Bridge over ocean
1 September 2017 CFA Magazine

Changing Client Needs Create Opportunities for Advisers

  1. Ed McCarthy

A rapidly evolving client marketplace can lead to new business models for advisers who adapt and innovate.

  • A new report finds that “misalignment between investor values and adviser value proposition . . . will require advisers to think and act differently.”
  • For savvy advisers who adapt and innovate, changing client needs will expand opportunities.
  • The evolving private client market gives CFA charterholders the potential to “create great wealth,” says one expert.


In the not-too-distant past, private wealth management clients and their advisers often focused primarily on investments. Clients wanted to know how their portfolios performed; for advisers, the question was “Did we beat the benchmark?” These concerns accounted for much of the adviser–client relationship, and good results led to satisfied clients.

That approach might still work with some clients, but for many, the emphasis is shifting away from seeking only investment advice to requesting more holistic financial guidance. “The notion was ‘Let me give you my portfolio. I pay you 1% a year. You do reports. I let you know how you’re doing,’” says Rita Cheng, CEO of Blue Ocean Global Wealth in Potomac, Maryland. “People don’t necessarily see much value in that. They want more. They want more life planning. It doesn’t have to be all this pie-in-the-sky, weird New Age stuff. But they want advice around things other than asset management.”

Support for Cheng’s observation comes from recently published research. A report from CFA Institute titled “The Value of Premium Wealth Management for Advisers” surveyed 4,000 wealthy individuals (average wealth $2 million) and 1,370 wealth advisers in the US and Canada, including almost 900 CFA charterholders, during the second half of 2016. Designed by CFA Institute and Scorpio Partnership, the research highlights a changing environment for the delivery of wealth management services.

Two key findings focus on misalignment and value. First, in regard to the alignment problem, the report states, “The misalignment between investor values and adviser value proposition has brought to light how the current solution has failed to attract the full potential customer base; the next phase will require advisers to think and act differently.” As for value, the study concludes, “A wave of younger clients is beginning to challenge the definition of value in the adviser–client relationship. And new tools and technologies are disrupting the traditional model to offer investors new options for consuming financial advice.”

The effects of these developments show up in wealthy individuals’ relationships with advisers. The survey reports that 25% of the respondents do not take professional financial advice, and among the 75% who do work with advisers in some capacity, “one in four described their primary advisory relationship to be with their retail bank, not a specialist wealth manager.”

Despite these challenges, the report notes that CFA charterholders considering working or already working in private wealth management face excellent business opportunities. Sources interviewed for this article agree that CFA charterholders who adapt their practices to take advantage of these trends can prosper.

Beyond Investing

Discretionary investment management has been and remains an important element of the wealth management offering, with both advisers and clients ranking it as one of the most important aspects of their work together. But the growing adoption of passive and indexed investments, combined with automated portfolio management (the robos), has diminished some investors’ view of investment management’s perceived value.

One result is that clients want their advisers to deliver value beyond investment returns—they want broader interactions with their wealth managers. Mark Willoughby, CFA, principal with Modera Wealth Management in Atlanta, Georgia, says his firm has experienced this change in perception firsthand. A decade ago, Modera’s ability to offer diversified, low-cost, tax-sensitive managed portfolios was a key selling point. But over the past decade, clients and prospects have “almost gone past the investment solution, where it’s almost a given,” he says. “I wouldn’t say it’s entirely commoditized yet, but we think it’s certainly going in that direction. I think that the advent of the robo-adviser platforms is an indication that the entire investment platform solution is getting more and more commoditized.”

Willoughby is confident that Modera can continue to distinguish its investment process from the robos, but he admits that fewer distinctions remain among registered investment adviser (RIA) competitors. Clients’ focus has shifted to more-sophisticated financial planning, he maintains. “If an executive comes to us, he or she has a host of sophisticated planning strategies around stock options and restrictive stock and those sorts of topics, and they’re looking to work with an adviser who has a lot of experience in that. We would argue that a generalist financial planner isn’t necessarily going to be able to handle the sort of sophisticated challenges that an executive might bring to us.”

