Advisors need to consider the possible benefits of trading short-term higher revenue from older clients for long-term growth that can be provided by younger clients, according to a recent report from Toronto-based PriceMetrix Inc.
The research also finds that financial services firms must allow advisors some leeway in terms of investment minimums and production requirements so advisors can attract those younger clients.
The report, entitled The Fountain of Growth: Demographics and Wealth Management, examines the effect that both advisor and client demographics are having on the retail wealth management business.
It is generally accepted that older clients have a greater amount of assets and generate more revenue. However, the research finds three reasons as to why advisors are likely to benefit from increasing the proportion of younger clients in their books.
PriceMetrix finds that return on assets (ROA) is 25% higher in books where clients are generally between the ages of 50 and 55 as opposed to books where clients are between the ages of 65 and 70.
This indicates that “these clients are more willing to pay a premium and are more productive for the advisor,” states the report.
There are also fewer household relationships to manage in younger books, which contributes to a lower cost for service and higher ROA. As well, the research finds a higher proportion of fee-based accounts in younger books, which highlights the fact that these clients may be seeking longer-term, advice-based relationships with their advisors, according to the report.
And while the assumption may be that younger advisors are targeting their own peers as clients, the report indicates the opposite. Clients are typically 10 years older than their advisor with the average client being 62 years old while the average advisor is 52 years old.
In some cases, the research indicates that the age disparity between advisor and client is even greater. For example, the average 30 year-old advisor has a median client age of 59 years old.
“This finding is consistent with the need for younger advisors to target older — and wealthier — clients to meet production and asset hurdles required to survive the early years in the business,” states the report.
However, the aging advisor phenomenon in addition to aging clients is setting firms on a precarious track with growth rates certain to slow down if these trends continue, according to the research.
Firms have to develop new plans for hiring advisors, succession and building new advisor teams, the report states.
“If firms are interested in attracting younger clients, firms should consider asset and account minimums that are adjusted to the life stage of clients,” the report continues.