The next generation(s)

Let me start with a huge generalisation. The financial advice market is dominated by clients and advisers who are aged fifty or older. So, what? I think the “what” is: What happens when the clients and the advisers die? Will the market belong to institutions as opposed to thousands of owner managed business? Will it be dominated by on line solutions, will the current model evolve into some form of private office aimed at very high net worth individuals or will it simply disappear like the insurance direct sales forces back in the 80’s? One year they were dominant, a couple of years later they were gone. All of them; apart from St James Place, and, let us be honest, they are unique.

 

I saw some research from The Centre for Economics and Business Research recently. It suggested that over the next thirty years around £5.5 trillion of assets are expected to transfer between generations. That is either a challenge or an opportunity for financial advisers and no doubt there will be winners and losers. My guess is there will be rather more of the latter than the former. But I don’t think failure to engage with today’s millennials will be the problem. They will be middle aged before they are likely to inherit anything and in the meantime their focus ls likely to be getting on to the housing ladder and/or starting a new business.

 

Typically, affluent people tend to live a bit longer than the population as a whole so I don’t think it unreasonable to suggest that a fifty-year-old financial adviser client may have at least another thirty years to live and his or her spouse perhaps a few years more. So, when it comes to generational transfer if the couple have “children” they may well be in their fifties before their parents pass away. Seems to me that this is the pivotal issue. How can advisers position themselves to help both parties at this time? I think there may be room for a “Family Office” proposition. What might this look like?

 

The first requirement would be confidentiality. Parents might not wish to share their personal financial and other circumstance with their children, let alone their grand-children, and vice versa. Second, perhaps there would need be a fee structure where all family assets are added together so that the less wealthy family members get a better deal than they would individually. Third, the proposition might assign more than one adviser to the family so that appropriate and strong personal relationships can be created and a degree of confidentiality maintained. Fourth, and of course most important, the proposition would need to be much broader than one simply focussing on intergenerational wealth transfers.

 

Apart from very recently, longevity has been improving steadily and that has thrown a spotlight on the range of mental and physical health issues that can impact the elderly. The Family Office proposition would need to recognise this problem and help generations plan accordingly. For example, for many elderly clients, long term care is a higher priority than inheritance tax and it can be punishingly expensive for clients used to an affluent lifestyle.

 

So what services would the Family Office provide? Obviously financial planning, investment and cash management, inheritance tax planning, a relationship with a local solicitor for wills, retirement income solutions, equity release advice, private health insurance and so on. All aimed to meet the needs of the older generation and also rather different services for the younger generations. Needless to say, the online experience will also need to be different so that it resonates with each segment. And so will the range of propositions. For example, the younger generation might need mortgage advice and the Family Office will need to facilitate it; but not necessarily deliver it themselves.

 

My guess is that many advisers already offer some services similar to those mentioned above. But the size of this opportunity is such that it must be worth others speaking to their clients and finding out if the concept appeals; particularly the possibility of reduced fees given the increasing cost transparency requirements.

 

Taking the idea a bit further and maybe a bit too far, I wonder if a Family Office could also facilitate an annual or semi-annual family “conference” for all the relevant adults. In my (admittedly limited) experience a lot of wealthy families find it difficult to talk about money until something happens and the issue becomes urgent. The “conference” might be positioned as a relatively generic market update but it might also provide a platform and a stimulus for some relevant intergenerational conversations. In my (even more limited) experience, those conversations may not be as constructive as one might hope. To say the least! But they can be very valuable

 

Going back to where I started I have to say that many advisers have expressed concerns about how they might lose control of client money when clients pass away. Perhaps the “Family Office” might mitigate the problem. Other advisers may take the view that they will have retired before this issue impacts their firm. And that may well be the case. But if they are thinking about selling their business at that point in time I imagine that some form of realistic retention strategy would be required if they are looking more than a run off valuation.

 

It’s also important to remember that new institutional competitors are emerging in the market; many focussed on the 50+ consumer segment. For some players, you may feel that is a triumph of hope over experience. And you may well be correct. But others will be looking at this potential £5.5 trillion generational transfer as a huge opportunity and are already prepared to invest significantly. For the advisers who currently dominate this space that could turn out to be a problem.