Full 3-Part Series Pay Attention To The Kids |
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Prepare Heirs For Assets, Not Just Assets For Heirs There is more than a 95% chance that when your clients die, their heirs will abandon you. With the death of their husbands, only 45% of wives will keep their assets with you. When the wives die, fugetaboutit. You'd be lucky to keep 2% of the heirs. As a result, you are constantly working to replace lost clients rather than attracting new ones. So says a paper written by three founders of the Institute for Preparing Heirs, which provides research, education and training for professional advisors on family dynamics and wealth transition. The paper was published earlier this fall in the Investments & Wealth Monitor, a publication of the Investment Management Consultants Association. FA Digital research found other voices citing similarly alarming stats and voicing dire warnings. "This is one of the biggest problems mature financial advisors face and if they don't do something, they'll lose a substantial portion of their revenue -- and firm value -- over the next few years," a prominent authority told Investment News. Ronald Zeeb, founder of the Heritage Institute, said it takes four new clients to replace the revenue lost when an account is lost through a generational transfer. The Institute trains advisors to work with multi-generational families. The challenge for financial advisors is compounded by a wealth transfer of tsunami proportions: "Every year for the next 50 years, $1 trillion will pass from one generatlon to the next, resulting in the greatest wealth transfer in the history of the United States," said the Investment & Wealth Monitor paper. A variety of reasons have been given for financial advisors being unable to hang onto accounts when the parents die and the kids inherit the wealth. The one that runs through virtually all of the literature on the subject is: The lack of any relationship between advisors and their clients' heirs. Thus, the heirs don't understand and appreciate what the advisor has done to build and retain the family's assets. Others include: • Baby boomers and younger generations are much less impressed by authority figures. • The needs of each generation are different, thus younger generations have a different focus.
What You Can Do "Historically, the industry has focused on preparing assets for heirs; with our more affluent client levels we now begin to offer the other half of that equation -- helping prepare heirs for assets." Investment News reported some of the measures employed by financial advisors to retain the heirs of clients who die: • Engage families in developing "life plans" to transfer values as well as money. • Set up periodic family meetings to discuss how to use money to support what the family believes in. Depending on client preferences, discussion at these meetings can range from full disclosure, giving adult offspring full reports on their parents' assets, insurance and estate plans to conversations that touch only generally on a client's financial plan. Such meetings can make the heirs feel more comfortable with their parents' financial advisors. Frequently in the course of these meetings, adult children become clients and even combine portfolios. • Offer to meet with clients' children at major milestones in their lives, such as college graduation and buying a first home. • Waive account minimums to manage investments of young adults not yet well-established. • Update your office decoration. Old mahogany and polished leather appeals to older clients but doesn't impress Generation Xers and millennials. • Employ advisors and office staff of various ages so when the next generation comes in they see some peers. Next: The Communication Gap. FA
Pay Attention To The Kids Are You Too Focused On the Here-and-Now? Studies have shown that most of you probably don't. What's more, they show costly communicatio gaps, not only between you and clients' children, but also between you and clients' spouses and even between you and your clients, themselves. All this costs you -- big time. It begs the question: Are you so focused on the here-and-now that you ignore the opportunities of tomorrow? Communication gaps are the main reason why, as we reported last week, you are losing a whopping 95% of your accounts when both client and spouse die -- 45% when the husband dies first, the rest when the wife passes. The heirs divvy up the money and scoot, leaving you in the dust. The evidence is overwhelming: You should give top priority to knowing clients' spouses and children and bringing them together. Research commissioned by the U. S. Trust Division of Bank of America uncovered some startling and disturbing facts. This study focused on 500 Americans with at least $3 million in investment. With less affluent Americans, the findings would be worse. Here are the highlights, as assembled by Dan Richards for Advisor Perspectives: • Six in 10 clients have never even as much as intdroduced their adult children to their financial advisors -- even though 84% of the parents believe the children would benefit from such meetings. (Not to mention that