Recently, I was invited to serve as a thought leader and facilitator at the 2014 NexGen conference, which will be held June 20-22 at Augustana College in Rock Island, IL. The NexGen conference has emerged as the premier educational event for the Gen X/Y advisory cohort (defined as under age 36, although the event is open to all ages). A number of planning firms have started sending their younger successor advisors to the conference in order to accelerate their development as leaders, managers and marketers, and generally acquire the skills that will be necessary when they take over running the firm. The older advisors may also be quietly having their planning staff gather insights into new emerging paradigms that are evolving within the next generation, so they can better market their services to the emerging generation of clients.
Having interviewed a number of people who will attend the NexGen gathering, and others who are in their generational cohort, I have distilled the ten key themes that illustrate how the next generation of advisors will change the profession when they take the reins.
1. Next generation advisors will commoditize ongoing asset management services.
Think of managing assets in two components: portfolio design and robo-advisor routine activities like rebalancing and harvesting tax losses. Designing the initial portfolio customizes it to the client and the client's goals, and can be thought of as part of the initial planning engagement. The ongoing processes can be automated or outsourced altogether.
Jude Boudreaux, of Upperline Financial Planning in New Orleans, LA is one of a growing number of NexGen advisors who have dropped their clearing firm relationship the way the previous generation dropped their Series 7 license. "I don't have the cost and expense of having a server or a clearing firm, because I'm not doing any trading," he says. "I hired Symmetry Partners to handle the implementation and investment management for my clients who happen to have investment management needs, and it all works. Other clients," he adds, "have money at Vanguard. We help them create initial allocations, and they send us duplicate statements, and we can monitor those as well."
NexGen advisors who are more traditional point out that Adhesion and Orion are already providing the services of the robo-advisory firms, and one of the top robo-advisors, Betterment, is quietly preparing to launch an institutional platform for advisors who want to outsource everything but the portfolio design. For Gen X/Y planners, the robo-advisory movement will be a synergistic friend rather than an enemy.
At the other end of the spectrum, more than a few NexGen advisors think the whole asset management revenue model is something of a charade. "The ability to sell alpha is gone, if it was ever there in the first place," says Alan Moore of Serenity Financial Consulting in Bozeman, MT. "Our younger clients don't need investment advice," he adds. "They understand that you cannot out-gain bad savings habits. When I look at our clients' net worth statements from one year to the next, it is amazing how small of a portion of their increase is attributable to investment returns. The bulk of it comes from savings, and cutting spending, and really finding that balance."
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2. Next generation advisors will charge differently for their services.
Younger advisors point to two weaknesses in the AUM revenue model that predominates in the profession today: it excludes too many potential clients and it puts the focus on the wrong side of the relationship. "We're seeing a transition to financial planning truly being the focus," says Moore. "Even fee-only advising, the way it is practiced today, has been investment-centric. We haven't been focusing on the value of the planning work. What younger clients need is a planning-centric approach."
So how will NexGen advisors get paid? "A lot of the clients we work with don't want to pay a high up-front planning fee, and they don't have assets to manage," says Moore. "So we hit the debit card for $100 or $200 a month, just like the gym membership and the insurance bill. People pay their other bills monthly, so why not pay a financial planner the same way?"
Boudreaux cites the example of a young professional couple in their early 40s who signed on as clients recently. "They're making good money, but because they have various debt issues and things that are out of whack in their financial lives, they would never get in the door of a traditional wealth management firm, which charges based on assets," he says. "We set their annual fee at $3,000, and they pay $160 a month that comes out automatically."
Another client, a young surgeon with limited savings who makes $400,000 a year, pays Boudreaux a $4,000 annual fee by check. "This is somebody who would have never been a profitable client for a lot of planning firms, but it's a profitable relationship for me," he says. "Charging for planning," Boudreaux adds, "puts the client in the center of the relationship. I say: people are my client, not their money."
One of the more interesting fee experiments can be found at Timothy Financial in Wheaton, IL, where company founder Mark Berg offers packages of planning hours, similar to the way different service levels are bundled into the cell phone or cable bills. If the client wants 10-14 hours of planning work a year, the cost ranges from $1,400 to $3,360, depending on whether the work will be done by one of the staff planners or Berg himself. A package of 40+ hours costs $12,800 a year.