Experience with clients had a similar impact at Versant Capital Management, based in Phoenix, Arizona. Thomas Connelly, CFA, the firm’s president, says that from the time he started Versant in 2004 up through 2009, the focus was on investments. Following the Global Financial Crisis, moving toward a more holistic wealth management model became largely unavoidable, he explains. “I ended up doing a lot of the wealth management work anyway as part of the investment process—you can’t make investment decisions on portfolios in a vacuum,” he says. “You have to consider what’s going on with people’s lives, how goals might change, how personal circumstances might change and impact portfolios, and how tax law changes may impact portfolios.”

Other research supports the idea that clients want more than investment management. Mark Tibergien, CEO at Pershing Advisor Solutions (a BNY Mellon company) in Jersey City, New Jersey, says surveys have found that clients view investing as just one part of their financial lives. “Of all the things, it probably is the most commoditized of the choices,” he says. Although wealthier individuals’ finances are more complicated than those of the less wealthy, they share similarities that highlight the need for a holistic approach. “At a very fundamental level, every client is worried about cash flow,” says Tibergien. “They’re worried about balance sheet health; they are worried about their ability to fulfill both their wants and their needs.”

But a successful client experience isn’t just about finances, cautions Lesley Draper, wealth adviser with RegentAtlantic in Morristown, New Jersey—it’s about building an enduring personal relationship by participating in clients’ lives. It can involve “attending their kids’ weddings or going to a bar mitzvah, knowing when their birthdays are and picking up the phone and calling them on anniversaries, things like that,” she says. “It’s the softer points that really make the client experience special."

Evolving the Business Model

Consequently, wealth management clients are more likely to seek information and advice unrelated to their investment portfolios. Estate and philanthropic planning, for instance, are two common concerns of wealthy clients. But clients also want advice on more mundane aspects of their finances. Steve Beals, director of operations with Beacon Pointe Advisors in Newport Beach, California, says that clients’ questions can involve leasing a car versus buying one, funding a vacation home, or paying for their children’s college. For some firms, the requests for more-diverse services and enhanced advice are leading to operational changes. Innovest Portfolio Solutions in Denver, Colorado, has decided to roll out a family-finance-oriented office service later this year in response to clients’ changing demands. The firm has always positioned itself as clients’ chief investment officer, according to Wendy Dominguez, Innovest’s president, but the family office structure will allow the firm to do more by serving as clients’ chief financial officer.

CFA charterholders have investment management expertise, but they may be less qualified in other aspects of personal finance. That raises the issue of how wealth managers can develop new areas of proficiency and deliver additional client services efficiently. Hiring more staff is one solution, but the costs associated with that approach must be weighed against the projected benefits. Tibergien uses a “rent or own” analogy to frame the issue of working with external partners versus hiring. “A big part of this in every advisory firm’s framework is to decide what is core to the majority of their clients and what is incidental,” he says. “So, as an example, bank financing may be one of those occasional things that is not core to what they do, and that would be a solution that they’d rent from another party. But estate planning or retirement planning or cash-flow planning or philanthropic planning could be core, and those are areas that they have to develop expertise in.”

Strategic mergers and acquisitions can be a source of talent for new advisory services. Willoughby explains that Modera has completed three significant mergers in recent years, and the firm views those mergers partly as a talent-acquisition strategy. Each transaction broadened the firm’s collective skillset by bringing in advisers with expertise in areas that Modera wanted to shore up. The plan is to eventually have the new advisers share their expertise throughout the firm’s offices, currently divided among four states.

Technology is another potential solution for generating operational leverage. Advisers’ primary role is to work with clients and nurture those relationships, says Connelly. He believes the goal is to “spend time talking to the clients about what they want, how different events and things impact them and the family, and then also give them time to make important judgments utilizing [the advisers’] expertise.” Technology can free up advisers’ time for client-facing activities by reducing the time needed for what he calls “the mechanical work”—data gathering, data sorting, and data analysis.

