Investment managers have long relied on an older population as a major source of revenue, but too much reliance on an aging demographic can be a source of financial stress down the road.
The reason for concern is simple: older clients will not be around forever.
To avoid a potentially scary financial situation, investment management companies should think about how to attract new clients while having cost-cutting measures in place.
And the demographic worries go beyond simply clients’ old age. Trends among beneficiaries and the young are also a concern.
It may not be a pleasant thought, but it’s a reality with business implications.
A 2017 McKinsey report revealed that the average client age for wealth managers in North America is 64.2, up from 63.6 in 2014.
Across the pond, the numbers show a similar story.
According to a survey conducted by Russell Investments:
These may be great clients right now, but given their age and what is in the interest of your firm, your organization should plan for a day when older clients will no longer be there.
If the days of relying on beneficiaries to be your clients ever existed, those days aren’t around much anymore.
MFS Investment Management conducted a survey in 2013 with more than 1,000 investors, and 75% of clients said their children had never even met their FAs.
Not surprisingly, a 2011 PwC Global Private Banking/Wealth Management Survey revealed that only 2% of children stay with their parents’ advisor.
Fidelity and the Institute for Preparing Heirs stated that 90%-95% of children leave their parents’ advisors upon receiving their inheritance.
“Advisers need to be communicating and engaging with today’s younger generation on the importance and value of advice, otherwise the demographic issue some of them currently face could have implications down the line for future revenues and cash flows.” – Nick French, managing director and head of UK wealth management at Russell Investments
Traditional wealth managers may face threats from fintech startups that provide a digital experience and real-time updates of their investments. These startups will also expand their offerings to accommodate.
Millennial investors “are far more likely to feel that some of the most cutting-edge technology tools are basic requirements of a service offering, rather than a ‘nice-to-have,’ ” according to a 2017 report on millennials and money from Accenture.
According to Cerulli Associates:
Moss Adams has estimated that the financial industry could face a shortage of more than 200,000 advisors by 2022.
In this scenario, attracting quality wealth management professionals would only get harder in the future because firms will be competing to attract talent from a smaller labor pool.
Companies will have to offer more generous compensation packages, and if they lose out on the talent, then they’re forced to settle for mediocre or sub-par talent, which could drive clients away.
Astronomically high living costs have rendered global financial hubs unaffordable for some of the most educated, talented, and otherwise well-paid talent.
When a Facebook employee
enjoying making a six-figure salary says he’s leaving San Francisco because it’s not affordable for his family of four, investment firms in San Francisco may face similar challenges keeping their staff or attracting new, young talent.
Keep in mind, a family of four with an annual household income of less than $117,000 in San Francisco is considered low-income by the Department of Housing and Urban Development.
Granted, San Francisco is an extreme case, but cities like New York, Boston, Los Angeles, Seattle, and Washington D.C. don’t offer much financial relief for educated professionals either.
The young talent that is needed to keep the industry – and your firm – going may not be able to afford living in or near the financial hubs you’re located in.
Investment management companies certainly face financial challenges from their older clients passing while younger clients take their wealth and assets elsewhere.
They’re also going to feel the pain by a lack of young talent joining the ranks and unaffordable housing in close proximity to their employers, which reduces the amount of available talent.
But it’s not impossible for firms to protect their financial interests in light of age demographic threats.
Advisories that take these measures will be thanking themselves later on. Plant the seeds of solutions now.