you and your firm would also benefit.) • One-in-four has never even as much as discussed the transfer of wealth with their advisor and one-in-three have never discussed their children's expectations. (Why didn't the advisor bring it up?) • Half of the client/parents have never discussed with advisors ways to help their children handle wealth responsibily. (Do you bring it up?) • Four-in-10 have never discussed legacy or philanthropic strategy with their financial advisor? (Have you brought it up?) Wealthy Americans are more interested in seeing the impact of their giving now, rather than leaving a legacy. A picture of why many wealthy clients are reluctant to discuss wealth transfer with their children -- and you -- emerged from the study. • Only one-in-three believe strongly that their children will be able to handle their inheritance. Nearly half think their children will not be "financially mature" enough to handle family money until they've reached age 35 -- at least. • They fear their children will become lazy (24%), make poor decisions (20%), squander the money (20%) and be taken advantage of by others. • Two-thirds say their heirs don't fully understand the parents' wishes on how to divide personal property. Not only are some wealthy clients not completely forthcoming with you and their children, they're not all that talkative even with their spouses, the study showed. • More than a third (36%) haven't discussed income needs in retirement. • One third haven't talked about each other's debts and obligations. • Four in 10 haven't shared the details of their estate plan. • Almost half haven't discussed plans for long term care. So, with all this that your clients may not like to discuss, what do they talk about among themselves and with you? Taxes (90%) and investments (80%) -- short term stuff. All about the here-and-now. Suppose you stopped playing along. You would being doing what's right for your clients and their families, while laying the foundation for future business. FA
Challenges in Wealth Transition Previously in this series: • There is more than a 95% chance that when your clients die, the heirs will take their inheritances and run. You're lucky to retain 2% of the heirs as clients. • This has become a major problem for financial advisors as they enter a period of the greatest transfer of wealth in American history. It takes four new clients to replace just one lost through generational transfer. • Advisors have failed to develop relationships with their clients' heirs. Thus, the heirs don't understand and appreciate what advisors have done to build and retain the family assets. • Serious communication gaps exist not only between advisors and their clients' heirs, but between clients and their spouses and even between clients and their advisors. • All this is due largely to advisors' constant focus on the here-and-now at the expense of developing opportunities for tomorrow. Historically, the financial services industry has focused on preparing assets for heirs. Now, it must also prepare heirs for assets. Conclusion of Series Nearly three out of four (70%) of families fall apart and lose their assets after a generational transfer. This is one finding from a variety of studies cited in a report from Investments Wealth Monitor, a publication of the Investment Management Consultants Association. The three authors are founding directors of the Institute for Preparing Heirs. The authors cited a 26-year study of differences between "successful and unsuccessful post transition families." Although the differences "had little to do with the acumen of the families' financial advisors," FA Digital believes the problems could be mitigated by more and better communication between advisors and their clients' families. • "60% (of the family break-ups) were caused by an internal breakdown of trust and communication within the family." (Could much of this have been avoided if the advisors had been more involved with the families?) • "25% were caused by a failure to prepare their heirs." (Whose failure? Maybe the advisors.) • "10% were due to a lack of an agreed-upon mission for the family wealth." (Elementary, my dear Watson.) • "5% were due to other causes such as failures to file and sign tax returns and incorrect interpretations of tax laws." (Where were the accountants?) This leads us to the conclusion that, in most cases, you are but one of a family's advisors with responsibility for a smooth transition of wealth. There are the CPAs, estate planning attorneys, insurance specialists, corporate attorneys and trust officers. Perhaps you can assume the role of quarterback and bring these teams together to benefit your clients. To enrich your practice, do what the Investment Wealth Monitor article1 suggests: • Deepen your relationships with your clients' families. • Cultivate new relationships with successful families planning to transition wealth. • Expand your network of allied professionals who work with successful families." 1Engaging and Retaining Families by Diane Doolin, Vic Preisser and Roy Williams, Investments Wealth Monitor, September-October, 2011. FA
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