The premium wealth management study found that clients also evaluate advisers’ technologies. Most private clients (62%) now expect their wealth manager to integrate technologies into the experience, with this number rising to 71% when looking at clients under the age of 35. But the challenge, particularly for older advisers, is that they are using suboptimal platforms, says James Poer, CEO of Kestra Financial in Austin, Texas. These advisers frequently have built their own systems and “end up with a random accumulation of technologies and tools that don’t really integrate or talk to each other well,” he notes. “Then what happens is that financial advisers spend a lot of time being [chief operating officers] rather than a revenue-generating, client-facing financial adviser.”

Transitioning to Younger Clients

Here are two more stats from the study worth pondering: (1) Nearly one-half of surveyed advisers’ existing client base consists of baby boomers; and (2) among wealthy individuals under 35, the proportion taking guidance from a bank rather than a private wealth manager rises from one in four to one in three. In other words, as the boomers pass on their wealth, a good portion of the recipients could be unreceptive to working with wealth managers.

That resistance can stem from several sources. Cheng believes that one reason behind this attitude is that many young people, who typically are still accumulating wealth, see little value in working with a firm whose business model focuses on and charges for assets under management (AUM). As Tibergien notes, wealth management, at least under the AUM-based model, is the only profession in which a client’s fees depend on the value the client brings to the relationship rather than the value the professional brings.

Poer cites younger persons’ negative experiences with the economy and financial markets as formative factors. “These people have had years in their life, in their developmental years, where the market didn’t perform, the economy was in a really challenging situation,” he says. “So, emotionally, they’re very much like investors that grew up through the Great Depression.”

Another challenge, particularly for smaller, independent advisers, is that younger generations have technological savvy. Their business interactions with vendors such as Amazon have created high expectations for online services. Banks and other large financial services organizations have done a good job in developing easy-to-use, high-touch technology, says Poer, but smaller firms may have difficulty matching the user experience that larger firms’ online platforms provide.

Advisers are investigating several possible solutions to attracting and retaining younger clients. One is to leverage wealth management skills with technology that allows the firm to serve less affluent clients profitably. Tibergien cites the hybrid digital-plus-adviser model at firms such as Personal Capital, which he cites as one of the fastest-growing RIAs. As of mid-June 2017, that firm’s website reported $4.5 billion of AUM. Such success demonstrates that there is “a market for people who are providing both some basic level of financial planning as well as some basic level of investment management,” he says.

Both Connelly and Willoughby say that their respective firms are actively considering options for attracting and serving millennials who don’t meet their AUM minimums. Identifying the right approach is a challenge, says Willoughby. “We’re going to have to take—I won’t say shortcuts, but we’re going to have to make the investment platform for this group more efficient. It’s going to have to be more technology driven and less human-interaction driven.”

Another approach by some firms involves pairing young clients with young advisers, a strategy that can also enhance a succession plan. Beals says that Beacon Pointe has created an associate wealth adviser position that can facilitate matching younger advisers with clients who are also in the early stages of their professional careers. “They may be thinking ‘How do we pay off our student loans? How do we save for retirement? Thinking about buying a house, buying that car,’” he says. “We’ve really tried to evolve our staff so that they are in a position that they can relate to some of these clients.”

Modera is taking a similar approach. The firm usually pairs younger advisers with more experienced staff, while simultaneously assigning them to younger clients. “We can take the experience that these younger up-and-coming advisers are getting and pair them with these young, up-and-coming, accumulating professionals who are successful in their careers and need financial planning advice,” says Willoughby. The ideal outcome from the firm’s perspective is that Modera will be able to develop a technology-efficient investment platform it can couple with young advisers to work with this client segment, he adds. “Then the adviser grows with the client, and it’s a win-win situation.”

Coming Full Circle

Sources interviewed for this article believe that millennials’ reported reluctance to engage traditional wealth managers is not a universally shared characteristic. Draper has encountered three distinct groups among the younger generation. The first group has been involved in their parents’ work with financial advisers; they understand the process, the adviser’s value, and “the importance of that stewardship that comes along with having a professional adviser,” she says. The second group consists of wealth accumulators who are simply too busy to focus on the need for wealth management. The last group is self-directed investors. Draper believes the latter two groups’ attitudes toward professional wealth management will change as they age and their finances become more complex. “They may not feel as comfortable about it at this point, but they’re going to age just like we all do,” she says. “They’re going to get older, their goals are going to change, and I think as they get older they’re going to move in the direction of having that more professional advisement.”

