Despite a challenging market environment, financial advisors still expect to grow their business this year, according to Natixis Investment Managers’ 2022 Survey of Financial Professionals.
In fact, financial advisors are looking to increase their assets under management by 10% this year (median), which is up from the 7% they projected in 2020, but down from the 14% they expected in 2018. They also are aiming to achieve a 15% annualized rate of AUM growth over the next three years largely by acquiring new assets from new clients. As such, they are seeking to add 10 new clients per year, on average.
Natixis IM surveyed 300 U.S. financial advisors, as part of a larger global survey conducted in March and April 2022 among 2,700 financial professionals in 16 countries. The U.S. findings provide insight about advisors’ growth strategies, the challenges they face and how they are adapting their business to changes in the market.
Interestingly, financial advisors also forecast a market rebound in the second half of 2022. They do expect the markets to remain volatile in the second half, but predict the S&P 500 will ultimately post a gain of 4.4% for the year. “Their outlook is decidedly bullish considering the staggering market losses year to date and a triple dose of reality for U.S. investors—a simultaneous double-digit correction in stock and bond prices, and the biggest rise in inflation in four decades,” the firm observes.
Adapting Business Practices
The findings also suggest that advisors are looking to opportunities from the vast amount of money in motion, including rollover retirement assets and the transfer of generational wealth. Many may be hard-pressed to hit their targets, however, unless they also adapt their business practices and assumptions, Natixis IM notes.
The survey found that client acquisition is the most difficult way for advisors to go about growing their business. When asked which business growth strategy is most challenging, 59% cite winning new assets from new clients, compared to 31% who cite gaining more assets from existing clients. In addition, 24% say retaining clients is most challenging.
The two factors most advisors say are crucial to their success are demonstrating value to clients beyond investment management (63%) and establishing relationships with clients’ next-generation heirs (60%). Yet, nearly the same percentage of advisors (57%) say that the time involved in adding value beyond investment management and establishing relationships with next generation heirs make both challenging.
“Advisors have to expand their capacity to grow their business while meeting the needs of new and existing clients,” says David Giunta, President and CEO for the U.S. at Natixis IM. “Advisory relationships are no longer defined by transactions in an investment portfolio, but rather by a deeper understanding of clients’ financial needs and the services they feel add the most value for the money.”
Model Portfolios
One way advisors are expanding their capacity on the planning side is by using model portfolios on the investing side, the firm suggests. On average, 93% of client AUM is in model portfolios, including 54% of assets in models that advisors build themselves, 26% in models built and managed by their firm and 21% from third-party asset managers.
Nearly 9 in 10 financial advisors (89%) say that clients whose assets are in model portfolios view comprehensive financial planning as the greatest value of having a relationship with a professional advisor. A significant number of advisors also said clients value tax management (56%), financial education and engagement with family members (56%), and trust and estate planning services (48%).
The most effective ways advisors are incorporating model portfolios into their practice are by:
- transitioning assets on a case-by-case basis, depending on each client’s willingness (58%);
- focusing on retirement account rollovers (42%); and
- focusing on new assets from new clients (29%).
Some advisors have found it particularly effective to reserve their use of model portfolios for clients who represent less revenue potential, including clients with lower balances (18%), retirement drawdown clients (17%) and younger clients (10%), the report further notes.
Prospecting Efforts
In their search for new clients, most advisors are considering the life stages of their prospects, placing the highest priority on pre-retirees (93%) between the ages of 50 and 60, followed by those between the ages of 60 and 65 who are at or just entering retirement (84%).
Six in 10 are also focused on older accumulators between the ages of 35 and 50 who are in their peak earning years and likely in need of comprehensive financial services to address multiple financial goals, such as saving for retirement, funding education and managing debt.
But given the market environment and generational transfer of wealth underway, advisors may be missing opportunities to reach potential clients, the firm observes. Fewer than half (47%) of financial advisors are focused on post-retirees, many of whom are drawing down versus accumulating assets but who still need planning and advice. Moreover, only 16% place a high priority on prospecting for Gen Y and Gen Z clients between the ages of 18 and 35, who represent the largest segment of the U.S. population.
Beyond age segmentation, advisors are tailoring their business offering and business development strategies to appeal to specific high-valued groups like professionals (76%) and next-gen heirs (44%). But the survey also found that they might be overlooking opportunities to meet the needs of certain segments, namely women (29%) and the LGBTQ community (7%).
Fee Models
Finally, as the wealth management business transitions to a more holistic financial planning business model, some advisors are reevaluating the way they charge for their services, Natixis IM further notes.
The number of advisors whose fees are based on AUM is expected to decline from 63% today to 58% over the next five years. A subscription-based fee model, that charges clients a one-time or annual upfront fee and then a recurring fee for any ongoing services throughout the year, is expected to rise incrementally from 2% to 9%. Additionally, 27% of advisors expect to offer a mixed fee structure employing AUM-based, subscription-based and transactional fees for services or time rendered, depending on the client, the survey found.
