Not long ago, a married couple with $20 million in assets phoned a wealth manager in our firm. They are in their upper seventies. Aware of the passing of time, they wanted to start spending a lot more money. One big priority was donating to their church. That meant withdrawing a considerable amount of cash.
This was not an isolated occurrence. Every week I get a report about aging clients pulling assets out of our firm, whether to spend their money on doing things they’ve always wanted to do, to cover daily living expenses or to take mandatory distributions. This is a function of the demographic cliff.
These net distributions are putting a lot of pressure on wealth managers’ portfolios. And with a fully valued market—the third most expensive in U.S. history—and a 0% interest rate on the safest investments, there is less incentive than in the past for clients to keep their money in retirement accounts.
These factors have created a situation that will hit a lot of wealth management firms like an oncoming bus if they are not prepared.
Wealth managers now have to work very hard at bringing in new clients, simply to avoid a decline in assets. All of our margins are under tremendous pressure. We have to do a lot more for the same fees to stay competitive. Asset management has become a commodity.
In the current environment, most advisors face a 6% to 8% yearly headwind when it comes to distributions. The market is not going to bail them out. They have considerable assets to replace and many are not prepared to withstand the 15-20% declines they could be facing. If they are not keeping their people happy, failing to reinvest in technology to grow their businesses or not attracting additional assets, their cash flow is going to decline.
On top of this, many advisors want to scale back their practices or retire. In the next few years, there will be an extreme staffing shortfall. There are not enough skilled wealth managers to backfill for them.
So how can wealth managers protect themselves? At Carson Institutional Alliance (CIA), a partnership of select advisors we formed, we have pooled our resources to work together to meet challenges like this. By thinking all of the time about all of the possibilities, we are able to withstand the massive turmoil in our industry and continue to provide value to our clients beyond a doubt.
The best way to do that in the future may be very different today. We are prepared for that possibility. Currently, for instance, my firm, Carson Wealth Management, is moving toward a system which will allow us to charge clients on an a la carte basis for the services they want. One client may want to pay a monthly fee to have all of a firm’s services available while another may only want a few. This customized system will potentially bring many new clients into the firm.
All advisors should be thinking along these lines as the demographic cliff looms.
To bring in new clients and assets, we must think about what services we can provide to bring value to the marketplace, what the marketplace will pay for them and how to deliver them efficiently as our industry changes by the day.
For many advisors in smaller firms, finding time to think this way is difficult. They have to spend most of their time advising clients and managing their wealth. Fortunately, with the right trusted partner, you don’t have to do all of that thinking on your own. Joining an alliance such as CIA is a way to stay ahead of the oncoming bus that will mow over many in our industry who are not ready for it.
