Futurist Edge

Could 60% of your AuM be at risk without you realizing it?


71 year old Prakash Mehra was Rahul's client for the last 24 years. Rahul had proficiently guided Mr. Mehra's finances from the time he had started saving for retirement, helped him build a good nest egg, maneuvered the portfolio well post retirement, ensured regular cash flows to provide for the lifestyle that Mr. Mehra desired, personally hand held all transmission related issues 5 years ago when Mrs. Mehra died and ensured that all investments were in good shape with clear titles - in short, Rahul had served Mr. Mehra very well. Rahul had insisted that the Mehras draw up a will 10 years ago, and a year after Mrs. Mehra's death, he got a fresh will made by Mr. Mehra, who wished to bequeath his substantial assets to his son Pankaj and daughter Priya. Rahul had taken care to get nominees recorded in accordance with the will.

6 months ago, when Rahul got the news of Mr. Mehra's death, he felt deeply saddened. But the professional in him swung to work. All the care he had taken to administer Mr. Mehra's portfolio well, came in handy as he was able to help Mr. Mehra's children through the asset transfer process very smoothly. They thanked him profusely for all his help and expert guidance through what could otherwise have been a tricky and time consuming process.

Rahul's interactions with Pankaj and Priya gave him an opportunity to reconnect with them after a very long time. They had moved out of the city, they led their own independent lives, and though Rahul had met them when they were college students at the time he took on Mr. Mehra's portfolio, he had little or no interactions with them once they graduated and started pursuing their respective careers. He was initially apprehensive upon Mr. Mehra's death whether this would mean loss of a sizeable chunk of assets for his firm, but he mustered up courage after seeing how much Pankaj and Priya appreciated his efforts in managing their father's assets and his assistance through the transmission process.

Today, 6 months after Mr. Mehra's death, Rahul is a disappointed man. Pankaj and Priya chose to move the assets to other advisors, and didn't even give him a chance to make a pitch. All the efforts he put into nurturing the portfolio, into ensuring smooth transition of assets - all of it had come to naught, for what he felt was really no fault of his.

A worry hit him hard. He started profiling his AuM by age of clients. When he was done, he realized that though his retired clients were 25% of his client base by numbers, their assets accounted for over 60% of his AuM. Is 60% of his AuM at risk now? He broke into a cold sweat.


Does this hypothetical story sound plausible? Could something like this happen in your firm? Have you thought about this? How are you going to handle this challenge?

These are some of the issues financial advisors globally are grappling with. Intergenerational transfer of wealth is a topic that is occupying center stage in the minds of financial advisors across the world. Its not enough for an advisor to ensure smooth transition of assets to the next generation. He then has to fight hard to retain those assets with him. And the odds don't look good. Check out these facts:

  1. According to a survey conducted by US based Investment News, 66% of children fire their parents' financial advisors after they inherit their parents' wealth.

  2. State Street Global Advisors' research suggests that only 38% of investors retain their financial advisor when the spouse dies. This drops further to just 29% retention by children when both parents die.

Valuations of IFA firms in Western markets take a steep hit when due diligence reveals a large proportion of retirement assets in the firm's AuM and no credible track record of asset retention upon transfer to NextGen. Whichever way you look at it, this is a serious challenge that needs to be tackled proactively.

The important thing for advisors to note is this: the next generation doesn't fire the advisor for incompetence - they fire him because they don't have a relationship with him, and possibly are already working with another advisor for their own assets. It just is a whole lot more convenient to consolidate assets with the advisor you already work with and trust rather than have different advisors for different streams of assets.

To understand how serious or relevant this issue is to your business, consider doing the following right away:

  1. Get your AuM profiled by age of clients, and place all AuM of 60+ clients into a "potential risk" bucket.

  2. For all these "potential risk" client assets, run a check on how well connected you are with the next generation. Are you the advisor for the next gen or have they made their independent choices already? How regularly are you in touch with them? What is your feel on the probability of them retaining you as their advisor after they have inherited their parents' assets?

  3. Based on this analysis, draw up your list of "at risk" AuM.

You now have a job cut out, to gradually reduce this "at risk" AuM by proactively engaging with the next generation. This could be quite a challenge: chances are they are at least in their 30's, they are independent, they may be in different cities. You may not have met them in years, perhaps not at all. So, how are you going to go about the task of reducing this "risk"?

If you have thoughts on how to handle such situations, do share them by posting your comments in the box below. Watch this space as we bring you the next part of this 2-part article, where we will share some thoughts and strategies on this issue for your consideration.


Content is created by Wealth Forum and must not be construed as an opinion by DSP Blackrock MF.

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