Building bridges with the next generation (Part 1)

This is the first instalment in a two-part article about expanding your client base into the next generation of younger clients, by accessing the children of your clients. In this first piece, we consider the challenge of gaining access to the children of clients. Next month we’ll look at how you make this work within your business.

For many established advisers who have been offering financial advice and solutions to their clients for many years, their challenge is that their clients belong to the same generation as themselves. These clients are moving towards retirement age, at which stage they will stop accumulating further assets, and in fact will start de-cumulating, through living off their ARFs and other investments built up during their working lives. And as their assets reduce, so does the remuneration of many advisers whose charges are based solely on asset values.

But an even bigger problem arises when these clients die. In the United States, it is estimated that children do not retain their parent’s adviser in 90% – 95% of cases after their parent’s death. This results in the adviser’s remuneration going immediately to zero. Is the figure likely to be significantly different in Ireland?

This is a shocking figure! Shocking because of the sheer size of the figure, but on the other hand the good news is that there is a lot that you can do to build solid relationships with the adult children of your clients.

 

Get to know them

First of all, make sure that your client’s children know who you are. Seek permission from your client to introduce yourself to them – not to hound them for business, but simply positioned so that their children have a recognised and friendly face in the event of the death of the parent. Your client will want their finances handled efficiently and as per their instructions. To assist in this, at this stage you are suggesting that their children should know,

  • Who you are
  • Where and how to contact you
  • The broad areas where you are helping their parents (obviously with the parent’s permission).

Should a death occur in the family, at least now you are a friendly face who has some chance of working collaboratively with the children of your deceased client, rather than some faceless organisation that the client doesn’t know, doesn’t trust and will be generally wary of dealing with.

 

Demonstrate your value from afar

Then when you are introduced to your client’s children, take the relationship very slowly. Look to add value by adding them to your ongoing communications networks, after first of all finding out which communication channels they want you to use. – depending on their preferences, look to add them to your email newsletter, connect with them on LinkedIn, follow them on Twitter etc. If you are hosting a relevant seminar, you should even consider suggesting to your clients that they bring one of their adult children along to it.

Now you have an opportunity to remind these adult children regularly of the value that you add to your clients (and their parents), and how in time you could also add value to them. Carefully chosen messages of the value that you add just might get them to contact you as a financial need arises in their own lives.

 

Include them (as appropriate) in their parent’s financial plans

This is obviously an area in which you need to tread carefully, but there may well be areas of a parent’s financial planning in which it makes sense to involve their adult children. As parents move towards the later stages of their lives, wealth transfer, estate planning and legacy building tend to become important areas for consideration.

While parents may not want to share every small detail of their financial situation with their children, some planning will make lives easier down the road.

Talk to your clients (and their adult children) about the importance of having a will. Talk all of them through the benefits of putting an enduring power of attorney in place. Build a partnership with a good solicitor who can put these in place for them.

Ensure your clients and their adult children understand the structure and implications of making gifts from a parent to a child and of Capital Acquisitions Tax. Make sure they are aware of the annual exemptions available so that they can avail of these exemptions whenever possible.

 

At the end of the day, you want the opportunity to demonstrate to the adult children of your clients that you really care about your clients, that their interests are paramount in everything that you do. They will see you a valuable, trusted adviser to their parents. And they will also see that you can carry out the same role for them too. And how you do this last piece will be covered in a follow-up piece next month.

What exactly is Lifestyle Financial Planning?

We have seen quite a significant movement over the last few years of Financial Brokers extending the services they offer to their clients, through the delivery of lifestyle financial planning. While this service may not be suited to every client, or indeed you cannot justify delivering it to every client, the shift is happening. This is because of the value that lifestyle financial planning brings to people’s lives and because of the deeper and more engaged relationships that develop between the Financial Broker and the clients that it suits. So what is it all about?

 

What is lifestyle financial planning?

Lifestyle financial planning consists of four main phases, and each of them in turn are required. The four phases are

 

1. Discovery

This is the phase that gets skipped over the most, which is a shame as this is the most important of all of the stages. This is the phase where the planner finds out the lifetime goals and ambitions of their client, where the client can visualise the outcomes in their own terms – the type of life that they will lead, the possessions that they will own, the impact they will be able to have on the lives of others, what they will do and achieve in their lives.

Until you know the answer to these questions, what are you planning for? Just building a pot of money with no idea of what it will allow your client to do?