For Berg, these ongoing fee arrangements eliminate a number of conflicts of interest that still exist in the profession at large. First, clients are free to have their assets managed anywhere, which removes a big part of the sales agenda in traditional prospect meetings, where the hidden goal is to get the assets transferred. Second, the hourly package arrangement – like the monthly fee arrangements that Moore and Boudreaux offer – provide incentives for the advisor to continue offering planning advice and service, rather than simply send out performance statements four times a year and schedule a meeting to look over them. "The initial planning work can be a loss leader the first few years for the firm," Berg points out, "but then as the line is crossed toward profitability, that's when the client questions the ongoing fee."
And third, there is a conflict whenever clients with larger portfolios are subsidizing those with smaller ones, as is the case at many planning firms. Before he switched revenue models, Berg found himself putting more time and energy into clients whose portfolios paid him $2,500 a year with whom he enjoyed working or whose lives were more complex, than clients whose portfolios were paying him $40,000 a year. But is that fair?
3. The next generation of advisors will expand the profession's traditional client base down into the middle market.
Moore speaks for many younger advisors when he talks about the frustration he felt when his firm prohibited him from working with people his own age who didn't (yet) have a lot of assets to manage. "When I worked within the traditional model, I couldn't bring in a young doctor who had high income and low assets," he says. "I had to get the $1 million baby boomer. How in the world is a 26-year-old going to bring in a $1 million baby boomer?"
Today, Moore's typical client is a young business owner who is maxing out on his or her 401(k) contributions, who only wants to make $150,000 a year and focus on enjoying a terrific lifestyle. Another client, a 34-year-old anesthesiologist, had been turned down by five other advisory firms in the area. "She was making $550,000 a year," says Moore, "and she said to me: Alan, I just paid off $250,000 in student loan debt in the last 12 months, and now I want to save that $250,000." Within four years, she'll be meeting any asset minimum the advisory profession is likely to set, but by then she will be a loyal client of Serenity.
The services that people in the early accumulation stages need are different from those the person in the shadow of retirement needs. Moore talks about the importance of cash flow planning at an early age, which means offering advice on the budgeting and spending side of the ledger. "The planning exercise," he says, "helps to show the impact of good savings habits at an early age. You can really see what a difference that extra $500 a month can make long-term. We are looking at cash reserves, debt payoff, developing good money skills and habits and helping business owners shape their lifestyles."
When Boudreaux describes a successful client relationship; he doesn't talk about investment returns. "I'm thinking of a particular couple that has made a lot of progress, and I'm proud of them," he says. "They had some IRS debt and they are getting caught up with that, they are refinancing their house, freeing up cash flow, which they never understood before – all those things are far more important," he adds, "than me telling them: you are going to need $4 million to retire in 40 years. How they handle their cash flow has far more impact on their financial life, and their quality of life, than anything that we will ever do on the investment management side."
Younger advisors are bringing this kind of thinking to more established advisory firms. Jacob Wolkowitz, a next generation partner at Accredited Investors in Minneapolis, MN recently performed a cash flow projection that looks at the tipping point when accumulating clients retire and become net de-accumulators, and made some assumptions about the firm's future clients. The easiest assumption was that the existing clients will each age one year every 12 months. Another easy one was to estimate the age of clients who are being brought onboard – typically people nearing retirement age. He assumed that new clients would be acquired at a steadily growing pace, and then looked at projected assets under the firm's management.
The result was eye-opening. The firm would be looking at net AUM outflows of 1.2% a year in 2017. "The problem accelerates the further you project out," says Wolkowitz.
The obvious solution is to bring in a portfolio of younger clients. But how many of them are going to meet the firm's $2 million AUM minimum? Wolkowitz worked with senior management to institute a new policy, where the minimum would not be a rigid AUM number, but instead would be calculated as the net present value – again using reasonable assumptions about client savings – of a client's value to the firm over the life of the relationship. A client with $300,000 a year in earnings, saving $100,000 a year, could be more valuable, long-term, than a retired de-accumulating client with a $2 million portfolio.
