The September CFP CE quiz is now available in the Members Section!

As the legend goes, when bank robber Willie Sutton was asked why he robbed banks, his answer was "because that's where the money is." Similarly, it's really no surprise that in recent decades, financial planning has become increasingly focused on serving baby boomers as they transition into retirement; once again, "it's where the money is." And as the age wave continues and baby boomer retirees will inevitably begin to pass away in large numbers in the coming decades, many industry consultants are already recommending that advisors shift their focus to where the money will be next: in the hands of their clients' children and grandchildren, with whom advisors had better begin to craft relationships and expand services now, or risk losing their assets as their clients pass away.

Yet the ironic reality is that while financial planning is focused on clients, a business that shifts its focus to the clients' next generation descendants simply because they will someday becomes heirs to the assets is arguably becoming more focused on the client's pot of money than on the actual clients themselves! After all, imagine a high-quality nursing home that decided, due to the death of its affluent clientele, it was going to pursue a strategy of making its accommodations more appealing to the children and grandchildren of its elderly residents. Does anyone really think that a young person will choose to live in their (grand)parent's nursing home, regardless of whether the facility is "tech-savvy" and has "young staff they can relate to"? Of course not. And why would it be any different for a financial planning firm engaging in the same strategy!?

Ultimately, the point here is not that advisory firms should never serve a younger clientele. In fact, as financial planning is so baby-boomer-centric, there is a tremendous opportunity to reach a grossly underserved Gen X and Gen Y demographic! But if the goal is to serve a younger clientele, advisory firms should really focus on serving younger clients, taking the necessary steps of segmenting the advisory firm, its pricing, its staff, and its services, to meet the needs of that clientele, and not simply pursue them because that's where their (former) client's pot of money landed! And for firms that aren't really ready to create a new segment of their business to serve younger clients properly, the simple solution to dealing with attrition of retiring clients is not to pursue their pot of money to the next generation, but to simply stay focused where they are and find new retiring clients instead!

Replacing Older Residents In A Nursing Home

Imagine, for a moment, that your business is owning and operating a nursing home. The good news is that you run a high-quality facility with excellent staff, which allows you to successfully charge a premium price for your rooms and services, and you have attracted highly affluent residents who can afford to and are happy to pay the fees to live there. The bad news is that by working with people who need nursing care, and are generally at an advanced stage of life, your residents often pass away, leaving costly room vacancies if they can't quickly be replaced. In fact, the typical resident only stays for about 3-5 years before passing on. Given this challenge of “resident turnover”, you must determine a way to keep your business afloat and your available residency slots as full as possible. So the question arises: what would you do?

One option would be to solicit the children and grandchildren of the (now-former) resident. After all, the resident’s descendants could easily afford to continue to live in the nursing home –they do have the financial wherewithal, especially given the inheritance they just received from their affluent (grand)parents. And they're (hopefully) familiar with the facility already, having visited their (grand)parents while receiving nursing care there! In addition, you could even retrofit some of the rooms with the latest digital technology (the senior residents don’t seem to care that much, but you hear it’s all the rage with young people!), start hosting social events to further appeal to younger residents, and perhaps hire some younger nurses and orderlies with whom younger residents might be able to better relate. And the upside is that because the children and grandchildren are so much younger, they’ll stay in the rooms far longer on average, improving the stability of your business. It’s a foolproof plan, right!?

Obviously, it doesn’t take much effort to see the disaster waiting to happen in this venture. It doesn’t really matter whether you provide some nice digital tools and a younger staff to relate to; young people just aren’t going to be interested in living in a nursing home! And trying to lure them with such superficial temptations is almost insulting to their intelligence, and sheerly ignorant of their preferred lifestyle and living needs! In fact, efforts to make the nursing home more appealing to young people will probably both fail to attract the young people, and alienate the existing residents as they realize the nursing home is no longer focused on their needs either. Simply put, “a nursing home for people of all ages” is basically a nursing home that appeals to no one of any age!

Instead, the reality is that if the nursing home faces the potential of resident turnover due to the older clientele they work with, the straightforward solution is to reach new potential residents who would want to live in the nursing home as vacancies arise! This might entail doing marketing to get the message out about the high quality of the nursing home’s facilities and staff, and forming strategic alliances with hospitals, care coordinators, and anyone else who might be able to tell your target affluent clientele about how desirable it is to live in the nursing home. Although thanks to demographics alone, the sheer number of baby boomers entering retirement over the next 15 years means little marketing may have to be done at all, as there are 10,000 new baby boomers retiring and becoming eligible for Social Security and Medicare every day who may ultimately need your services, and your facility only has 75 beds to fill anyway!

Replacing Older Clients In A Financial Planning Practice

While turning a nursing home that specializes in providing skilled nursing care to seniors into a “residential living community for all ages” – just to keep rooms filled with the descendants of former residents who inherited their parents' means to pay for the rooms – sounds absurd, the sad reality is that this is exactly the strategy that many financial planning firms are being told to implement and are pursuing today!

