Advisors offering education cost planning have faster "organic" growth, Dimensional study finds

As registered investment advisor dealmaking slows down, methods to boost "organic" growth are in the spotlight. One strategy that works, according to a new research paper: talking with more clients about paying for education costs.

That's one of the top takeaways of a new study of organic growth strategies published recently by researchers at investment management firm Dimensional Fund Advisors. The paper, "What Drives Growth for Financial Advisors? Evidence From a Multi-Year Survey," represents five years of research, surveying an average of 898 firms from around the industry each year, with 87% of participants fee-only independent advisors. 

The report found that even during the record dealmaking of recent years, focusing on planning for clients' education costs as part of a holistic approach to wealth management was a top driver of firm growth. This emphasis also opens the door for engagement with next-generation clients, who are often parents — and attracting younger clients is another big growth engine, the study found. 

"A 10 percentage point increase in clients under the age of 40 is associated with a growth in AUM in the same year and the next of an additional three percentage points," the report authors wrote. 

Yet for firms in the study, most clients were on average over 50 years old.

While mergers and acquisitions still make headlines in the industry, "we know that can't last forever," said Kaitlin Hendrix, a senior researcher and vice president at Dimensional who co-authored the paper, posted on May 2 on SSRN.

Industry News

Advisor Group's test: recruiting and retaining talent amid consolidation

May 16, 2023 2:25 PM

"This is an opportunity to have insight about back to basics … Things like, does offering more services to your clients help you build your business, or does that spread you too thin?" It's worth it to diversify services, the study suggests. "In fact, offering four more services is associated with two and a half percentage points growth in AUM," Hendrix said. 

The study was conducted by Dimensional researchers and Marco Di Maggio, a professor at Harvard Business School, between 2016 and 2020, with each year's data representing firm growth over the prior year. Respondents were mostly based in the U.S., with a median of around $100 million in assets under management and 125 clients, and data was collected over a six-week period starting in April each year.

While the most common services respondents offered to clients was asset management, education planning, account aggregation and retirement planning were the offerings most rewarded with higher current and future growth, the paper said. 

"Education planning appears to have the strongest impact. The coefficients on education planning services are reliably positive in all tests, for AUM, revenue, and client growth," the authors wrote, adding that this held true not only in the first year a firm completed the survey but also if they responded in the following year or two years.  

"Extending the education planning services to an additional 25% of clients can boost asset and revenue growth by around two percentage points in the next year and the year after," they wrote.  

College is expensive
The cost of higher education in America has ballooned in the past two decades, more than doubling since the start of the 21st century, according to the Education Data Initiative. The group found that U.S. college expenses grew at an average rate of around 7% each year during that time. Factor in lost income, student loan interest payments and non-tuition expenses, and a bachelor's degree can already cost over half a million dollars. 

"There are vehicles that the sooner people start taking advantage of them — 529 plans for example — that's just prudent financial planning," Catherine Williams, a vice president and head of practice management at Dimensional, said. 

Tax

College savings plan money left over? Hello, tax-free Roth

January 10, 2023 10:47 AM

But competing financial demands, such as eldercare expenses for aging family members and the stress of saving for retirement amid rising inflation, tug on the attention span of today's younger parents, who in many cases have rising wealth and represent the industry's next generation of clients. 

Enter the advisor. "If you are particularly working with a client that is more in a wealth accumulation mode, how do you get them to think about those mechanisms as early as possible?" Williams said. 

Advisors can demonstrate value here and engage such parents, as well as their growing children who could in turn become future clients, in proactively planning around both higher education and lifelong learning expenses, she added. They could also broach an honest conversation around whether more affordable alternatives to university education, such as vocational training, might be a better fit for some children in the family, Williams said. 

It can be a double win for a wealth management firm if they train their own younger advisors on these services, Williams said — giving them a competitive advantage as they try to build their own books, and using their ability to relate to younger clients.  

The successful move by some firms towards college and vocational planning also reflects a likely trend of firms in the RIA world moving "upstream," Williams said. "As clients have gotten bigger and more complex, they need more." She added that independent advisors are dipping their toes into family office services, which typically include planning for education costs and careers.

Wealth management

Ask an advisor: I don't have kids yet. Can I still save for their education?

March 9, 2023 7:04 PM

Career planning for next-gen clients
But the educational planning question needs to extend beyond going to college, Williams said. As younger generations in the workforce reskill and shift careers more frequently than the Baby Boomers did, advisors should prepare for those changes to become a broader, ongoing financial planning topic. 

"When you think about education planning, having that conversation with your clients, it could be, they want to go back to school and get a different degree or they want to change professions," she said. 

Angie Herbers, managing partner and CEO at advisor consulting firm Herbers & Company, said that given the pace of workforce disruption across industries, "the best opportunity financial advisors have right now is career planning."

"We can't even imagine how AI is going to impact the workforce," Herbers said. "But the opportunity here is for financial advisors to help real humans … plan their careers in the event that technology does put them out of work, and help them find other work." 

The Dimensional paper also found that having multiple referral sources, especially from "centers of influence" such as certified public accountants or estate attorneys, was a strong driver of growth, in addition to client referrals — stronger than referrals from other advisors or through digital marketing. 

Retirement

Surviving succession: Navigating the emotional minefield of transition planning

January 10, 2023 4:50 PM

The biggest drags on growth, the study found, were having an unclear succession plan or exit strategy for the practice and having too many old clients. Essentially, clients over 70 are often retired and spending down their wealth — as opposed to young clients, under age 40, who are growing their wealth and in need of many services such as education planning. 

Firms might hit two birds in one stone, though, by investing in such in-demand services. In doing so, they could raise "that next generation of up and coming advisors, who could potentially be the future owners, that are also contributing to the growth in the business today," Williams said.