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How I stopped worrying and learned to love the next-gen takeover

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Baby boomer advisors will go to their graves feeling justly proud of their achievements in the financial services world. Yet I would argue that that younger advisors have driven even more change.

I’m not discounting the boomer generation’s impact. In the 1980s, when I was editor of Financial Planning, the business was fundamentally a method to effect “needs-oriented selling” where advisors actually paid attention to a client’s circumstances before making a sales recommendation. That was a big step from “make a sales recommendation regardless of the client’s circumstances” — and planners weren’t finished. By the end of my second decade covering this emerging profession, boomer advisors were reducing their commission revenue in favor of an AUM revenue model. This fostered a dramatic increase in objectivity and alignment between advisors’ interests and the interests of their clients.

But consider the Gen X or Y advisor. Not one I know would even consider a career selling life insurance and equity-indexed annuities for fat commissions. The existing life insurance distribution system — captive and independent field agents — has been aging, with no younger volunteers to replace the warhorses as they retire. The unwillingness of Gen X and Y professionals to take up insurance sales drove a number of leading life insurance companies to start introducing fiduciary life and annuity products that could be distributed by fee-compensated advisors. What other choice did they have?

As the trend continues, the life insurance and annuity world will do something we thought was unthinkable a decade ago: shift from opaque, high-commission reliance on sales agents to fiduciary and transparent.

Thank you, Gens X and Y!

Meanwhile, dually registered advisors affiliated with independent broker-dealers have been content to split their revenues between asset management fees and sales commissions — until they started trying to recruit younger successors. Advisors coming out of college and career changers attracted to the idealism of real financial planning were not easily lured into an eat-what-you-kill sales role. To bring in younger talent, many thousands of dually registered advisors have had to reduce or in many cases eliminate sales commission revenues from their practices.

That, in turn, has led prominent broker-dealers, including LPL and Commonwealth, to create new no-commission service platforms for a growing number of advisors and reps. It’s not hard to see how these no-commission services models, still in the experimental stages, will become the primary service structure for IBDs as baby boomers age out and Gens X and Y take over their IAR offices. The sales model is being defeated on all fronts.

Is that all? I’m just getting started. Until very recently, it was hard to find a fee-only, boomer-led advisory firm that wasn’t exclusively following an AUM revenue model. Yes, advisors readily admitted, there were contradictions involved in charging based on the size of a client’s investable assets. But the predominant response to those like me who pointed out the conflicts was a shrug of the shoulders. Hey, if it’s working, why change it?

But of course that model didn’t work when those firms tried to market their services to Gen X and Y clients — something Gen X and Y advisors tried repeatedly to explain to their older colleagues. It’s hard to find anybody younger than a baby boomer who believes that fancy portfolio management and tricky investments are going to add meaningful alpha over costs, so why are you charging based on portfolio returns when the real life-altering value lies in the financial planning services?

Finally, as younger advisors demand to work with their age cohort peers, as advisory firms wake up to the fact that their traditional baby boomer clientele is entering a less lucrative decumulation phase, financial planning firms are starting to reach out to younger, less-wealthy, more skeptical consumers. We’re starting to see the emergence of new pricing models: monthly subscription fees, flat quarterly fees, project-based and hourly fees — and every part of that experiment is leading away from AUM and toward more congruence between the value of services provided and what is charged for them.

This represents a huge shift in our professional mindset, for the better. And it was driven not by logic (which has been around for decades) but by the idealism of Gen X/Y advisors and by the preferences of Gen X/Y financial consumers.

Of course, there are other areas where post-baby boomers have been nudging the profession to a better place.

I know of many boomer-led advisory firms that hung onto legacy technology for an embarrassingly long time. Embarrassing? I’m talking about firms running a DOS-based program on an ancient server or using ACT! or Goldmine as their CRM, and mostly using the CRM for sales activities rather than running the firm and providing better client service.

Hey, I get it: upgrading software and hardware is expensive. Why change when what we have works just fine? It may take a little longer to do everything, and it may make us look like dinosaurs, but the founder is going to retire in a few years anyway. That logic worked so long as the founders weren’t trying to recruit younger, more tech-savvy professionals to their firms. Now one of the first things an advisor recruit will check out is your tech suite. If you’re not showing up on social media, if your website isn’t mobile-friendly, if recruits can peek around the corner and find a server hiding in the storage closet next to the break room, then your chances of recruiting top talent is basically zero.

The result? A lot of grumbling, a lot of dollars invested in tech infrastructure, and the planning profession is turning technology decisions over to younger advisors at a time when time-saving innovation is coming faster than it ever did before. This will reduce expenses, and costs, for providing financial planning services — and drive new levels of convenience for planning clients.

It’s not hard to envision the Gen X/Y-run profession finally achieving things that a lot of us hoped would happen a decade or more ago. Planners will be all or mostly fee-compensated and fiduciary in their client relationships. Fee structures will be more closely mapped to the services provided. Planning will take over completely as the most-valued part of the service. Planning firms will move away from quarterly meetings toward more frequent, more substantive on-screen consultations. Updated portfolio balances and plans will show up on smart phones. And a higher percentage of the population will be able to access the services of a financial planner.

Before long, I predict that an annoying new Generation Z will enter the profession, and start pushing for additional changes. I have no idea what they’ll be demanding from their prospective employers in the way of technology, fee structures and professionalism. But based on our experience with Gens X and Y, the direction of change will be driven by increasing levels of idealism and an eagerness to adapt to whatever works better than what we have now.

The next older generation will grumble about having to make changes, but in the end, the profession will be the better for it.

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