Financial planning and wealth management practices who face an aging retiree client base that will eventually pass away are increasingly being advised that they should seek to establish relationships with the children and grandchildren of their clients, egged on by “shocking” statistics like “86% of heirs intend to fire the advisor used by their parents.” Outreach to this “next generation” of clients to avoid the future avalanche of outflows might include getting more social media and tech savvy, conducting educational workshops and social events for the client’s family members, and hiring younger associate advisors who can better relate to this younger clientele and establish relationships with them. All this effort is intended to preserve the advisory firm’s opportunity to continue to manage the pot of money after the client passes away.

Yet when viewed in the analogous nursing home example, the absurdity of this approach becomes increasingly clear. Taking a firm focused on retirees and managing their assets, and trying to mix in clients of all ages, just distracts from the focus of the practice! Such a solution is unlikely to appeal to a younger demographic who will still recognize that the firm’s retiree- and asset-management-centric services are not for them, and may even alienate the retiree clients, too. In fact, the whole approach highlights and accentuates the fact that a firm chasing the children and grandchildren of its retiree clients really isn’t focused on the needs of its clients at all, but is simply focusing on the client's pot of money instead – and chasing it to whatever generation or destination it happens to flow!

In other words, if your client is really just a pot of money, then the death of a current “client” means you should pursue the pot of money to wherever it goes next. But if your client is really the retired client, then the death of a retired client simply means the best solution is to find a new retiring client amidst the 10,000 baby boomers who are retiring every day, and stop chasing their pot of money!

Client Segmentation And Separate Businesses For Separate Clientele

The point of this discussion is not to say that advisory firms should never try to serve a younger clientele. In some family offices that are truly built to serve the entire multi-generational family, this really is a standard part of the service model. And a few advisory firms have truly segmented their clientele and the services provided, and are able to provide an effective and relevant financial planning services to both younger clients and to older ones – though notably, the services provided, and their pricing, may be substantially different to ensure each demographic receives what it needs and what it can afford.

Ultimately, the key point is simply that the advisory firms that execute on this strategy well have made a core business decision to really craft a service, priced and staffed appropriately, to serve a younger clientele, going far beyond just having some younger advisors on the team and being a little more tech savvy. Some firms will create entirely separate divisions of their advisory firm just to serve a younger clientele, with a distinct DBA (“Doing Business As”) name for that side of the business. At a minimum, though, serving a younger clientele effectively often means having a true segmentation of clients; for instance, a number of larger advisory firms we’ve talked to about our XY Planning Network solution for young advisors serving young clients are looking at rolling out an entirely standalone offering for this new client demographic, with distinct pricing (monthly subscription fees instead of AUM fees), separate advisors (who are compensated appropriately for the work they will be doing and the clientele to be served), and specialized expertise in the issues that really matter for this clientele (which may be far more focused on issues like student loans, buying a home, starting a family, and managing their human capital not their [limited] financial capital!).

In the end, the sad truth is that financial planning really has become increasingly retirement-centric (as baby boomers approach and transition into retirement en masse), and there really is a large underserved demographic of Gen X and Gen Y consumers who need financial planning advice as well. For firms that aren’t really ready to focus on them, though, the better approach if you're concerned that your retiree-centric clientele may eventually pass away (although statistically speaking, the business impact of aging clients isn’t likely to be material for a decade or two!) is – just like in the nursing home example – to stay focused on your core (retiree) clientele and simply find new retirees to serve instead (and the good news is, demographically speaking, there won’t be a shortage anytime soon)! On the other hand, for firms that really do want to work with the next generation of clients... do it because you actually want to serve them well, and execute it in a manner that truly targets younger clientele to serve their needs... not just because they're the new owners of a pot of money you were already managing for their (grand)parents!

So what do you think? Are advisory firms moving too quickly to chase their existing assets under management instead of focusing on the clients they serve? Share your thoughts in the comments below!


11 Tweets / Trackbacks

Michael E. Kitces

I write about financial planning strategies and practice management ideas, and have created several businesses to help people implement them.

For ConsumersFor Advisors

Blog Updates by Email

Nerd’s Eye View Praise

@MichaelKitces Twitter

Out and About

Tuesday, October 13th, 2015

*Understanding Longevity Annuities and their Potential Role in Retirement *Generating Tax Alpha with Effective Asset Location @ FPA Southern Wisconsin

Thursday, October 15th, 2015

*Future of Financial Planning in the Digital Age *Cutting Edge Tax Planning Developments & Opportunities @ FPA Mid-Tennessee

Monday, October 19th, 2015

*Cutting Edge Tax Planning Developments & Opportunities @ IMCA Advanced Wealth Management Conference