Perhaps the most radical experiment in bringing financial advice to the middle market is being conducted by the younger financial planners who work part-time with eHow Now, answering any financial question for $10 a question or a subscription fee of $20 a month. Ashley Murphy, Arete Wealth Strategists, San Francisco, CA, estimates that he derives roughly a third of his total income from his eHow Now work, alongside 12 other young advisors who log in remotely at preset hours. "The questions are anything from: help me track the value of these stock certificates I found under my late father's bed," he says, "to: can I roll my privately-held company stock into my self-directed Roth IRA? It turned out," Murphy adds, "that he could: he was only a 1.2% owner."
4. Next generation advisors will take a more professional view to managing their firms.
At last year's Insider's Forum conference in Dallas, a panel discussion looking at the succession planning issue from the successors' chair suddenly veered into areas that you don't hear much about. Successors of advisory firms talked about how easy it was to map out a more efficient set of systems and procedures on paper, but getting the founder to let go of systems he/she has built and is comfortable with was far more difficult. There was discussion about how the successor wants to invest retained capital in the firm while many owners are cutting back and simply milking the practice. The successors talked about the impatience they feel with the lifestyle practice approach, where the firm slowly erodes its client base and revenues – until the successor finally finishes buying it.
Readers of Advisor Perspectives can find a detailed writeup of the challenges that successors face in bringing their practices to a greater level of professionalism here, but the point is that advisors coming out of college today have better business management skills than many advisors who changed careers, started a practice and somehow ended up with a business. And the younger advisors who are buying into the practice have a far greater incentive to keep it viable and adapt to new software and processes than the owner whose time horizon may be five years and shrinking.
5. Next generation advisors will work remotely with clients, and enjoy a much broader geographic reach than today's advisors.
In the age of Skype, some advisors are questioning the value of requiring clients to drive to your office for a meeting. Alan Moore recently relocated from Milwaukee to Bozeman – where, he says, the skiing is terrific – and continued meeting regularly with his Wisconsin-based clientele. It turned out that none of them were meeting him face-to-face anyway.
"If somebody is at home taking care of the kids, does it make sense for them to have to find a babysitter so they can meet with me?" he asks. "Videoconferencing is much more flexible and convenient for them and for me." He handles all his client meetings using Skype or Google Hangout, whichever clients prefer.
But what about gathering documents and getting the forms signed? Moore has clients send him scanned documents, and they electronically sign his engagement agreement using EchoSign. The account transfer forms are handled using DocuSign with biometric signatures. "Shareholders Service Group [Moore's custodian] has never rejected a form," he says.
6. NexGen advisors will practice in more focused niches.
When Moore began working with clients virtually, the goal was to become location-independent. But he quickly realized that there were no longer any geographic boundaries on his client base, which created new marketing benefits.
"This model lets you create a much more focused niche clientele than you could if you were marketing to people in one town or city," he says. "In the future, people who are increasingly web-savvy won't just be searching for a generic financial planner in their neighborhood," he adds. "They'll search for a financial planner who specializes in orthodontists who are selling their business. If there is somebody out there doing that, anywhere in the country," Moore continues, "then he or she is a better choice than the local guy who has never worked through these issues with a client before."
There are also advantages on the practice management side. "If you create this homogenous set of clients, it makes it a lot easier to provide efficient services," says Moore. "If you're always working with new parents, then you know they are experiencing the same challenges, as opposed to if you are working with a business owner or a baby boomer executive."
Interestingly, the niche that Moore himself is developing is business owners who want a lifestyle like his. "They'll say to me: I want to start a business, but I don't want it to consume me," he says. "How do I do that in a way that makes sense?"
7. The new generation of advisors will offer their clients a more pleasant (less painful) initial planning experience.
To Joe Pitzl of Intelligent Financial Strategies in Minnetonka, MN, the traditional planning model looks an awful lot like a transaction. "You charge someone upfront for a financial plan, punch a bunch of data into the software, it spits out several reports, you talk through that and then move on the investments," he says. "There is a lot of resistance to that from consumers in our generations, Gen X and Gen Y, because we know that life is an evolution, not a static path."
The next generation is changing the traditional planning experience in two ways: by de-stressing it and handling it more collaboratively. When clients walk into the offices of oXYGen Financial in Alpharetta, GA, they are invited to belly up to the office's oxygen bar or sample specialty coffees or ice creams. There's a Wii station in the lobby area. When oXYGen co-founder Kile Lewis arrives for the meeting, he is scrupulously following the firm's no-tie rule, which he believes helps clients feel more at ease. "One thing our industry has to do is somehow get off the pedestal," he says.
