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An old saw claims that good wine and wisdom get better with age. But of late, that maxim does not seem to apply to the aging of typical advisory practice. At NextChapter, we observe organizations of all sizes delivering great financial results - earnings - but losing assets to the inevitable impact of an aging clientele. Left unchecked, firm valuations will continue to slide. That’s not the next chapter most ownership envisions. What to do?
We see three common scenarios - each a function of how that ownership views their situation. Let me first describe the three and then suggest remediation strategies for each.
Scenario 1 - What’s the Problem?
This is “great earnings” scenario - powered by a historic bull market, maybe some acquisitions. Earnings are great if you are an employee or a stockholder with a short term time horizon. If you plan to retire soon or sell your stock, there is no problem here. Advisor attrition is at an all time high and there is strong anecdotal evidence of record senior industry leadership departures - also well timed with a cresting wave of success. So with the benefits of good timing, we say “enjoy!”
For the other two scenarios - it’s back to reality.
Scenario 2 - What to Do?
Firms in this bucket tend are operating as usual for the most part, but have lost long-time clients here and there due to life-related inflection points like a death or significant illness.
As you know from popular industry data, advisors without a solid relationship with spouses, partners and adult children seldom hang on to those relationships. 70% departure rates are noted for the unengaged spouse, 90% for the unengaged Generation 2 children. An experienced trust and estate colleague of ours claims that when she gets involved with a competitive situation and the survivors are questioning the value of continuing with the incumbent advisor, she finds enough overlooked details to win 100% of clients away from their (typically) dad’s advisor. So there is a cost of inaction.
This scenario is mostly defined by a lack of certainty - what should we do - and not a lack of interest or willingness. The practice is challenged by new circumstances associated with aging families.
Scenario Three - Bring it On
These are the advisors and practices that are leaning in to the challenges of aging clients and seeing the opportunities with surviving Generation 1 spouses/partners and with Generation 2. This is the advisor cohort that has been including - requesting - engagement with family members before most of the “Moments” occur. This proactive effort is paying dividends as conditions develop and the family already knows and trusts the advisor and team.
This type of practice also manages more moving parts than a straight-on investment shop. We see three important attribures that define a “longevity savvy” business compared to the other two scenarios above:
Dedicated professional staff applied to the unique demands of longevity planning - including the ability to react to the Moments That Matter without significant disruption to the business.
A mindset of proactivity to engage. This practice is not just ready for action - it facilitates it. In the classic family office model or the ethos of a private bank, connecting with G1 survivors and Generation 2 is THE business objective, not an ancillary activity.
The practice measures success not by absolute financial returns, but by the percentage achievement of “opportunity”. This metric is different from most advisory practices and becomes more powerful as the size of the organization increases. Another descriptor is serving well “the other 80%” of the clients typically not the focus clients of a firm. The narrowing of engagement is a natural development over time as clients that are not ideal or not fully connected may slide off in part, attracted by other products, different ideas or lower prices. The “full opportunity” objective is a dedicated plan to earn back those “held away” assets by learning why they are not with the practice and what it would take to get them back. This is a true mindset of creating and maintaining organic growth.
So Growth Doctor - What Now?
Back to the first scenario. The perspective that there is “no problem” may be not be so accurate depending on the exit strategy. Like with the sale of your family home, your sales price has a lot to do with your view of the result. A practice that has been depleted by withdrawals from aging clients - and not replaced by engaging G2 children or new Gen X or Millennials - is truly a wasting asset. We see greater scrutiny of the “age-weighted” revenues when buyers approach practices. Organic growth is the metric — retention plus the impact of net annual flows - and this measure has become top of mind for buyers including more savvy private equity firms. Buyer education is improving, informed by some overly optimistic early acquistions, and that dilapidated house just won’t fetch the premium paid for a well maintained structure.
Scenario One invites a couple options - mostly a function of time horizon. If the owner wants to go soon, one choice is to align with another firm and help transition relationships. On a timeline with transparency for everyone. This is the best way to increase value by getting help to grow the existing relationships.
The second option takes more time but essentially recruits a junior partner to earn out the buy. One interesting take on this option we saw recently was a two year run after the hiring of the primary owner’s daughter, who refreshed most of the firm’s relationships, picked up the G2 kids and nearly doubled the practice revenue. She leveraged the G1 connections but really focused more on the kids, who she said were “learning a lot” by watching the issues faced by their aging parents. With those lessons running in real time, the new advisor got the kids to the table investing in retirement income and long-term care, with immediate bump to the firm’s margins.
Scenario Two is a bit easier - if the WILL is genuine. So many advisors and firms are running so fast that it is difficult to find the time to add longevity services. The additional needs of aging clients and their families can creep up on us - and all of a sudden everyone seems to need everything. That’s the real challenge of those “Moments That Matter” - they don’t come with advance warning.
Scenario Two firms first need a strategic “time out”. Resist the temptation to treat longevity planning as just a bolt-on to your existing capabilities. This is a different business requiring different service and - likely - dedicated personnel. The most effective model we have seen is when the practice acquires a specialist to not just meet the current expectations of current clients, but also oversees the practice “expansion” into longevity planning and the aligned capabilities, like how to refer caregiving needs, execute estate planning and mitigate risks of fraud.
Linda M, a senior advisor from a wirehouse firm, joined the existing four professional practice at a competitor in Northeast Florida. Linda says - with a smile - “I do the soft stuff”. She now oversees most of the firm’s financial planning capabilities in addition to coordinating support capabilities including fraud protection and caregiving referrals and long-term care. Linda’s four partners each focus on one other legacy capabilities - retirement plans, investment portfolios, bonds and tax management. They say, “For our clients and their families, Linda is the glue”.
The Thirty Year Flood (of New Business) - Choose a Boat
The condition of an aging demographic is so well known, the very mention of “baby boomers” creates the eye roll wherever I go — but this is more. The current state of the advisory business is being shaped by an demographic but the awareness of that force is uneven across firms either not immediately impacted by the loss of clients or complacent about their current terrific financial results. As a result, the response to the demographic changes is wide ranging.
Like most really significant trends, the impact of longevity is slowly building but will be a game changer for alert advisory practices leaning into the trend - and for companies providing capabilities and products that support higher quality longevity. Adaptable firms have an opportunity to capture market share at a rate we have not seen since managed accounts began to roll over stockbrokers. That part of the industry captured $12 trillion from a dead start. A similar path could be enjoyed by companies offering retirement solutions including protected income. Annuity sales were a record $100+ billion in the first quarter of 2024. Given the slim penetration rate of annuities within the advice industry, I can see upside that is multiples of the current run rate in order to achieve a pretty basic share of the retirement pie. The demography of the annuity buyer is getting younger - reflecting a lot of interest from Generation 2, which is learning from watching their parents. And we know that they are just getting started - this tide will lift all participating boats.
Longevity planning and solutions - stimulated by the Moments That Matter - are the biggest potential disruptors and drivers of business valuation since the move from advisors selling products to positioning managed solutions.
So what is your plan?