make their pitches to maintain the business connection. 

Planning and technology are the two primary weapons against a lack of data sharing. Using a centralized CRM to create detailed, easily accessible client profiles should be a top priority at any firm that doesn’t already have such a system. This platform should integrate with other technology to ensure consistent up-to-date views across the organization. 

Making client data accessible and transferable gives advisors’ knowledge and information tangible value as they create personalized, client-focused strategies and offerings. The improved client experience can boost a firm’s performance now and for years to come. 

Overcoming risks to stand out in the financial advisory space

While it’s easy to imagine some financial advisors falling prey to the risks associated with a generational wealth transfer, those missteps simply create opportunities for more attentive and well-prepared wealth management businesses to step up and become leaders. 

Complacency, lack of preparation and a weak technological infrastructure could cause some longtime industry stalwarts to lose long held assets as their clients’ heirs look elsewhere for partners that better meet their needs, values and preferences. Firms that overcome those same issues and present a tech-savvy, client-friendly posture have plenty to gain as millennial and Gen Z investors take control of a massive collection of assets.

The generational wealth transfer isn’t a one-time event, but rather a gradual process that’s already taking place. This means that if you want to join the forward-looking firms adapting to the new generations, there’s still time, but you should start as soon as possible. 

Practifi can be the CRM technology that unites your firm’s data in an accessible, transferable format, enabling advisors to smoothly navigate the risks of the generational wealth transfer — and unlock the rewards.

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