The initial data gathering process doesn't involve a questionnaire or canned questions about goals and objectives. Instead, Lewis and his partner Ted Jenkin will brainstorm interactively with their clients using tablet computers. The goal is to create a comprehensive plan for their lives, which doesn't focus on retiring in 30 years; in fact, there is no retirement assumption at all. "We say, let's help you figure out how to build an exit plan from what you don't enjoy doing today into the work that you've always wanted to do," says Jenkin, "so you can still have fun and enjoy life and be able to meet your goals."
Rob O'Dell, at Wheaton Wealth Partners in Wheaton, IL and Naples, FL, starts out even slower, by asking clients to give him their basic family information in narrative form as he types the information up on the screen. Then he asks them about some of the life challenges they're facing now and that they expect to face in the near term (1-5 years) and longer term (6-10 years). This starts a dialogue with the goal of articulating some of the things that the clients want to accomplish, and these, too, are typed up on the screen. "When we get to the milestones," says O'Dell, "the husband and wife will start conversing back and forth. Are we going to sell the residence up north in that 1-5 year time frame? Or is that in the 6-10 category? At that point," he adds, "they're completely engaged."
Clients are invited to correct the wording of their goals, creating a non-stressful iterative process where they can move closer to articulating what they want to accomplish – and only when they're comfortable does the conversation move on to harder financial topics.
Neither oXYGen nor Wheaton require their clients to dig around their account statements; a designated staff person will sit down with them and log into their various accounts, pull down and print the latest statements, and handle the chore of populating the planning software. In the new model, this "numbers detail person" (no actual staff position name has yet been created for this role) will take an active role in the second, third and subsequent meetings, as numbers are attached to goals and clients assess how realistic those goals are given their current financial situation. The additional meetings allow clients to interactively create the plan and buy into it. This is planning with the client, not to the client.
Finally, the process doesn't lead to a planning document; the output delivers a clarity of purpose to the client, and a better awareness of the client's financial resources for the planner. The real work is not the plan, but becoming what neuropsychologist Moira Somers has called a "think partner" for clients as they make decisions and move forward toward the life they envision. "I think all of us have a tremendous amount of respect for the existing process," says Pitzl. "But the general consensus in my generation is that the planner-client relationship is a partnership. The model that existed before placed the planner in a more authoritarian position. Instead of making recommendations along the way, we talk about the options."
8. Next generation advisors will market differently from their predecessors.
Lewis believes that the way clients find advisors is about to shift dramatically, and for Gen X/Y consumers, it already has. "Yesteryear, you had to be concerned about your reputation in the local community," he says. "In the future, it will be all about your 'webutation,' which includes social media. Generation X and Generation Y clients will Google you up, stalk you on the web, and if you look legit on Google, then you're legit in their eyes.”
When Garrett Prom, of Prominent Financial Planning in Cincinnati, OH, hung up his shingle, it was primarily a virtual shingle. Prominent's website includes Facebook, Twitter and LinkedIn links, plus his blog posts and an invitation to communicate via email. What it doesn't provide is his company's office location. "I just had an introductory Skype call from somebody in Ohio," he says. "Location isn't as much of an issue now as it used to be."
"Most of my clients found me from the Internet," adds Boudreaux. "I've done no traditional marketing since I've started, in terms of getting referrals from attorneys and accountants. I have a website that speaks in my voice and is willing to share some of who I am. I have a blog, and it was a combination of blogging with a search mindset, trying to put in some terms that would be searchable and search friendly. It has raised my ranking for a local search, to get people who are looking in that direction."
When he was starting up his practice, Moore was a heavy blogger, but he actually had to slow down the pace because the content was attracting too many new clients. He created a YouTube video a year ago that is still bringing in business. "Somebody re-tweeted one of my videos today, which I thought was kind of funny," he says. But in his mind, clients of the future are going to want to look for professional advisors who are generous with their information, who they can have a relationship with before they ever meet face-to-screen.