Liz Miller, CFA, president of Summit Place Financial Advisors in Summit, New Jersey, agrees with Draper. “As [millennials] become more successful, their questions become more complicated, and they are going to hit a wall where they realize the person they’re speaking to may or may not be able to coordinate and direct them to someone that can answer the range of questions that they’re going to have,” she says. “So, it may be that that generation moves into the advisory community a little bit later or just in a different path.”

“I think they’ll come to the realization that an algorithm or a robo-adviser platform or some sort of a mechanistic financial planning software isn’t going to do it for them,” says Willoughby. “We believe that a portion of the folks who are more digitally inclined now in the future may peel away and actually realize, I need to sit in a room with an adviser and look at him or her in the eyes and get advice and guidance and be able to trust [that person].”

Aligning Compensation Models

The wealth management study also investigated compensation models and reported the following: “At present, roughly a third of wealth practitioners state that they are incentivized for growing client assets, but just 16% are assessed by their ability to deliver value to customers over the long term and fewer still by the satisfaction levels of their clients. If this performance driver does not shift soon, clients will notice. And, if clients do not perceive advisers as fully aligned to their interests, the influence of the personal relationship manager in the wealth management proposition could be significantly diminished.”

Sources’ responses to this assertion were mixed. A frequent comment was that the position makes sense but that implementing it is problematic. Additionally, sources believed that their current compensation models were already aligned with clients’ interests. The typical plan includes a base salary plus bonuses for achieving such firm-wide goals as profitability levels and client-retention measures, along with bonuses for meeting individual and team goals (if the firm uses a team model).

Some advisers are trying to measure client satisfaction directly. Connelly says his firm has identified several organizations that conduct client surveys and is evaluating those companies as possible vendors. Draper reports that RegentAtlantic surveys clients every few years to measure satisfaction and learn what new services and products clients might be considering.

Client retention was the most frequently cited measure for gauging client satisfaction, but it may be a lagging rather than leading indicator, according to Tibergien. For example, a firm could survey its clients and ask if they like their advisers, but the line of questioning would be incomplete if it stopped there. A logical follow-up would be to ask if that client would consider referring a close friend or family member to the adviser. If the client is neutral or says no, that’s a cause for concern and indicates a need for more information.

Technology could boost efforts to provide real-time measures of client satisfaction. Tibergien says firms are using more data to begin doing predictive analytics around clients’ needs. The resulting metrics can indicate which clients are most satisfied and which are most likely to leave. For instance, the IBM Watson Client Insight for Wealth Management website promotes the software’s ability to “reinforce client loyalty with recommended retention strategies and predict client attrition up to 30 days sooner.” Salesforce has a similar feature with its artificial intelligence–based Einstein product. These tools could negate the need for periodic surveys, providing advisory firms with faster, more in-depth analyses of client satisfaction. Firms could then use that information more readily to modify compensation models if a change in employees’ behavior is indicated.

A Golden Years Opportunity

Although the traditional wealth management model and target markets are experiencing disruption, sources agreed that CFA charterholders should still consider the private client business. Poer cites two trends to support this contention: (1) The continued shift to indexing means there likely will be less demand for traditional portfolio managers and analysts; and (2) at the same time, the current generation of baby boomer wealth managers is approaching retirement. He estimates that between 25% and 30% of advisers will be retiring within the next five to seven years, creating a shortage of qualified private wealth managers. “There is a vacuum, and there is a need for [CFA charterholders’] expertise in this space, and they’re smart people,” he says. “They can build really successful practices and create great wealth for themselves if they pursue it.”

Tibergien believes that CFA charterholders’ investment management skills will transfer well to private wealth and that those skills will remain essential. The idea that investment management has become commoditized is probably a temporary reaction to the long-duration bull market, he says, because most financial markets have not experienced significant downward moves in years. When the next bear market or highly volatile period starts, that’s when advisers with investment expertise “tend to earn their keep,” he believes. He urges CFA charterholders not to abandon the investment management core to their proposition if they transition to a career in wealth management.

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