Will You Profit from the Next Generation?

Are you an outstanding FA? Of course, you are! Stay on top of the changes in our tax laws and the industry? Check. Constantly profile your clients? Check. Have taken the time necessary to get to know the heirs of your wealthy clients? Whoops. According to a study conducted by PriceWaterhouseCoopers Global Private Banking/Wealth Management, only two percent of heirs retain their parent’s advisory relationships, and seventy-five percent of clients say their advisor has never met their children.1

At Cannon Financial Institute, we are currently offering an array of resources and courses designed to help advisors get to know the children, grandchildren and other heirs of wealthy clients. Lately, though, I’ve begun to notice a somewhat disturbing trend.  Some advisors – enough to get my attention – seem to have replaced other prospecting efforts with a focus on ensuring family continuity.  From a business standpoint, this may not be the wisest choice. 

If you have become the trusted adviser to most of your clients, and they are, indeed, introducing you to their heirs, then I have a question. Are you making a profit commensurate with your efforts? The reason I ask is this: to be a successful FA in our business, you must first stay in business. I don’t mean your firm. I mean you.

One of the critical misconceptions about the intergenerational transfer of wealth is this: while your client is the family, will that family be profitable after the wealth transfer occurs? Consider the following scenario. You have a client with $10 million and five children. That client passes away. The estate is divided evenly, and each child receives $2 million.

Suddenly, instead of having one account you have five accounts. If you must spend an equal amount of time dealing with each of the five accounts, then you are now spending five times the amount of time you spent on the matriarch’s $10 million account for the same amount of money.

As part of your practice management, you can create a plan to grow your business by spending the time required to build relationships with heirs of the matriarch. Before doing this, I suggest you calculate how much of your time will be required to build these relationships.  Yes, the family is your client. Yes, you need to know the heirs and know them well. But this advice should only apply to clients and families with large sums of money.

If you have a client worth $50 million who also has five children and leaves equal amounts to each child, you will now have five accounts worth $10 million each. But you will still be spending more time managing five relationships rather than one.

There are many ways to measure profitability. A classic is GAP analysis. That is, what is an account yielding in net profit to you today and what would that account yield to you in the future when it is split between heirs? For purposes of illustration, let’s say the five new $10 million accounts cited in the paragraph above generate the same amount of money as the single account of $50 million on which you spent four hours a month.

If the five new accounts each require four hours a month, then you will now spend sixteen hours for the same amount of money. As FAs, we don’t think of ourselves as hourly workers, but a lot of professionals do. Consultants, attorneys, and physicians come to mind. Maybe you should think of yourself this way as well.

If you are making $500,000 a year net to you—before taxes— in your practice, then first divide that figure by twelve to get your average monthly income. In this case, it is approximately $41,000. Take the number of hours you work each week. Not hours in the office but hours you are actually working. I guestimate this to be about thirty hours a week or one hundred twenty hours per month.

What is your hourly rate in this example? $341.  In our scenario, you have spent four hours per month on the $50 million account. Those hours cost you $1,364 worth of your time. If you end up with five $10 million accounts, and you spend 20 hours a month on those five total, servicing those accounts will cost you $6,820 of your time.

Whether you are creating a business plan with the most advanced software or with pencil and paper, you will note how easy it is to fall into the trap of totaling your projected fees but not totaling the projected hours of your time it will take to earn those fees.

I’ll conclude by asking you, how much is your time worth per hour and are you getting your money’s worth from your expenditure of your time?

To learn more about this topic, register for our Certified Wealth Strategist® curriculum.

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Resources: 

1 https://tinyurl.com/PWC-Think-Advisor