February 23, 2024



Trade as a registered investment advisor slow down, ways to promote “organic” growth are in the spotlight. According to a new research paper, one strategy that works: Talk to more clients about paying for education.

This is one of the most important takeaways from a new study organic growth A strategy recently published by researchers at investment management firm Dimensional Fund Advisors. The paper, titled “What’s driving the growth of financial advisors? Evidence from a multi-year survey,” represents five years of research, surveying an average of 898 firms from the industry each year, with 87% of participants being fee-only independent consultant.

The report found that, even amid record deals in recent years, a focus on planning for clients’ education costs as part of a holistic wealth management approach was a key driver of the firm’s growth. This emphasis also opens the door to engagement with next-generation customers, who are often parents, the study found — attracting younger customers is another important growth engine.

“A 10-percentage-point increase in customers under 40 was associated with an increase in AUM for the same year, followed by a further three-percentage-point increase,” the report’s authors wrote.

However, for the companies in the study, the average age of most customers was over 50 years old.

although mergers and acquisitions still make headlines In the industry, “we know this isn’t going to last forever,” said Kaitlin Hendrix, a senior fellow and vice president at Dimensional and co-author of the paper, Posted on May 2 on SSRN.

“It’s an opportunity to get back to the basics…Like, does offering more to your customers help you build your business, or is it a distraction?” Research shows that diversifying your offerings pays off of. “In fact, offering more than four services was associated with a two-and-a-half percent increase in AUM,” Hendrix said.

The study was conducted by Dimensional researchers and Marco Di Maggio professor At HBS, for the period 2016 to 2020, each year’s figures represent the company’s growth over the previous year. Respondents were mostly based in the United States, had a median of about $100 million in assets under management, and had 125 clients, and the data was collected over a six-week period beginning in April each year.

While the most common service respondents provide to clients is asset management, educational planning, account consolidation and retirement planning are the fastest-growing services now and in the future, the paper said.

“Educational planning appears to have the strongest effect. The coefficient for educational planning services is reliably positive across all tests, including AUM, revenue, and client growth,” the authors wrote, adding that this applies not only to firm formation The survey was done the first year, and did they respond in the next year or two.

“Extending educational planning services to the additional 25% of clients could boost asset and revenue growth by about two percentage points over the next year and the year after,” they wrote.

college is expensive
Cost of Higher Education in the US swelled over the past two decadeswhich has more than doubled since the early 2000s, according to Education Data InitiativeThe team found that during that time period, the cost of college in the United States increased by an average of about 7% per year. Factoring in lost income, student loan interest payments and non-tuition expenses, the cost of a bachelor’s degree already exceeds $500,000.

“There are some tools that people start using them earlier — like 529 plans — and it’s just prudent financial planning,” says Katherine Williams, vice president and head of practice management at Dimensional.

but competing financial needs such as Pension expenses For Aging Family Members and Stress Saving for Retirement With Rising InflationPulling the attention of today’s young parents, who in many cases are increasingly wealthy, represent the industry’s next generation of customers.

Enter advisor. “If you’re working with a client in particular that is more focused on a wealth accumulation model, how do you get them to think about these mechanisms early on?” Williams said.

Advisors Can Prove Value Here, she adds, let those parents, and their growing children who might become future clients, actively plan for higher education and lifelong learning costs. They can also have honest conversations about whether more affordable alternatives to college education, such as job training, are better suited for some children in the family, Williams said.

If wealth managers train their own young advisors to use the services, it could be a win-win for wealth managers — giving them a competitive edge as they try to build their books, and using them to connect with younger clients, Williams said Ability.

Some companies’ successful moves toward college and career planning also reflect a possible trend of companies moving “upstream” in the RIA world, Williams said. “As clients get bigger and more complex, they need more.” She added that independent advisers are dabbling in family office services, which often include education costs and career planning.

Career Planning for Next Generation Clients
But Williams said the issue of educational planning needs to expand beyond attending college. As younger generations in the workforce reskill and switch careers more frequently than baby boomers, advisors should prepare for these changes as a broader, ongoing topic of financial planning.

“When you think about educational planning, when you have conversations with your clients, they might want to go back to school and get a different degree, or they might want to change careers,” she said.

Angie Herbers, managing partner and CEO of advisory 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 affect the workforce,” Herbers said. “But the opportunity here is that financial advisors can help real people … plan their careers when technology is really putting them out of work and help them find other jobs.”

The Dimensional paper also found that having multiple referral sources in addition to client referrals, especially from “centers of influence,” such as CPAs or estate representatives, was a stronger driver of growth—than other advisors or through Recommendations for digital marketing are more powerful.

The study found that the biggest drags on growth were the business not having a clear succession plan or exit strategy, and having too many old customers. Essentially, clients over 70 are typically retired and spending their wealth – and the opposite is true for younger clients under 40, whose wealth is growing and needs many services such as educational planning.

Still, by investing in such on-demand services, companies may be able to kill two birds with one stone. By doing so, they can develop “the next generation of consultants who have the potential to be future owners, who also contribute to the growth of the business today,” Williams said.