Delivering advice that spans the generations

7 March 2019

There has been a significant amount of change in the advice profession over the past 10 years.

However, that pace of change is only set to accelerate over the next 10 years to match both the challenges that financial advisers need to address but also the massive opportunity that is there for those who learn to adapt.

The requirements of Mifid II in terms of disclosure of annual fees and communicating movements in investment valuations is already causing some unease among some advisers and their clients.

At the same time, the change in demographics and wealth distribution between generations over the next 20 years is well documented.

Various studies indicate there will be somewhere between £5trn and £20trn passed between generations over that period. This intergenerational wealth transfer is a massive opportunity for financial planners and the wider financial services industry.

There will be a huge increase in the proportion of the population who require advice about inherited wealth at a time when the number of advisers in the profession is, at best, static.

According to BlackRock, in 2017 69 per cent of financial planners turned away new business. Much of this was due to insufficient planning resources.

Technology and intergenerational planning

Technology and its use will need to fill much of this capacity gap. We see this as being three-fold:

  • Making automated advice available to more people;
  • Providing enabling technology to advisers to allow them to provide engaging advice, often dovetailing into automated advice; and
  • Allowing more paraplanners and support teams to take a more integral role in the planning process itself, letting financial planners focus on engagement, business development and managing clients’ needs. In this way, firms can take on more clients but still maintain a quality planning service.

The intergenerational transfer of wealth is often focused on those pre- and post-retirement.

But planners increasingly need to include the next generation in these conversations too. This process of transferring wealth is more likely to go smoothly if both current and future generations are involved in and understand the context of the decisions that need to be made.

What is more, the trust placed in the adviser by parents and grandparents can easily be broken with the younger generation if the latter do not fully understand the thought processes that went into the planning process.

Intergenerational wealth planning can be complicated and needs considerable thought. Clients need guidance on various, and often contradicting, factors such as:

  • How much money should we give?
  • When should we give it?
  • What protections should we place around that transfer of wealth?
  • If we do this, will we have enough left if disaster strikes?
  • What assets should we pass down?
  • Who in the next generation should we make the transfer to?

In some cases it is straightforward, but it will usually require a balance (and often a trade-off) of planning involving:

  • Pensions and retirement
  • Tax planning
  • Gifts and trusts
  • Investment planning
  • Protection

The emerging role of cash flow modelling

All these factors – the need for technology, the advice gap and the complexity of intergenerational planning – have led to an increase in the use of cash flow modelling applications among financial planners.

The planning between transferring assets to the next generation and answering these questions of “how, when, what if and who” not only has short-term implications.

Potentially, the impact of these decisions could be felt far into the future, by the whole family and beyond. Cash flow modelling has become a key tool in supporting planners in taking clients through these journeys.

Clients are after empowerment and understanding. They want to avoid financial mistakes and ultimately make sure they and their family have sufficient funds available for the future.

Advisers need to be able to engage clients, make sure the process is efficient and, ultimately, ensure their clients know and understand the process. Clients should feel they are part of financial planning rather than having an exercise or decision imposed on them.

In discussions with financial planners, they are demanding their cash flow modelling systems include the following as a minimum:

  • It must be a unified tool that can consider investments, pensions, protection and tax concurrently in one single tool. There is so much trade-off between all aspects of planning that these can’t be considered piecemeal.
  • Tax is critical – the application must show the income, capital gains and inheritance tax implications of any course of action as ultimately this can impact on the return to the family.
  • Client engagement is crucial for them to understand the options and not feel overwhelmed by what can be a stressful exercise. The application must be visual and demonstrate clearly the implications of the various options that might be available.

Though there will always be challenges in the advice sector, the opportunities are massive.

Using appropriate technologies in the right way will allow firms to take on more intergenerational planning business. In turn, this should lead to more longer term, valuable client relationships.

This article was written by i4C Technolgy CEO Mark Harman, for the Nucleus Illuminate blog