Schwab Outlook Study Warns of Succession Challenges

Advisory firms will have significant opportunity for growth over the next decade, according to Schwab Advisor Services, but success will require new strategies to win “Generation Now.”

American workers ages 30 to 45, referred to by Charles Schwab as Generation Now, control nearly $3.5 trillion in investable assets, according to Cerulli Associate’s data cited in the firm’s semi-annual “Independent Adviser Outlook Study.” This client group is beginning to actively seek financial advice and guidance on setting and attaining long-term financial goals, the research suggests, presenting registered investment adviser (RIA) firms with a golden opportunity to push down the average age of their clients.

The latest independent adviser study shows nearly 40% of all RIAs’ existing clients are retired, while another 30% are less than 10 years from retirement. These numbers are challenging many RIA firms’ long-term viability, Schwab says, especially those depending on asset-based fee structures. In fact, more than six in 10 (63%) retired clients are already withdrawing from portfolios, including from principal, according to the survey findings.

“With this in mind, now is the time for independent advisers to actively focus on acquiring the next generation of clients and assets, especially given that the majority of advisers tell us they are planning for legacy,” says Bernie Clark, executive vice president and head of Schwab Advisor Services.

With $16 trillion in total wealth transfer anticipated by 2050, advisers are divided on whether the next generation of investor presents a risk, an opportunity or simply a challenge. Thirty-seven percent of advisers see risk in the years ahead, Schwab says. These advisers believe they will need to develop new client relationships that will enable them to grow their businesses and maintain asset levels. On the other hand, 40% say they see opportunity in the next decade to develop new service models to meet the needs of emerging clients and smaller accounts.

“We feel that the next generation investor is unequivocally an opportunity for independent advisers,” Clark adds. “They have significant wealth, and their individualized priorities, along with the competing financial needs in their lives, can benefit greatly from the customized, client-focused advice that independent advisers can deliver.”

Schwab researchers say attracting the next generation of wealth management and retirement planning clients will be a function of differentiating service offerings, identifying new centers of influence, and developing a solid social media and Web presence.

Among RIAs, demonstrating firm expertise and services is the top priority for attracting younger clients and is deemed extremely or somewhat important by 91% of advisers in the study. More than eight in 10 advisers also point to the importance having a strong reputation based on firm reviews and centers of influence relationships, offering a unique service or value proposition, and clearly communicating the benefits and differences of the RIA model.

When asked about the extent to which members of their firm can effectively articulate the firm’s value proposition to prospects, clients and influencers, a full 90% of firms report that client-facing advisers can do so all or most of the time.

Approximately one-third of independent advisers (32%) consider referrals to be a formal and routine aspect of their firm’s culture, but more than half (55%) say that the role of referrals is informal and is up to individual advisers. The research shows some RIAs ask for referrals and some do not. Sixty-nine percent of advisers believe cultivating client referrals differentiates their firm from the competition.

With respect to cultivating the next generation of investors, half of advisers (53%) believe reaching the next generation will require engagement with entirely new centers of influence, while 47% believe that the current centers of influence (such as attorneys and accountants) will remain relevant.

Fifty-nine percent of study participants reported social media and online resources are used mainly as a tool for marketing and raising firm visibility versus a means of increasing engagement with current clients. Social media is noted, however, to be vital to communicating with the next generation of clients by 32% of firms. But advisers still firmly believe (68%) that in-person contact will remain the crux of their business and that social media can never replace personal interaction.

“It will be critical that everyone, from advisers to office support staff, knows and understands Generation Now and is able to meaningfully connect them at every point of interaction to their firm’s value proposition,” Clark recommends.

Looking ahead, a full 70% of independent advisers have plans for creating a legacy firm—one that lives beyond its founders. Of these, close to half (48%) are planning an internal succession or partner buyout.

When considering the next generation of leadership for their firms, independent advisers appear to be focused most often on cultivating leaders from within (37%), Schwab says, versus looking externally (14%). However, 30% of RIAs are not attempting to grow the firm’s leadership in the near future.

The study shows over half (56%) of independent advisers believe automated portfolio management (“robo advisers”) could supplement their current offering and help grow their business, versus 44% who consider robo advisers an increasing threat.

In terms of their service offerings, many advisers are staying with their core investment advisory business centered on long-term financial planning, including retirement planning (54%), planning related to clients’ employer-sponsored retirement accounts (47%), charitable planning (37%), estate planning services (35%) and workplace retirement plans for business owners (34%).

Detailed survey findings can be found here.