This phase is carried out by careful and well thought out questioning by you. And then listening intently. It is not “airy fairy”, instead it is the most important conversation that you will have with your client as you get to understand their hopes and dreams

 

2. Planning

This is where the planner then uses his/her expertise to develop the roadmap for the client to get from where they are today, to achieving the life they visualised in the discovery phase. This is generally a comfortable area for Financial Brokers, where you can utilise all of your experience and technical skills to develop a plan for your clients. As a result though of the comfort at this stage, some brokers rush to it without properly completing the discovery phase – when that happens, you are no longer carrying out lifestyle financial planning.

Important also to this phase is the use of future cashflow planning. Without it, it’s not really lifestyle financial planning. When using this process you can demonstrate to clients if they are on track to lead the life they visualised, and if not what they need to do to get on track. You can show them the impact of unforeseen events and how to plan for them, the impact of changing goals and of course the actions they need to carry out, or products they need to put in place to achieve the plan.

 

3. Implementation

The most straightforward of all of the phases and an area that Financial Brokers excel in. This is where you assist the clients in carrying out the required activities (e.g. budgeting, wills, power of attorney) and where you put the required financial products in place that will play a role in achieving the goals of the plan.

 

4. The ongoing journey

This is again a really important stage that sometimes doesn’t get enough attention. Regular contact and scheduled meetings sit at the heart of lifestyle financial planning. The ongoing interactions turn the plan into a real journey towards the client achieving their lifetime ambitions. They are the opportunity to review and restate / change goals, review the progress and performance of the actions and products that were implemented and keep the client on track in terms of their behaviours with their money and their investments.

Without these meetings happening as scheduled, it is akin to pushing a boat away from the harbour wall to sail the stormy seas alone… You need to be beside your client at every turn, helping them to navigate their way towards their dreams. These review meetings also give you the opportunity to stay close to your client, and to gently remind them of the incredible value that you are bringing to their life.

Equally importantly, having a robust and valuable ongoing service also enables you to justify your ongoing charges to the client.

This shift towards lifestyle financial planning is to be welcomed. It increases the value of Financial Brokers in the eyes of their clients, provides a richer client experience and builds value in your business through easier justified ongoing charges.

What impact would 0% asset management fees have for advisers?

Are we seriously talking about 0% asset management fees? Well maybe not yet in Ireland, but Fidelity recently announced the introduction of two core equity index mutual funds covering the U.S. and international markets without any management fee.

If we saw a similar development in Ireland, what would it mean for financial advisers? And even if we don’t, what impact will the downward pressure on investment manager fees have for advisers?

 

A forensic analysis of fund management charges by clients

The two big asset manager stories over the last year or so were first of all when Vanguard announced a flat 0.3% management fee, regardless of how much an investor has in their account. This fee includes access to a CFP professional who will provide financial planning and investment advice. This was followed this summer by Fidelity’s announcement of 0% fees on two of their funds. These price developments will inevitably move closer to Irish shores over time and when they happen, they will be (rightly) trumpeted loudly by providers. This in itself will bring a keen focus from clients on the level of fees that they are paying into their existing funds.

We are certainly not advocating that fund management fees are the only factor for investors to consider – far from it in fact. But should fees reduce substantially, the reality is that investors will more regularly raise this issue with their adviser who will need to be prepared. The adviser will need to be crystal clear about their rationale for guiding clients towards higher charge funds. Higher cost funds make sense for many clients – you just need to be ready to clearly articulate the reasons!

The bottom line is though, fund management fees are likely to come under ever-greater scrutiny.

 

A lower overall fee creates adviser opportunities

One of the most common refrains I hear from advisers being unable to charge 1% (or even 0.75%) trail for their own services is that the current fund management fees don’t allow it. They argue that when you add 75/100 bps on to  a high management charge, that the overall charge is simply too high.

If the fund management fee went to 0%, surely this problem goes away? Now the only charge that would apply would be your 0.75% / 1%, which would not overly impact the returns achieved by clients. Could you charge a higher trail then and justify it to your client?

I’m not so sure that a reduction in fund management charges would be the silver bullet that some think it might be. The argument of fund management charges being too high sometimes hides an underlying issue of some advisers being unable to engage and convince clients in the value that they themselves (the adviser) are adding.

 

Can you articulate and demonstrate your value (and justify higher trail)?

How do you actively demonstrate to your client that you are worth paying 1% per year to? How clearly do you set out to your client the value that you add and the difference that you are going to make in helping them achieve their lifestyle and financial goals? How do you demonstrate the expertise that you bring to the table to help them, and both the quality and amount of work that you do on their behalf? How do you convince your client that they are fortunate to have found you, and that your 75/100 pbs charge is worth every single euro?

