How the investment industry can tackle its failure on the great intergenerational wealth transfer

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The financial services industry has been anticipating the great wealth transfer from baby boomers to the next generation for close to two decades. Yet, for the most part, it’s hard to imagine the industry doing a worse job of preparing and appealing to millennials – the inheritors of this wealth – than it has thus far.

In 2019, Toronto-based research firm Investor Economics estimated that more than $1-trillion would transfer out of the hands of Canadian baby boomers as they age. Today, after a few years of hot financial markets and explosive growth in the value of real estate, that figure may be even higher.

Meanwhile, millennials have grown up reading about advisor fees and, to a lesser extent, passive management from the media, blogs, and social media. They now also have access to everything they think they need right on their smartphones.

The conversation about the fees the investment industry charges has painted advisors predominantly as little more than a conduit for investment products. To be fair, that’s the genesis of the advisory industry in Canada and, sadly, for many advisors, still their sole value proposition.

But in today’s world – populated by discount brokerages with commissions as low as nothing, and robo-advisors providing a diversified portfolio for just 0.25 to 0.50 per cent in annual fees on assets under management – it’s evident quite quickly that access to capital markets has been commoditized wholly and effectively, with advisors no longer seen as the gateway to investing.

Combine this new reality with the fact research effectively has proved that active management underperforms the broad market, and the “access-to-markets advisor” is left with little to no salient argument in favour of clients ponying up the 1 to 1.5 percentage points in fees that most charge before the cost of the products themselves.

The current situation appears lost on much of the industry and many baby boomer clients given the proportion of advisors who still hold their value proposition as their ability to “beat the market.” But this certainly isn’t lost on the generation poised to inherit the money.

Focus on planning services

From where millennials are standing, if fees are the most salient issue governing the decision of how they should invest, why pay more to have human help?

The industry has spent too much time focusing on and selling a commodity – investment products – instead of delivering value through comprehensive financial planning, coaching, and other services even as a growing body of evidence supports their value. That has resulted in advisors exposing themselves to valid criticism, which has eroded a generation’s trust in “mom and dad’s advisor.”

The irony of all this is that the industry has trained its focus on what it can’t control – markets – instead of what it can – financial planning.

Given the stereotype that millennials are focused more on lifestyle and experience than previous generations, advisors should develop strategies on how to give them a roadmap to achieve those life outcomes, invest their money in line with their goals, and protect them and their young families from unforeseen events that could derail those ambitions.

The cost of not getting them young

Many advisors have largely ignored their clients’ millennial kids, now entering their 40s, because they weren’t profitable clients earlier on, or the advisors thought they couldn’t find common ground to build a relationship. As a result, advisors have put themselves at a disadvantage in capturing that wealth transfer.

Look no further than the last few years of meme stocks, day trading, and cryptocurrencies to reflect how deeply the industry has failed millennial investors. While advisors may decry these trends as “gambling,” millennials may think this is how investing works based on the media they’ve consumed in place of guidance from their parents’ advisors.

If you have a hard time understanding Wealthsimple Inc.’s valuation, for example, consider how different its outreach has been from that of a typical full-service advisor. Wealthsimple has targeted millennials explicitly, adopting their language, lifestyle, and has met them where they are – on their smartphones. And, for better or worse, expanded into areas this demographic cares about, such as crypto.

Speaking directly with our clients’ children when they’re young adults, providing financial literacy resources, and updating the technology in our practices, would go a long way to bridging this gap.

Understanding the millennial mindset

The result of all this is who do you think millennials will turn to once their parents can’t take care of their own affairs? The advisor they’ve never met, or the company that started as a robo-advisor and evolved to meet their needs?

What I’ve noticed with millennials who have either come into substantial windfalls or developed successful cash-generating businesses is that they will often reach out to learn about comprehensive financial planning and family office services specifically tailored to their needs. They even acknowledge these services can solve so many of their problems, which often have a degree of complexity that punctuates the need for help.

Unfortunately, many then fall into a state of panic when faced with the need to pay for professional financial advice because that goes against everything they’ve ever read online. Those who need advice, but can’t get past the need to pay for it, will likely continue with the do-it-yourself method to their long-term financial detriment.

Creating a new future

Is there time to fix all this? Yes. Looking at clients’ adult children as the future of your business is a start. Advisors have tremendous value and education they can bring to people who are just starting to build wealth. These are relationships advisors can cultivate for their eventual successors. In fact, they will pay a premium to have younger clients on board as opposed to a client base made up mostly of their elderly parents.

But until advisors start focusing on life outcomes delivered through financial planning versus last year’s performance relative to a benchmark, they’re giving the likes of Questrade Inc. plenty of ammunition.

Jason Pereira is a partner and senior financial consultant at Woodgate Financial Inc., a financial planning firm under the IPC Securities Corp. umbrella in Toronto, and president of the Financial Planning Association of Canada.

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