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Can family office models help bridge advice gap for IFAs?

laughing laughterConfronting the darkest topics seems to be the way forward as financial advisers try to tackle the intergenerational gap

Financial advisers should draw on aspects from traditional family office models to help hold on to clients across generations, leading advice market experts have said.

By smoothing clients’ intergenerational wealth transfer, advisers can secure their clients’ legacy while also looking after the future of their own business, according to Sesame Bankhall Group executive chairman John Cowan, as they forge ongoing relationships with the beneficiaries of that wealth.

Tackling both an advice gap and seizing the business opportunity means confronting two of the most taboo topics in British conversation: death and money.

Research suggests this is still proving to be a major barrier as most financial advisers have only established professional relationships with 20 per cent of their clients’ beneficiaries.

A study last week by Octopus Investments found that while just over half of advisers were working on these relationships, 22 per cent did not know who the beneficiaries were, and 39 per cent said it was not something that was discussed with clients. In the survey of 202 planners, a third said they found conversations about continuing to advise beneficiaries difficult.

On the other side of the equation, Octopus found that two thirds of UK adults expecting to inherit £250,000 or more do not currently have a financial adviser.

The findings lend further weight to research by Sanlam last year, which showed that while those aged under 45 are in line to inherit more than £1trn over the next three decades, two-thirds of advisers are not making any efforts to engage with them.

By looking at a family’s finances as a whole and securing a client base of the future through better engagement with beneficiaries, advisers can generate more business value from lower-net-worth individuals who are neglected by the current advice market, Cowan believes.

He says: “Post-RDR, we raised standards in the industry by making people better qualified and they in turn drifted upmarket and selected higher-value clients to look after.

“We have ended up with millions of people who are being disenfranchised because the banks are out of it, the IFAs are not looking after them so they’re on their own. Traditional advisers have had a fantastic time post-RDR boosted by pension freedoms and a bull market which has added extra fuel to the rocket. They have not had an incentive to look after lower-value clients.”

But Cowan points out that this high-net-worth client base around which the adviser community has gathered is ageing fast and will be passing on properties, pensions and investments to its children.

While clearly it is only the ultra-high-net-worth who can afford a whole entourage of professionals who are solely devoted to managing their own wealth, legal and tax affairs, Cowan believes there are some transferable aspects of the family office concept that could help advisers leverage this wealth transfer.

“Traditionally a family office was really designed to bring all the services that a very rich family who live in Mayfair or Manhattan might need. They would own property at home and overseas, they have a business, they have wealth. The family office brings all the financial planning, accountancy and legal services together to transfer wealth between the generations efficiently,” he says.

This type of rounded approach requires a great deal of professional expertise which a single specialist cannot hope to deliver alone. Yet by teaming up with other individuals or businesses with complementary skills it becomes possible. For Cowan it is not just advisers with wide-ranging permissions who are missing a trick, but also mortgage brokers.

“Too many mortgage brokers are transactional and still just trying to fix a mortgage for people,” he says. “When someone invests money there is an obligation on the adviser to talk to them about capacity for loss, volatility, risk profile, and yet in the mortgage market there’s no such obligation. A person can take on £200,000 to £500,000 of debt through a mortgage and there’s no obligation to talk to them about personal risk, critical illness or income protection. The advice community can do so much better at helping the consumer.”

Breaking out of silos
Too many people in the industry remain consigned to their own areas – be that equity release, mortgage advice, pensions or investments – when for the client these matters are inextricably linked, Cowan points out. Stronger referral links between different specialists is the obvious answer and technology can make this far easier, he argues.

He says: “We are in a world where analytics and artificial intelligence are getting better and better and better. [Sesame Bankhall Group] facilitated around £42bn in mortgages last year and you can imagine the amount of data those brokers are collecting.”

The mortgage process could easily be used as a fact-finding mission to gain a wider understanding of the client’s finances and family needs, he suggests.

“A broker who is fixing a mortgage for a couple in their 40s will talk to them about affordability, but we could be talking to them about what’s going to happen in their lives. Have they got well-off parents who are going to leave them money? That can completely change the conversation. The collection and the interpretation of data will be so much more sophisticated a few years on from now. Mortgage brokers have typically been transactional and not really embedded any value in the business, but there is value in that data.”

Financial Technology Research Centre director Ian McKenna agrees “there is a huge amount to learn from family offices”. Software firms are already coming to market with solutions to help advisers manage their client books and think in this way, he says. But before technology can help, advisers need to look at other reasons why they may be losing business through the generations.

“Ninety per cent of people inheriting wealth will fire their parents’ adviser because they have had no contact and it is a similar percentage for women who inherit their husbands’ wealth,” McKenna says. “It is largely because they have been treated as someone in the corner who has never been spoken to.”

Leave it too late and the next generation will have already found their own trusted professionals long before they inherit enough wealth to pique the interest of advisers who court only the most profitable clientele, he warns.

technical financial graph on technology abstract backgroundTech talks
Practifi is an Australian fintech firm which aims to help bring family
office-style financial planning capabilities to the advice market through its business management platform.

It has already launched in its domestic market and in the US with plans to offer its product to UK advisers after Easter. Chief commercial officer Adrian Johnstone says: “It is centred on the client records and customer relationship management, but not in the traditional sense. We are much more geared towards managing the complexities of the relationships and the other voices and centres of influence that sit within the client conversation – so an adviser knowing their client but also knowing their accountant and their lawyer and being able to manage the network across their client book.

“We are able to help advisers to understand in a single click every client within their client community so that they can then directly target those people for education sessions – for example, free financial literacy training for the younger generation.”

Johnstone explains that the system can help to identify clients with children to target with this type of approach: “They can use our system to store information about the interests of those people and their children – such as where are they going to school, what trust assets are held in benefit – so they can really start to understand where to get the best targeted return because time is a precious resource as an adviser. Data is key and advisers need to seize every opportunity to gather information and record it in a structured way.”

However, many advisers say that they have always taken a family-oriented approach.

LEBC director of public policy Kay Ingram says: “We often deal with what you might call the sandwich generation who are typically in the late 50s and early 60s who have got grown-up children in the early years of their career as well as parents who are still alive.

“We are well-placed to advise the sandwich generation on planning in their own affairs leading up to retirement, but we also help them with questions like whether they should pay their children’s student fees upfront or help pay loans back and what kind of safeguards they should put in place when gifting money to their kids. When looking at the older generation we have specialists in our teams who deal with later-life matters – they are members of the Society of Later Life Advisers.”

Adidi chief executive Anna Sofat agrees that good advisers are already considering their clients’ finances in the context of their family and legacy planning goals. She says she takes every opportunity to involve clients’ children in advice sessions from a young age if they are being gifted money in order to start the conversation about financial management as early as possible, even when this means offering free sessions.

She says: “You cannot do everything from the bottom line, which is not a conversation we often have in the industry. I know many advisers who do pro bono work, so why not start with your own clients as a bit of our give?”


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