If you are not able to do this, even with reduced fund charges your client will still baulk at the charges. Now they will realise that most / all of the ongoing management charges are going to you and will really want to understand what they are paying for. Your fee won’t get “lost” any more in an overall charge.

To be able to articulate and demonstrate your value, you need to take a step back from your business and spend time identifying the value that you add and the difference that you make to the lives of clients. You need to articulate that value, your advice methodologies and be able to demonstrate the structure and rigour of your approach.

Only then can you justify your trail amount, irrespective of the direction of fund management fees in the future.

How can you improve the value of your business?

We wrote last month about the different ways in which a potential buyer will look to value your business. This is a follow-up piece about how you might increase the value of your business, to ensure you extract the very best price possible. Obviously your recurring income is a crucial starting point. However a good business is about a lot more than a simple multiple of your recurring income. There are a number of ways ways that you can demonstrate additional value in your business, which will allow you drive up the price.

 

Work through all the valuation methods yourself

As set out last month, financial advice businesses can be valued using a number of different methods. The oldest (and simplest) model is the multiple of revenue model. However this is being replaced today in some cases by buyers using a multiple of the profitability of the business (usually excluding the business owner’s earnings) as this takes account of both revenues and costs within the business.

It is really important that you consider all of the potential valuation methods, as a purchaser most likely will do so! If a particular valuation method is proving very difficult in justifying the value of your business, are there changes that you can make that will improve the picture? Doing the calculations yourself and being prepared are really important to achieving the price that you want.

 

Drive up trail & other recurring incomes

Obviously there is no point just a year or two before you want to sell up, to really start trying to make the switch from upfront commissions to the flatter income structures that are far more prevalent today. A purchaser will want to see a steady and increasing recurring income stream over a prolonged period. If a sale of your business is on the horizon at all, now is the time to start making that shift to increase your recurring income stream – the StepChange “Getting to 1%” programme could really help you here!

 

The persistency of business is crucial

Of course the size of your business is a main factor. But so equally is the persistency of your revenue. Lapse rates have become a major issue for life companies and advice firms alike, so obviously persistency will significantly impact the price someone is willing to pay for your business. There is little value in a firm that can’t demonstrate an ability to build up a durable revenue stream.

There are a number of steps that you can take to help address any purchaser concerns in this area. Preparing the ground for an effective “earn-out” period will really increase the confidence of a potential buyer – one of their concerns will be your commitment in this area. Also reducing the reliance of clients who seek to deal exclusively with you will also help. If you can demonstrate that clients deal with your business rather than just you, a buyer will feel more confident about those clients staying with the business.

It is also worth looking at the remaining advisers in your business. Having them tied into solid contracts with clear non-compete clauses should they leave, will again help you in your negotiations with a buyer.

 

Have a winning business proposition

A buyer will want to believe that he or she is getting more than their money’s worth when running the rule over your business. A very compelling business proposition will help to provide this comfort. For example, this may be strengthening the buyer’s position in their chosen market or indeed giving them access to a new market. It may be a unique expertise that your business offers or strength in attracting a particular target group of clients. A strong position within a niche market can be a very attractive proposition! If you own a brand that is really well known in an attractive target market, this is a very valuable asset. However on the other hand, if you’re not clear about what’s unique about your business and be able to demonstrate this, you cannot expect a prospective buyer to see this potential.

A buyer will also want to be purchasing clients who are engaged by and committed to your organisation, and are likely to stay with the firm going forwards. To achieve this, you’ll need to ensure that your processes for ongoing client engagement really stand up to scrutiny.

 

Your service and compliance systems are very important

Potential purchasers also want to minimise the headaches involved in a purchase. They want to buy a well-run business that looks after its clients in a professional and engaging way and is compliant in everything that they do. In fact better still, they want to buy a business with potentially better processes and systems than their own, that they can then leverage for their now expanded business. There’s a real opportunity to make your business more attractive to a buyer through utilising excellent business processes.

 

Your people are the heartbeat…

While your clients are at the core of your business, your own people are the heartbeat of it. They have the strong relationships with your clients, the expert skills that potentially are sought by a buyer and the capability to deliver brilliant service to attract and retain your clients and valuable income stream. A highly skilled, cohesive team is an enormous asset when selling.

 

These are just some of the factors you might think about as you prepare your business for a potential sale. If you have any comments in relation to the above or indeed can identify any other factors, please leave your thoughts below.