9. Next generation advisors will change the way client information is organized and managed.
Lewis at oXYGen is one of a growing number of younger advisors who use eMoney Advisor to create a "key performance indicators dashboard" for clients, which also functions as a repository of their important documents. "It's the starting point of our relationship," says Lewis. "It aggregates every one of their accounts, their assets and liabilities, their key documents and everything else, all under one password. Our road warriors can put in their frequent flier miles and AmEx reward points all with a single sign-on."
In fact, Lewis believes that, just as Baby Boomer and Greatest Generation clients see more value in asset management than planning, Gen X/Y clients tend to see the organizational power of the dashboard to be more important than the advice that comes with it. Prom, agrees. "Keep in mind that for the generation I'm working with, this online stuff is a piece of cake," he says. "And bringing it together online makes the data-gathering process go a lot more smoothly," Prom adds. "Instead of having clients fill out a lot of forms, and then having the advisor transfer that information manually to the planning software, clients can go in an create links to their accounts. At the same time they're creating their vault, they're populating a lot of the fields that we need to do their planning work."
O'Dell has clients collaborate with him as he organizes their financial lives into their customized mind-map, and eventually he will link all documents, forms, investment accounts, contact information for outside advisors and the financial plan are all organized together in one place. "It really gives them a sense of all the moving parts in their life," he says.
Moore, who uses MoneyGuidePro as a planning "collaboration tool" for his clients, thinks that as younger advisors customize their planning approach to a new generation, they will start interrupting the flow of clients into traditional advisory firms. "As advisors and their clients age," he says, "we will be there to pick up the pieces, working with the biggest generation in [American] history, which is Gen Y. We are going to be helping them long before they have gotten to the point where they are attractive to the traditional wealth manager with the AUM minimums," he adds. "We will eat up the future base of clients."
10. The next generation of advisors will change how conferences are organized and managed.
Pitzl sees an enormous generational divide in the way conferences are organized today. You go to a conference these days and it is a 60-year-old's dream come true, and a NexGenner's nightmare," he says. "The attendees all know each other, and they decide long beforehand what is going to be talked about, and you get lectured over and over and over again. It is always the same thing, and there is no time for thought and interaction. It is just a linear teaching model, and if we're lucky, we might get three minutes of questions at the end of it."
What's the alternative? "We just want to talk about things," says Pitzl. "We want to be able to organize our own experience when we arrive." This sounds chaotic, but the goal is to more consciously harvest the wisdom of the crowd. Every speaker knows that the audience collectively knows a lot more than he does about any subject, including the one he happens to be speaking about, and many attendees of traditional conferences will tell you they got more out of the hallway conversations than they did from the podium. Why not go straight to that information source?
"There are always conversations about best practices, how to fully utilize and leverage technology, be a great employee and endless takeaways and enhancements to be brought back to our respective firms," says Pitzl. "But more than anything, these events are designed to push people past the artificial boundaries that have been set in their lives and firms. It is a place for questioning everything, rather than repeating the same old tired conversations this profession has been having for decades."
There is clearly a migration among younger advisors away from face-to-face meetings toward online communities. NexGen has its own online discussion forum, and newer communities like APViewpoint are making it possible for advisors to share their thoughts and ideas – and participate in the equivalent of hallway conversations – without having to physically travel to a conference. I think of the NexGen meeting as the face-to-face equivalent of an online community, where the conversations could go anywhere the curiosity of the attendees takes them, with the added bonus that friendships are created that carry over throughout the attendees’ careers.
I am eager to see how these themes will play out – I haven't been part of the modern NexGen experience – yet. I'll keep my eyes open this June in Rock Island, knowing that the advisors I meet and interact with over three days will one day be included among the most effective successors of their practices, and the leaders of a very different profession. I may also discover that this list I just provided is only the beginning of the changes that are gaining momentum in the planning world.
Author’s note: if you decide to register for NexGen, be prepared to navigate a bit of a maze. The link (here) will invite you to create an account, with a user name and password. Once you do, you’ll be redirected, for some reason, back to the FPA’s main menu, where you have to drill down several steps, first by clicking on “Professional Education,” then “Events and Conferences,” then on “Events Calendar,” then on the NexGen meeting itself, where you’ll see the button to register. Be patient. The FPA made it difficult, but not impossible.
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