Financial advisors did a good job holding on to their clients during the tumultuous pandemic year of 2020, according to the PriceMetrix report released today by global management consulting firm McKinsey & Company.
The 10th annual iteration of this report is based on data collected from more than 20 North American wealth-management firms comprising client holdings and transaction information from roughly 70,000 financial advisors. It spotlights several key themes gleaned from last year's activity:
Record-high client retention, but modest growth in new client additions.
McKinsey compared client behavior during two watershed events: the financial crisis of 2008 and last year’s pandemic-fueled financial meltdown. It noted there was a jump in client attrition in 2008 when money was in motion as some clients dumped their advisors. But things were calmer last year as client retention set a record at 94.6%, a slight uptick from 2019, according to the report.
“An optimistic take would be that the depth of relationships, as well as the importance of human advice during the pandemic, led to higher levels of client retention,” McKinsey said in its report.
Meanwhile, advisors started 7.4 new client relationships last year, representing a small decline from 8.1 added client relationships in 2008. Nonetheless, assets per new client reached a record high of $905,000 in 2020.
Asset and revenue growth increased, thanks mainly to market performance.
McKinsey said that median assets per advisor last year hit an all-time high of $130 million. That marked a 9% jump over the prior year, but three-quarters of that increase came from market performance. And while median revenue per advisor set a record of $724,000 last year, that was just a 1% rise over 2019’s total.
Youth will be served.
Generations X and Y (i.e., people between the ages of 25 and 56) are gradually stepping in as the next wave of wealth management clients. According to McKinsey, these two cohorts comprised 24% of wealth management clients last year, up from 19% in 2016. “The drop in the average age of new relationships is evidence that advisors are choosing to work with a greater number of younger clients, an accelerant to the overall change in client-demographic composition,” the report said.
But while the average age of new clients has trended younger during the past five years, it’s still pretty much the domain of the middle-aged crowd as the average age of new clients dropped from 57.5 in 2019 to 56.4 in 2020.
McKinsey posits that attracting younger clients in the future could be challenging. Online wealth platforms saw significant growth in new accounts last year, and while conventional wisdom holds that many investors begin as “self-directed” and later switch to humans as their financial needs become more complex, the increasing sophistication of online platforms could upend that narrative to some extent.
Continued growth in fee-based revenue, offset by continued decline in fee pricing.
Revenue from fees comprised nearly three-quarters of compensable revenue for financial advisors last year, McKinsey said, up from 54% in 2016. And 58% of client relationships now have fee-based accounts, or 15 percentage points greater versus 2016. Fee pricing for new client relationships (in the $1 million to $1.5 million range) declined slightly last year, and McKinsey said it expects pricing on all fee accounts to drop over time as new fee relationships are priced lower than existing relationships.
Relationship pricing: The next frontier.
McKinsey noted there’s a growing number of “hybrid households” with both fee-based and transactional accounts, and that this changing dynamic of product use will challenge wealth managers. “Most firms continue to set and manage pricing policies within product lines, but those lines are clearly blurring,” the report said. “Advisors need tools and policies that help them consider the entire relationship when determining and communicating price with clients.”