Wealth managers need better tech to win next-gen clients: Arizent research

5 takeaways from Arizent research on using tech to win next-gen clients

July 6, 2023 6:42 PM

Young woman with tablet, credit card. Happy female customer, digital internet banking

Young clients in line to inherit trillions are interested in online engagement, but advisors across the wealth management industry remain unprepared to meet them where they're at.

A report last week by Financial Planning parent company Arizent, "Unleashing automation: Attracting the next generation of investors," found that around 2 in 5 wealth management professionals don't use any technology as a source of lead generation, instead sticking largely to referrals. While that might have worked for decades as the "old way" of doing the trade, it might not sustain a practice through the ongoing wave of $73 trillion being passed down through 2045 to heirs, who are often of a digitally minded generation.

"In the industry's preparation to shift away from serving boomers and Gen Xers to younger millennials and Gen Zers there's also an expected shift in how data, social media and automation tools will be leveraged to court, acquire and onboard these new customers," according to the report, which was published on June 27.

FINRA Investor Education Foundation research recently found that Gen Z investors, in particular, preferred getting financial advice from social media and websites, followed by family and friends, rather than financial professionals. Failing to invest in relevance to young investors could be immensely costly when elderly clients' assets pass on to them in the future or when they later become high earners.

Angie Herbers, the managing partner and CEO at industry consulting firm Herbers and Company, said the explosion of breakaway advisors starting their own registered investment advisory firms in recent years means even more competition among those RIAs for wealthy clients. Marketing in such a cutthroat field may be more cost-effective if it targets those who aren't wealthy yet, although it would still be an upfront expense for firms to swallow.

"It's more expensive to go after an affluent client, someone who has investable assets over $1 million, than it is to go after a mass affluent client who has investable assets over $500,000 and then invest the time in their growth to get them to the affluent level," Herbers said in an interview.

The trick is catching those clients on their way up, before someone else takes them off the market. Fortunately for firms, because of the recent turmoil in the economy — from market volatility over the past year to runaway inflation and constant headlines about white-collar layoffs — the rising rich are more likely to seek out professional help now, Herbers said.

"When you have multiple pain points hitting the consumer, you'll see that … the amount of assets they have (when) they reach out for help starts to decrease," Herbers said.

This makes 2023 a perfect year for firms to initiate that relationship with a new mass affluent client — which could require investing in new tools to target them more broadly online.

"What we know is, if you get those consumers early and you get them past the three-year mark, meaning they're working with you for three years, they often stay for a very long time, if not forever, with that firm," Herbers said.

The Arizent study was conducted online in spring 2023 and polled 220 wealth management professionals. Some 29% — the "small firms" — had less than $100 million of assets under management; another 43%, the "medium-sized firms" — had AUM between $100 million and $999.9 million. The remaining 28% — the "big firms" in this study — had AUM of at least $1 billion.

Scroll down to view key takeaways from FP and Arizent's research. The entire report is here.

Customer acquisition undervalues the young

Similar to findings in another recent Arizent report on the great wealth transfer, this new study found that firms overall ignored younger clients and considered them a lower priority for acquisition.

This was especially true for small and mid-sized firms, which each rated acquisition of younger clients as a "critical/high priority" only 30% of the time. The big firms were more focused on next-generation clients, with 50%, or half of them, rating them a critical or high priority.

Old-school referrals dominate

Among survey respondents, the most popular way to get more business is still from referrals by friends, family, or colleagues. Some 79% of advisors said that was one of their top three sources of new customers.

Referrals from accountants came in second, with 40% of respondents citing that as a top source. And 25% of respondents cited referrals from a financial planner, reflecting the importance of collegiality in the field, while 23% cited lawyer referrals.

However, while relationships are the glue of any business, simply leaning on those might not be enough to keep up with competition in the future. Advisors who go beyond relying upon networks and centers of influence — professionals in adjacent industries who make referrals — could win clients that otherwise wouldn't know they exist.

Using more referral methods could be a huge advantage

Overall, more than 4 in 10 advisors (42%) said they don't use any technology to get new leads.

Only 24% indicated they used social media, and 7% used Google ads or search engine optimization (SEO).

Some 6% used customer relationship management software such as Salesforce, and another 6% said they used email tools like Mailchimp.

Using the right tech "can be just as effective in generating new clients, if not more so," Arizent said in the report.

Data science and social media are underused

Data science tools such as machine learning and artificial intelligence, as well as social media, could be used more to engage younger clients, the study found. Yet few firms had such tools in place.

Only 18% of firms overall used data science "aggressively" to pursue new client relationships, the study found. Yet of those that did use data analytics, 87% — the vast majority — said they were "effectively advancing goals for increasing the volume of leads/customers," Arizent said.

Additionally, 56% of respondents said their firm was not using social media well to attract clients. Yet "social media is viewed as a critical tool for acquiring the next generation of customers with more than 8 in 10 respondents noting its importance in acquiring Gen Z and millennials customers," the report said.

Firms may be unsure how to target leads effectively

Starting to change can be the hardest part, especially if advisors don't know where to begin. Only about half, 56%, of the respondents said they felt their firm was somewhat or very sophisticated in using targeted methods to reach the right audiences.

While large firms had more confident employees, with 67% saying their employer had sophistication in this area, small firms were noticeably less certain — only 41% of small firm employees, around 2 out of 5, said so. Overall, 36% of respondents said they felt the company's efforts to help with customer acquisition were not effective and failed to increase leads and customers.

"We are very conservative — never leading, always following," an anonymous employee broker-dealer advisor told Arizent in the survey, referring to their firm's use of data strategy.

Those disgruntled words could also translate into talented advisors leaving the firm if they feel their employer is falling behind — making it all the more important for firms to consider investing more in competitive lead-generation tools.