Why Heirs Leave

Between 2007 and 2061, it is estimated that $59 trillion will be transferred from one generation to another. This week in the Wall Street Journal, Alex Davidson addressed how this transfer is impacting financial advisors in an adverse manner. Some cures to the problem offered in the article include ensuring that a relationship is established early with the heir, using technology as part of the financial planning/investment management process, creating videos or having clients write letters to help the logistics of the transfer, and providing gifts (from the advisor) to heirs.

The piece included an estimate that 90% of heirs flee advisors (another study posited that 66% of heirs will ultimately leave their parents’ advisors). Will any of the proposed remedies help to decrease that number? Let’s examine some of the reasons the advisor-heir relationship may not be successful.

Advisor/Firm Factors

  1. The advisor built the relationship a long time ago, based on traditional wealth management practices, and didn’t move with the times to provide value above and beyond what clients can fairly easily do for themselves today. This is one of the key premises of the article.
  2. The advisor lacked empathy, so even efforts to include the heir as part of ongoing conversations weren’t effective.
  3. The advisor and/or his firm isn’t setup to advise remotely, and the heir lives 500 miles away.
  4. The advisor really never gained the trust of his client. As one investor in his 90s said to me recently after I suggested he find a new advisor, “I’ll let [my wife] and [kids] deal with that.” Ok, I get it.  If the advisor never really won the heart and mind of the benefactor client, then there is nearly zero chance of retaining the heir.
  5. The advisor was never a trusted member of the family, either. In contrast, a trusted advisor plays key roles (or “faces”) for his clients.
  6. The advisor or firm provides unidimensional financial planning or investment management, and hasn’t yet embraced the idea of a holistic practice.

Heir Factors

  1. The heir is already working with someone, or has someone that he/she knows and trusts.
  2. The heir is a DIY investor, financial planner, and/or tax/estate planner. The DIY crowd knows all too well of the potentially exorbitant fees associated with having others manage or take care of their finances.
  3. The heir gets what a “fiduciary” is, and gets that perhaps his parents’ advisor was never that.
  4. The heir never had any intention of working with mom’s advisor (any more than he/she intended to eventually join mom’s bridge club).
  5. The heir has been living as though he already had a windfall, and while she may like dad’s advisor, she’s not interested in having anyone keep tabs on her finances.  In order to prove dominion and control over the assets, the heir by definition must move the assets to someone else.

And, finally, the advisor and the heir never “hit it off.” The article didn’t address the potential for a firm-wide focus on retaining heirs–potentially featuring a program or effort to match heirs with advisors in the firm that would be a better fit for their unique needs and personality (if not just age). Also, conducting interviews or surveys with heirs who have left could pinpoint the firm- or advisor-specific issues that can be fixed.

Finally, the practice of serving as a truly holistic advisor to the family economic unit may provide the most effective comprehensive solution to the retention conundrum. An advisor that actively provides something akin to financial life management–including coaching and development for all members of the economic family in key areas such as consumption management and career development–likely increases the probability of retaining the business of the younger generation. Imagine a situation where the advisor spends years working with all members of the economic family, assisting and coaching them in developing positive wealth-accumulation behaviors and attitudes and working towards long-term goals (think college finance and admissions, or maybe assisting with references for that first post-college job).  How would that kind of relationship impact retention inter-generational retention? If an advisor is able to take this type of approach, perhaps the next generation would look to mom and dad’s advisor as a trusted advisor of their own.

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