Financial advisory firms that do not offer more holistic financial planning may find themselves on the outside looking in with clients as more investors are realizing the importance of financial planning, according to a new white paper released today by Boston-based research firm Cerulli Associates and broker-dealer giant Osaic.
For the paper, called “Financial Planning: Fueling Client and Business Growth,” the two firms surveyed almost 11,000 households, and found 53% of the respondents believing that having a written financial plan is important. That figure jumped up from 41% of the respondents at the end of 2014.
"Investors are looking beyond just investment management in selecting their advisors,” said Andrew Blake, associate director at Cerulli, in an interview. “They are also considering the importance of a financial plan in their complete financial picture … when they’re selecting an advisor. And that is correlated with their happiness in working with an advisor as well.”
The main reasons for this increase have to do with recent market volatility as well as a greater number of financial products available to investors, the white paper found.
Investment management by itself is no longer a differentiator for advisors but something that must merely be offered as part of the package, Blake said. Offering more financial planning services is a differentiator, he said.
Most investors are looking for a financial advisor to help them put together a financial plan. However, they want to work with someone who understands them, the white paper pointed out. In its research, Cerulli found that 55% of investors prefer that their advisor understand their financial goals, needs, and risk tolerance and 49% want an advisor who understands their entire financial picture. Only 46% are looking for advisors who are focusing on investment performance.
Investment management is still important to investors, Blake pointed out, but they are also interested in areas such as cash flow management, charitable planning, estate planning and executive compensation planning, among other things.
The financial advice industry has been evolving for several years from simple asset management to a more holistic financial planning model. The firms that don’t adapt to the changing tide are finding themselves missing out, the research suggests.
Those firms focusing on comprehensive wealth management have more assets to manage and higher-end clients to work with, Cerulli and Osaic found.
In conducting the research for the white paper, the firms interviewed 2,000 financial advisors. The paper found that those advisors offering comprehensive wealth management managed $822 million in assets and that 37% of their overall clientele were considered high-net-worth investors. By comparison, the firms that didn’t offer comprehensive wealth management managed an average of only $210 million in assets and counted only 7% of their overall clientele as high-net-worth. Comprehensive wealth managers also oversaw larger client portfolios, at an average of $1.8 million, whereas the average at other firms was $562,000.
“Advisory firms themselves really need to take to heart that the demand for comprehensive financial planning services is only increasing and they’d be doing a disservice by not enabling their advisors with the proper technology, training and coaching to move their practices toward this more holistic model,” Blake said.
However, despite investors’ push for more services, some clients aren’t getting them. Blake said anecdotally that there might be a generational divide here: Young advisors might be more willing to branch out into new services while older ones might be too set in their ways.
“There are some advisors who are just ingrained completely in money management exclusively and that’s their sole value proposition and they’re probably not going to move from that,” he said.
There are those advisors, in particular smaller shops, that have the desire to expand their business but may not have the resources. Advisors can always reach out to other firms or start creating partnerships. In addition, those associated with a broker-dealer can use the resources that might be available at the firm they affiliate with, including planning tools and even training, Blake explained.
Regardless, firms that choose to offer comprehensive wealth management do not have to start offering it all right away. It can be something that they grow into, Blake pointed out.
“To alleviate the stress of going from purely investment management to all of a sudden trying to portray yourself as a complete financial planner … you can start gradually,” he said. “Small steps can be taken toward incorporating financial planning.”