Wealthy clients often switch firms after inheriting money. How firms can stop them

The kids are about to inherit a lot of money, and when they do they plan to shake things up.

Many inheritors have no intention of sticking with their parents’ wealth advisers. Picture: iStock

The wealth management industry is built around baby boomers, and for good reason: Americans born before 1964 collectively possess over $US83 trillion ($125 trillion) of wealth, according to a UBS study.

There’s just one issue. Within the next two decades, many baby boomers are going to die. And as tens of trillions of dollars pass down to younger generations, many inheritors say they have no intention of sticking with their parents’ advisers. That means thousands of clients, with trillions of dollars of newly inherited wealth, could soon be on the move.

“Financial advisers have done a very poor job of trying to retain that next generation,” says Mike Camp, head of client solutions at 55ip, a fintech platform owned by JPMorgan.

The problem is widespread. A Capgemini study estimates that 81 per cent of young high-net-worth individuals plan to switch advisers within two years of inheriting their parents’ wealth. Research firm Cerulli puts the figure at 70 per cent.

Some inheritors are already jumping ship. Sam Diarbakerly, founder of Generation Capital Advisors, says his firm receives messages every week from heirs who don’t understand their financial situation and want to explore different wealth management options. “If you’re not on the forefront of this, clients are going to change advisers,” he says.

The wave of inherited money, often termed “The Great Wealth Transfer,” is expected to transform the wealth management industry. “This isn’t something that’s going to happen, it’s something that’s happening,” says Mr Camp.

“It’s affecting all aspects of the ecosystem.” A trillion dollar question. To explain why young inheritors might be planning to leave their parents’ adviser, professionals point to the strength of relationships.

“The truth is that wealth advising is a relationship-driven business,” says Andy Reed, who leads Vanguard’s behavioural research team. “Advisers often have relationships with one person, often the breadwinner. But they don’t necessarily have a relationship with their spouse, or especially with the heirs.”

As the Great Wealth Transfer accelerates, advisers are trying to provide services that young clients need. Picture: iStock

Building an advisory relationship with a whole family, rather than just the retiree breadwinner, can be challenging, professionals note. Family elders are often reluctant to discuss financial subjects with their children and grandchildren. “We don’t like thinking about death,” says Mr Reed. “And money can be something of a taboo subject.”

Also, it takes a lot of time and effort to build a relationship with an entire family, rather than a single point person. Because younger generations typically have less money, that effort often comes with little financial reward for an adviser, at least in the short term. “Quite frankly, a lot of firms aren’t putting in the work because they’re not profitable clients yet,” says Mr Diarbakerly.

Another challenge is wealth managers are getting older. McKinsey estimates that 38 per cent of advisers are planning to retire within the next decade. As advisers near retirement, they often become increasingly out-of-step with their younger clients, notes Hunter Lloyd, a founding partner at 49 Financial. Recent inheritors “want a long-term solution to manage their funds”, he says. But it’s hard for ageing advisers to promise that long-term solution, especially when many are looking for the exits.

New approaches

As the Great Wealth Transfer accelerates, advisers are trying to provide services that young clients need. “If our specialty is retirement planning … how does that translate to a client who is younger?” says Amanda Muse, a vice-president at Bogart Wealth. “It’s a big switch from distribution planning.”

One answer, firms say, is education. Wealth managers across the country are rolling out webinars, newsletters, and one-on-one sessions aimed at improving financial literacy. The hope is that by meeting young clients where they are, and by helping them build personal wealth early, advisers can develop relationships long before major assets change hands.

Some wealth advisers are offering networking opportunities. “Investments are 5 per cent to 10 per cent of our value add,” says Mr Diarbakerly at Generation Capital. The rest of his firm’s value, he says, comes from relationships, resources, and connections. Generation Capital has even started a book club so that young clients can meet and socialise.

Another big focus is technology. Many firms are launching mobile apps and compliance-approved texting services, products designed to reach young adults who often don’t have the time or desire to attend meetings in-person. “If you can’t meet the next generation from a digital perspective, you might need to get together with a larger partner,” says Alex Smith, a managing director at Cresset. Accessible technology and strong cybersecurity, Smith says, are “table stakes”.

Fresh faces

Education, networking, and mobile apps aren’t enough. To reach younger clients, many executives say they need young advisers. Perrin Berry, a 25-year-old relationship manager at Apollon Wealth Management, says his youth allows him to bond with the next generation. “I think me being on the call is very relatable to younger clients,” he says.

Berry’s boss, Rob Wolfe, joins calls to provide more in-depth guidance. But Berry can speak to retirees’ children and grandchildren on their own terms. “We probably have almost four dozen young clients at this point,” notes Mr Wolfe.

Youth isn’t the only metric that matters. The generational wealth transfer is also expected to spread fortunes across the globe and increase the share of wealth held by women. Firm leaders say the next generation of advisers will need to be more diverse. “You need to have a diverse group of advisers with different backgrounds,” says Mr Smith.

Barron’s