How customization can keep next-gen clients from jumping ship

November 20, 2023 6:57 PM

As trillions of dollars trickle down from one generation to the next, Envestnet's Dana D'Auria knows that advisors have a tall task ahead of them.

That task is convincing a crop of future heads of household who have shown little interest in keeping their parents' advisors around that casting them aside is the wrong move for their financial futures.

Dana D'Auria, co-chief investment officer and group president for Envestnet Solutions

According to a recent study from Cerulli Associates, just 20% of affluent clients choose to work with their parents' advisors when the time comes. The study also suggests that of affluent clients who are still with their parents' advisors, roughly 1 in 4 will jump ship in the next 12 months.

But keeping it all in the family isn't just good for an advisory firm. It's good for clients themselves. The same Cerulli study finds that families that work with one advisor or team of advisors over the course of generations benefit from the familiarity those professionals have with their distinct circumstances and investing and savings goals.

Still, about 90% of affluent investors who picked their own financial advisor did so without even considering their parents' advisor, and a staggeringly low 4% reported trying their parents' advisors out for a while before moving on.

With that in mind, the group president and co-chief investment officer for Envestnet Solutions caught up with Financial Planning just in time for the holiday season to give advisors a few stocking stuffers in the form of tips to make those crucial next-gen relationships stick, and how her firm is working to provide a bit of that glue.

The power of customization

For D'Auria, it's important for financial professionals to understand how much the outside world is influencing what clients expect from the advisor-client relationship.

Chiefly, technological advancements and frictionless experiences in every other part of their lives means they want the same from their wealth manager.

"The next generation is emblematic of it. But really, everyone more and more expects customization. They expect solutions to be customized to their needs, and that's not surprising … it's this," D'Auria said while holding up an iPhone, noting that the number of services now at the average American's fingertips has grown tenfold since her early days in the industry. "It's the digital world we live in, and it is delivered to us in a customized way. So naturally, everyone expects that the same is true of financial services. And as a provider of the technology that delivers these financial services, we're putting our chips on the types of solutions where the advisor is going to be able to personalize."

But the other issue, D'Auria says, is that not only do clients expect deep customization — they don't expect to pay for it.

"We expect ads to follow us around the internet that are specific to what we're looking for. We don't expect to pay for this sort of customized experience. So how do advisors deliver basically a much more bespoke offering in a scaled way that they can do without additional cost and maybe even lowering costs?" she said. "And I think it goes past expectations. It's actually a negative if you don't get it right. There's going to be disappointment on the part of the client, who has all of this customization going on in the rest of their life … but they're going to that financial advisor and having this traditional experience that doesn't include that level of understanding."

D'Auria said for advisors, the key is addressing that concern before it becomes a problem by upgrading your tech and looking for solutions that allow that level of knob turning. She adds that clients are unaware of the regulatory structure that we all have to live in.

While that is something an advisor has no control over, it is still something advisors will need to navigate to prove to the next generation that they are ahead of the curve.

"The advisor is left in a position where they have to be able to engage with that client on a bespoke personalized level, and they have to have the solutions that enable them to do that without them spending half their day on a single client," she said.

Giving the people what they want

While the call for customization is strong, knowing exactly what clients are after helps advisors focus their efforts. According to a 2020 Broadridge Financial Solutions study, investors seek more personalized communications from their advisors.

When asked what type of information they would like to see tailored to them in advisor communications and technology platforms, 44% of surveyed investors responded that they want comprehensive views of their accounts, and 32% said they would prefer tips on saving money which are personalized for them.

Meanwhile, 32% of surveyed investors indicated they would want ideas for new investment vehicles that could help them meet their goals, and 29% said they would like a customized analysis of their investing habits.

Younger generations also place great value in a hyper-personalized digital experience with solutions, content and communications tailored to them. New tech helps solve for that, D'Auria said, but the advisor should not be lost in the process.

"With all this newness and customization, it still has to connect to where the advisor has a comfort level around providing that information and standing behind it," she said.

As far as areas where advisors are confidently delivering customization, D'Auria said direct indexing is at the top of the list.

"Direct indexing started as a tax solution. And a lot of people when they talk about the DI will still talk about the tax benefits and the ability to individually harvest. And 100% that's true. But it's not our experience that it's just a tax benefit," she said. "A lot of people are looking at DI solutions because they want a low cost equity SMA that they can customize however they want to customize.

"It could be transition services. It could be I don't want to own XYZ company. It could be I want to tilt a little towards dividends right now. There's a gamut of customizations that occurs."

Speaking of taxes, D'Auria said that is another area where advisors can score some big wins with the next gen and quickly show their value.

"Nobody can control what the return is going to be. At the end of the day, it's never been a great place to be as an advisor to be hanging your hat on trying to outperform the market. That's such a feast or famine type thing … but tax is manageable," she said. "And being able to show an after-tax return that says, look, I have this service for you. For a nominal fee, I work with this firm and we are able to save XYZ on taxes every year. I mean, that's just kind of a no-brainer customization that [you] customized to your clients' tax needs."

Don't avoid those three scary letters

ESG. When it comes to customization, the ability to craft portfolios informed by environmental, social and governance factors, and sustainability remains a hot topic.

It is also something the next generation is passionate about. So much so that they are willing to take smaller returns if it means they can use their money to support causes they believe in.

A July survey by U.S. Bank finds that nearly two-thirds of Gen Z investors want to allocate their portfolios in a way that supports causes they care about, compared with 59% of millennials, 45% of Gen X and 30% of baby boomers.

The survey, which polled 4,000 investors, also found that more than 80% of Gen Z and millennials would be willing to underperform the S&P 500′s 10-year average return of 12% to ensure that the companies where they've invested align with their belief systems. About 73% of Gen X and 65% of baby boomers felt that way.

The tricky part, D'Auria said, is how to approach that conversation as an advisor in an environment where those three letters have become so politicized.

"Advisors, I think to a certain extent, have become afraid to even bring it up. Because unless they feel really confident that they know what that client thinks from a political perspective, they're fearful that even bringing something like that up could be perceived as a political statement and offend the client," she said. "It's not easy on advisors because they've been thrust into this politics thing where there's a lot of strong statements made on both sides, and at the end of the day, the advisor is trying to deliver the best portfolio they can to the client."

But not taking the time to understand how clients feel is a missed opportunity that top performing advisors are not letting pass them by.

So shake off that shyness, and dig deeper on the issues that matter most to your clients.

"I do think advisors who are able to navigate that and be the one to bring it up can be differentiated in that market," she said. "I think the advisor who is able to thread that needle and have that conversation has an opportunity set that maybe other advisors are shying away from."