How can financial planners expand their businesses as their core population ages and young investors flirt with novel financial products like cryptocurrency?
The most profitable path forward is to follow the very advice they often give clients: diversify, diversify, diversify. That’s the key finding of a new study
by Harvard Business School associate professor Marco Di Maggio.
“Having a broader view of the financial picture of the client helps [advisers] keep their clients and helps with growing the clientele as well.”
Traditional investment advisers find themselves at a crossroads as baby boomers surge into retirement and fintech businesses offer new ways for investors to grow their nest eggs. While revenue from financial planning reached $65 billion in 2021, up 30 percent from 2017, many in the industry are trying to figure out how to market to millennials and generation Z, who are more comfortable using technology to make financial decisions.
It turns out, Di Maggio says, that “having a broader view of the financial picture of the client helps [advisers] keep their clients and helps with growing the clientele as well.”
By widening their list of offerings to include services like education planning and account aggregation, advisory firms can strengthen their businesses, shows the study, which Di Maggio cowrote with five collaborators from the investment company Dimensional Fund Advisors.
The issue is, the average client base becomes older,” says Di Maggio, Ogunlesi Family Professor of Business Administration. “And in this situation, you get stuck there if you only offer a few services, don’t have a good marketing strategy, or you don’t really have a good referral program.”
The research sheds light on an important sector of financial markets and offers lessons more broadly for other industries looking to appeal to younger clients or adapt marketing strategies to a fluid business environment.
Sizing up a changing investment world
Historically speaking, financial advisory firms have focused on financial and retirement planning, personal investment advice, and wealth management. The number of financial advisory firms grew 41 percent to more than 15,000 between 2015 and 2021, according to Barron’s.
Every April, Dimensional Fund queries hundreds of financial advisers across the globe, who together manage $250 billion in assets. For the analysis, Di Maggio collaborated with Dimensional Fund researchers Wei Dai, Kaitlin Hendrix, Wiebke Lamping, Savina Rizova, and Trey Roberts.
To understand the growth drivers, the researchers compared firms’ service offerings, practices aimed at expanding the client base, and the challenges they faced. They contrasted those with growth in assets under management, revenue, and number of clients.
Two firms take different paths
Di Maggio says the ideas are best illustrated by looking at two firms from the study, both founded around the same time in the 1980s, that diverged in financial performance over time.
One firm, Di Maggio says, doubled its assets under management and grew its assets under management by 22 percent a year, while the other stayed roughly flat, growing only 4 percent a year. The higher growth firm offered more services.
“If you look at the different dimensions, you have the higher growing firm with more clients who received services like education planning and retirement planning, and the other had a lesser focus there,” he says.
Perhaps more significantly, offering more services helped the high-growth firm cope with some of the traditional challenges from growth, such as fee compression and rising average age of its customer base. The low-growth firm struggled with those challenges.
Headwinds for financial planners
One of the top challenges for the industry is an aging client base. Firms with a higher percentage of clients over the age of 70 grow more slowly than those with a greater number of clients under the age of 40.
“If you have a client base that is getting older, it means that basically you are stuck to the set of assets.”
While this makes intuitive sense, as younger clients are seeking to grow their assets while older clients are spending them down, the study quantified the impact on firms. A company that increases clients under 40 by 10 percentage points stands to gain 3 percent more assets under management in that particular year and the years that follow.
“If you have a client base that is getting older, it means that basically you are stuck to the set of assets. We also found that low-growth firms struggle with business development and marketing,” DiMaggio says. “That’s the loop you can get stuck in.”
Ways to diversify
The firms offering the broadest set of client services tend to expand more than firms that don’t, according to the study. Notable growth opportunities came from education planning and account aggregation, or helping clients collect household financial data in one place.
“Actively going after clients by offering information sessions, teaching them financial principles and such has a much bigger effect.”
Successfully delivering education planning and account aggregation to 25 percent more clients boosted asset and revenue gains by up to 2 percentage points in the following year, as well as the year afterward.
Active business development also proves key. Efforts to introduce a firm and its services to referral sources or influencers such as attorneys, accountants, and insurance agents furthered expansion. Gaining 10 new clients from referrals is worth a 1-to-2 percent increase in assets under management and revenue, and 0.5 percent to 1 percent in outlying years, the research finds.
“It does seem that actively going after clients by offering information sessions, teaching them financial principles and such has a much bigger effect” in terms of growth rates, Di Maggio says.
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