I'm told that financial advisors lose 70% of their clients when the wealth and power pass from the first generation to the second generation. I can't confirm it. But whatever the number, keeping the next generation from wandering away is a key problem for all types of financial advisors, whether they are "people" or institutions.
My experience says that the "people" have a fighting chance to retain second-generation clients while the institutions-private banks, wirehouses, etc.-are probably not even going to retain their current positions. Time was when families shared a local banker-the neighbor across the street, perhaps. And then there was a time when E.F. Hutton talked and people listened, and of course there was a time when the bull roared off the business cards of Merrill Lynch bankers.
Like a lot of other folks, I think the market crash of 2008 and the seismic shifts in the global economy this year are serving to hasten what was already a move from institutional brand name advice back to the "people," like yourselves. Isn't that what Bob Veres, publisher of the industry newsletter Inside Information, has been telling us since the 1980s when he wore his dinosaur T-shirt to industry conventions? The dinosaurs were labeled "PaineWebber" and "E.F. Hutton" and Merrill Lynch." On September 27, UBS chief executive Oswald Grubel confirmed to the Financial Times that PaineWebber is on the block.
So I think the "people," the independent advisors, won the last round. But just because your clients would rather work with an independent financial advisor today doesn't mean their kids will want to work with the same one. There are always other "people" around trying to make your clients a better offer. How will you hang on to the future generations of a family client?
I've tried to round up some ideas about that. On October 1, Teddie L. Ussery, a family business consultant who runs a company called Family Matters, hosted a panel at the annual Family Wealth Alliance multifamily office meeting in Chicago on just this topic. I've known Ussery since 2004 when she served as director of Synovus Family Asset Management, a division of Synovus Financial in Columbus, Ga. Synovus is a bank, making Ussery a banker, which I was willing to overlook because of what she learned about families and how she used it.
Ussery had originally gone to work for a smaller bank, owned by a family, that grew into Synovus. The family patriarch wanted her to head a family office for his family and to add other clients. She was free to make client needs her top priority rather than selling bank products. Her family office succeeded in bringing in families such as a $50 million family from the West Coast precisely because she was an independent rather than a bank product pusher. Her growth with these families set Ussery on a course of becoming deeply involved in family dynamics and governance and communication. Her firm today does no investing at all. Another point for the "people" versus the institutions.
There are other happy banker stories like this. At least one. GenSpring, the offspring of Sun Trust in Atlanta, is one of the most successful and rapidly growing of the multifamily offices thanks to its independence and focus on providing advice rather than products. I've never gotten the straight scoop on Sullivan, Bruyette, Speros and Blayney since it became part of Harris Bank in Chicago so I can't comment.
But I digress. Holding on to the second generation. Each of the experts I talked with, like Ussery, has personal experience in retaining clients and each insists that it's the relationship that creates the "stickiness." Of course, independent financial advisors have known for years that the relationship is the magic. But the people I talked with have special insight into rolling that stickiness over to the future generations.
Ussery emphasizes the importance of staffing family offices to work with the next generation and to set up a governance structure and a method to identify the family dynamics and the gifts and dreams of later generations. "One of the keys is to find what the passions and gifts of the next generation are and to match them with the asset levels of that family to use that money to grow human capital," she says. So doesn't the process become much like what the "people" planners refer to as life planning? Put another way, some might call it discovering how to keep growing your whole life long and how to help your clients do the same thing.
(The first time I heard the term "human capital" was some years ago at a wonderful seminar presented by Richie Lee and David Diesslin, planners in Dallas and Fort Worth, Texas. Lee gave a presentation about the importance of human capital, how your own future and the future of your clients depend on growing the human wealth of the person by enriching his skills and passions and work and spirituality.)
What could be more important now, what with the loss in confidence in the markets, the high unemployment-52.5% among young adults-and the scary unemployment of those nearing retirement. A recent survey by benefit consultants Watson Wyatt Worldwide found that 44% of those aged 50 or older planned to delay retirement. At the same time, nearly a quarter of those looking for work were 55 to 64 years old. I see in stories online saying some employers cannot find new hires with the creative thinking and creativity skills they need. Another story talks about how Americans are turning more to the Internet and to financial advisors to help them get through the economic slump.
We have much more control over human capital than financial capital. We can open new windows, gain experience and skills, deepen our knowledge and, by the way, our sense of satisfaction with our lives. This will become the new/old frontier in financial planning. This will help cement the ties between generations, between your firm and your clients. Could you put together some resources to help the children of your clients get started on a career path? Could you build a resource center to help broaden client skills and networking savvy?
No matter what their wealth, this search for human capital will be something that all clients will need help with going forward. "If we don't find a way to build that human capital, if we don't have success on the human side, we can't find financial success," Ussery says. For Ussery, that means working with a client family to "discover their value set and work on how you will continue to support that through the next generation." For some families, financial assets may be their core value, Ussery says. "There's only so much you can do with that."
While Ussery says she firmly believes the key to better client relationships is in the human growth side, she says that one of her colleagues on the panel might think differently. He is H.F. "Rick" Pitcairn II, a CFA and chief investment officer of the Pitcairn family office in suburban Philadelphia. Though Pitcairn is on the financial side of the business, he completely agrees with Ussery about the primary importance of human capital.
Pitcairn Company, the multifamily office of the heirs of John Pitcairn, founder of Pittsburgh Plate Glass Company (PPG) in 1883, followed in the footsteps of offices like Bessemer Trust and the Rockefeller Family Office in converting the family manufacturing business into a family trust that eventually opened to other wealthy families. Pitcairn did that in 1986 and today serves 35 multigenerational families with about $3 billion in assets.
Rick Pitcairn says that what gives his company an advantage over competitors like UBS "is our ability to work with second and third generations. "Pitcairn is in the fifth and sixth generation of the family. "I like to say we've got the scar tissue," Pitcairn says. He also believes it's important to clients to know that the Pitcairn family is in the same business they are and that they have trusted their financial management to the same group of people.
I also spoke with Gary Shunk, a Chicago psychologist whose company, Wealth Psychology, helps wealthy people deal with money problems and also helps advisors find solutions for their clients. Shunk says he compares the economic trauma of the last year to 9/11. "The trauma is that the rug gets pulled out from under us from the way we've experienced life in the past," he said. "We've had an acute sense of loss. A lot of trust has been injured, damaged. A lot of it is irreversible."
Shunk says that many financial advisors are left-brained, which is to say that they are logical, linear, rational thinkers. Many of the e-mails and phone calls these rational planners have received over the past year were filled with fear and anger. Shunk said the firms that did well were those where advisors had developed deep, collaborative relationships with clients. "The firms that did not do well were the institutions," he says, where, he could add, the planners were worrying about their own jobs.
Shunk, who has had a clinical practice since 1992, suggests to advisory firms that they hire advisors who are in the peer group of the second generation of client families. Wealth psychology, he says, is about helping families and individuals integrate a sense of identity and wealth no matter how much money they have. Or don't. Shunk's comments reminded me of a time eight or ten years ago when some financial advisors were hiring psychologists to deal with their right-brain clients. Many top firms now outsource this "right-brain" need.
Surely there's nothing new in this emphasis on "relationships." Car dealers value them. So do dentists. Even banks refer to their salespeople as "RMs" or relationship managers. But what is the relationship? That's the question. Is it, "I will look after your human and financial capital needs"? Or is it: "I will shove this product down your throat"?
Mary Rowland can be reached at [email protected]. She has been a business and personal finance journalist for 30 years and has written two books for financial advisors: Best Practices and In Search of the Perfect Model.