07 Aug 2019
By focusing on three key areas and associated action steps, writes Brendan McCurdy, advisers can give their practice the best chance of achieving its maximum value whether that be for a sale or for a successor
If you had to sell your practice tomorrow, what would it be worth? How valuable would it be to your heirs? As advisers, we can become so busy in our day job advising clients and building portfolios that we forget to step back and view our practice as a business. Always remember, though: you are the boss of your own practice.
As the boss, there is plenty on the horizon to worry about: low interest rates, rising volatility, increasing regulations, fee compression, and competition from robo-advisers. We expect these headwinds to reduce the revenues of the average adviser's practice.
Imagine a typical UK advisory firm with £100m in assets under management (AUM), charging an average fee of 100 basis points (bps), for £1m in annual revenue. The firm raises 3% (£3m) in new assets annually. The average age of its 70% male, 30% female clientele is 61. Using inputs from industry studies, GSAM calculations and actuarial tables, we project this firm's CEO will see a 5% drop in AUM and a 29% reduction in revenue over the next 10 years …
Source: GSAM
So how do we stave off this erosion of value? We work to counteract issues such as lower returns (due both to ageing clients with more conservative portfolios as well as lower expected asset class returns going forward), lower fees due to fee compression, higher distributions being paid to retired clients, and more clients passing away while money goes out the door to heirs.
As boss, we focus on what we can control, which includes three key areas of focus: reduce the average age of your clients; retain more of the heirs in and around your client base; and reduce the volatility of your client portfolios to ease your client relationships. Let's address each of those in turn.
Each year your client base will become one year older which, because of the forces listed above, we calculate can reduce as much as 4% of your total revenues per year. Younger generations like the millennials do not have much money yet. But that will soon change - millennials range in age from 19 to 39 and are just hitting their stride in terms of earnings, spending, and savings.
At Goldman Sachs, for example, more than 70% of our workforce is millennial. Adding younger clients to your practice means greater growth of assets through savings, higher equity allocations, lower distributions and lower mortality rate.
Source: GSAM
* Involve your clients' children in the advice process - for example, pair older and younger financial advisers to cover a family, each working with their age bracket within the family. Review pricing methodology for families and offer educational resources.
* Implement a communications strategy so geography does not inhibit client retention. Invite clients to include their children in meetings via Skype.
* Bring forward the talk about death - don't wait until y our client is 70 and their adult children already have their own adviser. Remind your clients of the saying "rags -to riches -to rags in three generations," and ask them about their values around money that they would like to pass on. According to US Trust Insights on Wealth and Wort h, 2016/18, leaving a financial inheritance is ‘very important' to more than four -fifths of high net worth investors , yet more than half (56%) believe their children will not have sufficient knowledge to manage family assets prudently.
Many adviser practice demographics are heavily skewed toward male breadwinner clients. Studies, however, show that two-thirds of women identify as the household primary decision maker; £21.5 trillion of inheritance will move into women's hands over the next 40 years according to the Center for Talent Innovation; and advisers' retention rate of divorcees and widows is poor - at around 10%.
* Studies have shown that women are more considered and deliberate in their decision-making process than men. Give them options and the room to decide what is best for them. Help them weigh the pros and the cons, including understanding what may happen if they do not take action
* Women tend to select options that connect to their end-goals rather than chasing the highest returns. Help them connect the dots between what they need and the strategy they need to implement to get there.
* Ultra high net worth women are very philanthropic, giving 26% more in total than their male equivalents, according to US Trust Insights on Wealth and Worth. Be prepared to help them navigate the charitable giving world from a planning and tax perspective.
* If a male client dies and you are trying to keep the wife as a client, there can be a perception issue if all of your advisers are men. You had better have capable women on your team - as the boss it is up to you to make that happen.
Fortunately, this may be the easiest for advisers to implement. There are many quality multi-asset investment propositions - in that regard, we would modestly, if inevitably, note our own offering here at GSAM - that are diversified and turnkey, giving you more scale in your practice and leaving you more time to focus on where you make your money: relationship management and financial planning.
* Find a multi-asset investment proposition you trust, or build a simple blend of no more than four complementary multi-asset funds.
By focusing on these three key areas and the action steps outlined above, you can ensure that when you decide to leave the helm as the boss, your practice will be worth its maximum value - whether for a sale or for a successor.
Brendan McCurdy is head of international portfolio strategy for GSAM’s Strategic Advisory Solutions group