It’s time for a better valuation method for wealth management. Most criteria today rely on objective data points — AUM, number of accounts, product mix, fee-based revenue, et al. Important measures for sure, but limited in their ability to accurately predict the potential challenges and opportunities facing the practice.
Savvy buyers of advisory firms have learned to scrutinize the story behind the numbers, such as the demography. A client list dominated by seniors in their 70s and 80s has different service costs and revenue implications than a practice built of mid-range Baby Boomers 10-20 years younger. Likewise, a product lens may reveal healthy fee revenue from managed accounts but can mask a lack of estate planning and inter- generational relationships needed to preserve that income. Where valuation leads, management must follow…so let’s follow the clients and the advisors most focused on serving them well.
It’s a (Different) Numbers Game
The weakness of any empirical valuation is the presumption of persistence - that the clients are happy and loyal. An important perspective to test, given that the median high value client today is a mid-late stage Boomer, 63-65 and on the cusp of “retirement”. This is the Moment of Truth for wealth managers, since this is the time clients begin to get truly serious about planning - often triggered by a life event involving aged parents or looming retirement. The resulting awareness and willingness to take action favors pro-active planners who drive consolidation of assets from among the 4-5 firms typical of Baby Boomer households. The consolidation process has winners and losers and it is remarkably easy to be a winner if you are actively engaged with clients. Scale is the adversary here - and most advisors simply do not maintain the level of communication and connection needed to be seen by clients as their primary advisor in this most important of life stage transitions. To be fair, most clients are unpredictable with their timing for getting serious, but preparation improves your chances of success.
Be Client Driven
For an ongoing wealth management concern, the most valuable success metrics reflect how well the practice drives asset consolidation and new wins (referrals). But how best to earn those rewards? Ask the clients. Consolidation “winners” are offering something the clients want and are not receiving from their current array of “relationships”. The two most common reasons for clients leaving advisors remain “planning” and “relationship”. Both are as much perception as fact, too often surprising advisors who assume all clients know what the advisors can do for them and that indeed they are truly concerned, just thought the clients were “all set”. Which they were — until they weren’t. If you want to beat yourself up some more on this topic, read this artifact and ignore the date - it still tells the story! (see Appendix: “Three Things Baby Boomers Won’t Tell You”, Investment News, July 23, 2007)
Client-Driven Valuation
A better test of a wealth management offering’s future value is how well it meets the expectations of future clients. Pause here to absorb the meaning of “future clients”. Even a current, long-term client who has not yet consolidated accounts with you is also considered a “client” by 3-4 other firms. Someone is mistaken – in the future state. Likewise, happily, there are clients you might not know who are looking for you but have not yet found you and will become available if they remain ignored by the firms they work with today. It isn’t far-fetched to imagine your client list to be radically different in just a few years based on the timing of the demographic. You win consolidation and new clients from your current base while other advisors lose - and other advisors snag clients you’ve ignored. This process is evidence of why the demography of wealth management is the biggest industry disruptor of all. To win this battle, you need a compelling and dependable system built of high quality parts.
Wealth Management is an “Eco-System” of Integrated Elements
Wikipedia says “an ecosystem…is a community made up of living organisms and nonliving components”. A digital ecosystem is a “distributed, adaptive, open socio-technical system with properties of self-organization, scalability and sustainability”. Welcome to the cutting edge of wealth management.