As boomers age and spend their savings, advisors will need to adapt their practices.

As more baby boomers stop accumulating assets and withdraw from their portfolios to pay for retirement, independent advisors will have to adapt or face lower revenue, higher marginal costs and less profit, predicts a white paper by Thornburg Investment Management.
The paper, Preparing For Tomorrow-The Role Of The Advisor In A Depleting Asset Environment, was released in May and summarizes conclusions from the firm's 6th Annual Wealth Management Conference in Santa Fe, N.M.
"The extraordinary demographic and economic shift caused by the baby boom generation will transform the financial securities industry into a depleting asset environment, or one that is also referred to as a 'spend down' environment. In these new surroundings, the role of the financial advisor is going to change. Accepting the changes and adapting to them will be critical to the prosperity of our profession," the paper says.
As investment portfolios are used more for financing lifestyles and medical bills rather than accumulating assets, their balances may not shrink but they will not receive any more contributions, the report continues. Independent advisors will need to shift from investment management to financial advice, the paper maintains, and will face four significant challenges: succeeding against increasing competition, anticipating how advice and service needs will change, compensating for the changes to maintain profitability, and defining your value-added proposition.
"The issue is that the fundamental aspects of a business model as it applies to an accumulation practice are way different than the model that would be applied to a distribution practice," says advisor David Lawrence. Lawrence, a speaker at the conference, is president of practice consulting firm David Lawrence and Associates in Lutz, Fla.

Succeeding Against Increased Competition
Competition will increase exponentially. Today's overall marketplace includes 19,000 registered investment advisors with combined assets of $2.1 trillion under management, the report says. Seven sectors of the financial services business are all vying for a piece of the pie, including full-service brokers, independent advisors, retail banks, private banks and money managers, CPAs and law firms, insurance companies and discount brokers.
One of the most formidable competitors today is full-service brokers, or the wirehouses. They control 50% of the private client market (clients with assets of between $500,000 and $1 million), the report says. The wirehouses are training and educating their brokers to be wealth managers, who they want to be doing fee-based business, the report says. "The big firms are increasing their advisory services and the leader is Merrill Lynch," it notes.
But independent advisors captured the lead with 36% growth in assets per year and have emerged as competitive forces against wirehouses. "By providing complete wealth management services, advisors can move away from simply offering a better price or more products. Personal service is this group's winning formula," says the report.
Still, wirehouses are making a comprehensive effort to gather assets before people retire so that they are the firms of choice when $1.9 trillion is rolled over in the next five years. They also are rolling out new products that focus on generating income and are marketing themselves as providers of "retirement solutions," the report says. They also are gearing up to offer these services through face-to-face interactions and seminars to help people work through issues and concepts in a wealth management product, it continues.
Meanwhile, the commoditization of investment management is continuing, and the same thing is happening to asset allocation, once the unique selling proposition of independent advisors. For most independent financial advisors, the only viable choice is to increase their value by offering "client-centered" services. One solution may be to offer very distinctive financial services to different segments of the market, the report adds.

Anticipating How Advice Needs Will  Change
As baby boomer needs change, more advisors will focus not only on asset distribution but also on lifestyle issues. The paper predicts services offered by advisors will change in seven ways:
Investment management will become less relevant. In a declining asset environment, advisors will need to differentiate themselves in some other way, such as wealth preservation to meet extended longevity.
Knowledge will be required about new products focused on distribution and income-producing assets.
Taxes and tax planning will become more important. As people liquidate assets, important concerns will be capital gains issues, required distributions out of tax-deferred accounts and maximizing after-tax income.
Bill paying, tax preparation and health-care advice will be more in demand. Clients may call on you to manage bill paying and tax preparation, and may ask for your advice on health-care issues.
Wealth transfer will take on more urgency. The creation of a complete estate plan, along with a charitable giving plan, will increase in priority.
Risk management will become more critical (longevity and health-care risks in addition to wealth preservation). More clients will move into a wealth preservation and protection phase, and advisors need to be aware of it.
Educating staff about the marketplace and the changing needs of clients will become more challenging.

How Will You Compensate For These
Changes To Maintain Profitability?
As many client portfolios decline in value, advisors who want to maintain their firm's profitability will need to offer more services and have more clients, the paper says. They'll also need to better manage overhead costs through outsourcing, leveraging and smarter employee hiring and management.
Compensation models traditionally have been based on an advisor's ability to gather and grow assets. Advisors will need to transition their fee structure from a percentage of assets under management to an a la carte fee structure with a fixed component for financial planning services, says the paper. And they'll need to persuade clients that they need to pay for advice in some way other than assets-based fees.
"It's not demographics that will directly change the way advisors need to charge. But demographics will change what clients need, therefore what advisors need to deliver and therefore how they should charge," says Rebecca Pomering, a conference speaker and a principal in Moss Adams LLP who consults with financial advisory practices on various issues.
As clients age, they require more than asset management or a different approach to it, Pomering says. While some firms already deliver more to their clients, the pricing model for most advisors is based on a percentage of AUM, which does not necessarily reflect what they are delivering, she adds.
"Historically, advisors have had a tough time getting compensated for financial planning, but the biggest barrier to this has been advisors themselves. When advisors do ask clients for fees, very seldom, if ever, are they turned down," the report says. "If clients value what their advisors do for them they are willing to pay."
The challenge becomes how to adjust your pricing to reflect the value you've provided all along, the report says. "It's difficult, but may be necessary, to say to clients, 'I've been charging you incorrectly all the years of the great stock market-now that asset management is a smaller component of my service offering, I'm going to need to change my pricing model because I'm not getting compensated adequately.'"

How Will You Define Value Added?
One solution to adapt to the changing environment is to become a client-centric advisor, the paper says, and this entails modifying your business model from one that was investment centered. The client-centric business model is more focused around relationships with clients and the management of their overall wealth and well-being. Client-centered planning focuses on current client needs and supervision.
"I put forth the notion of a client-centric model, where virtually every aspect of a practice relates to a central theme and a central question: Whether you are dealing with technology, new products, new hiring, whatever the decision, you make the decision based on how it is going benefit your client," says Lawrence.
The paper says that the client-centric advisor is a wealth manager who builds and quarterbacks a team of outside specialists who can help clients achieve their financial and life goals. This "virtual company" design allows the advisor to expand services without expanding costs, the paper says.
"Positioning your firm as a wealth manager can also serve as a defense against the big wirehouses, as well as help you leverage existing relationships with baby boomers and the affluent," the paper concludes.