The Future of Wealth Management: Short-term Noise, Long-term Planning

As promised, I’m sharing my summary of the meaty content from “The Future of Wealth Management: Short-term Noise, Long-term Planning,” a recent event in Scottsdale co-hosted by FP Transitions and Bloomberg. The keynote speaker was Brad Bueermann, CEO of FP Transitions, a firm whose credibility on the subject rates highly given they value 1000 advisory firms a year, have managed over 150 M&A transactions, launched 400 succession plans, and most dear to my heart, have placed 800 Generation 2 advisors into the ownership slot.

I find it ironic that we know our clients need to plan for the long-term, and that to achieve financial success, they need to recognize investment pornography as noise, yet we are, as a group, neglecting to plan for the long term of our own firms and to recognize industry pornography as noise.

So, what’s the industry noise?

The threats of consolidation, the slow savings rate, and fee compression and competition from the fintech side of the business, the “Robo-advisors.”

The data don’t support these “threats.”

1. Consolidation.

a. Only representative of 1.5% of firms

2. Slow savings rate.

a. Wealth formation

i. Families making over 100k a year in Canada and the UK are less than 15% in each country, while in the US the number is 40%. In the US, 15% of families are making over 200k, and those above that threshold have experienced huge growth since bottoming out in 2013: 1mm families per year are joining that segment.

ii. The latest Fed Reserve report on household wealth counts a total of $80 trillion, averaging 7% annual growth – and that’s just liquid assets – not including real estate or business assets.

b. Demographic

i. People aged 55-65, the pre-retirement folks in their peak earning years, were 32mm in 2006. That figure is forecasted to be 41.7mm in 2019, representing 1mm people a year entering that age group.

ii. The growth of those entering the 35-44 age group, where earnings are accelerating, is compounding as well.

3. Fee compression and competition.

a. When we hear soundbites like Vanguard is vacuuming up $1 billion a day into their funds, that’s not much compared to $80 trillion in household wealth.

b. Fintech Robo advisors. Robos can’t deliver the long-term planning that our clients need, nor can they do anything about the highest, primary value we deliver to clients, which is to help them transcend the market noise aimed at them, so they can make good decisions.

The Conclusions

There is real growth in household income – this wealth accumulation is increasing the demand for financial planning, and the giant emergence of wealth transfer is something that Robo algorithms can’t deal with.

The cycle for single-owner firms follows somewhat of a bell curve with three phases of building, plateauing, and then declining, fading away. Interestingly, our clients follow a similar curve: accumulation, peak earnings, and dispersal. If you overlay the two curves you’ll find clients’ peak earning years coincide with our plateau, yet they still have a 35-year runway! How are we going to serve the growing wealth in the U.S.?

The real challenge is about talent: building sustainability and multi-generational growth. That’s what will determine your firm’s ability to survive and thrive.

The number of credentialed advisors is just over 300,000. Historically, the wirehouses and insurance companies were pumping out trained, licensed reps that were feeding this number, yet those training programs have diminished to the point that our universe hasn’t grown since 2010. 8 years!! And that number is much smaller if you strip out the people who aren’t actually advising clients.

Where Your Focus Should Be

Change your focus from the short-term to the long-term. We need to get laser-focused on turning our practices into real businesses that will:

1. Meet our clients’ expectations that we’ll take care of them as they age, and their next generation, and

2. Deliver the highest value for our own future and that of our families.

The Alternative: Be a Statistic

The average age of the RIA is 55.5. 80% plan to retire in 15 years, yet only 30% of advisors over the age of 60 have a plan in place.

Panelists in “The Succession Challenge,” moderated by Julie Littlechild at the 2018 FPA Retreat in Phoenix, presented a clear message and some startling statistics.

• The central theme: “Your business is your biggest asset, don’t let it evaporate.”

• David Grau, President and Founder of FP Transitions, presented the statistics:

• “Books” & “practices” represent 95% of advisors – those that treat their business as a personal piggy bank. Only 5% of advisors run a business, with multiple owners made up of multiple generations, where the founder(s) are slowly selling their life’s work to their successor advisors. The former, books & practices, will perish. Grau jokes about the rolling 5-year plan – advisors he’s spoken to over the years that plan to sell in 5 years. Five years later, those same advisors are saying: they plan to sell in 5 years.

• Even if you have an exit plan, either someone to step in if something happens to you or an intentional sale, without a team you might get 2.5x rev, but that will be based on 100% client retention. Tough to achieve if the only individual the clients have a relationship with isn’t going to be around. With a succession team in place, your sale to the team might be closer to 6-7x revenue, and you’ll still get your share of the profits while it’s growing!

• Your strongest young people will get recruited away if you don’t have a plan that includes their growth and development. And 9 out of 10 Generation 2 advisors say yes to committing their money, time and effort as a G2 owner.

As one of Littlechild’s panelists prescribed: “You have to examine your own vision: ‘What do I want for myself and my clients?’”

If you’re on your own, or you have a team, but you are still overwhelmed, you need to get laser-focused on growing the people that will carry you forward. You’ve worked too hard to let it all evaporate. Get to work on your team and experience the freedom they will bring. Your clients will notice and be grateful.