What’s keeping advisers awake at night?

By: Victoria Reuvers, Managing Director at Morningstar Investment Management SA

Victoria Reuvers

Given the vast amount of change in the financial advice industry over the years, a recent NMG survey asked advisers to rank what trends they are most worried about when it comes to their business. The primary worry (when viewed from an internal perspective) was technology, followed closely by clients, and then succession planning.  I had the privilege to unpack these concerns with Jaco van Tonder from Ninety-One and Georgina Smith from INN8 Investment Platform, at the Morningstar Investment Conference.

Technology and the financial advisory sector

With the influx of tech providers, conferences, and products in the advisory sphere, have any of these tech solutions truly revolutionised the industry? The panel consensus was that a fundamental issue remains unsolved: data integration. Without a robust foundation for aggregating data, the outputs generated by these tech solutions might not live up to their potential. This deficiency in data integration acts as a bottleneck, holding back the industry.

Platforms play a crucial role in integrating the various tech tools that advisers use. Georgina Smith highlighted that an integrated dashboard of all client information is something that advisers are still seeking. However, the challenge remains: many advisers continue to operate across multiple platforms, leading to a patchwork of integrated and non-integrated tools. There is a clear need for standardisation in data transfer protocols to ensure this seamless integration. 

Shifting the focus to Artificial Intelligence (AI), there are several practical applications of AI in advisory practices, as well as opportunities for leveraging AI to automate tasks that don’t require human intervention to enhance efficiency. AI could be used to transcribe and analyse meetings, saving advisers time and effort. It can also be used to optimise client-adviser interactions by providing insights and suggestions based on client data. However, while AI’s potential is vast, it needs to come pre-packaged with a level of trust.

Ensuring that AI provides factually accurate information is vital, given that it can produce convincing but erroneous results if trained on incorrect data. The absence of standardised checks and verification mechanisms presents a significant challenge that must be addressed for widespread AI adoption in the advisory sector.

Wealth transfer and client preferences 

When looking at the percentage of clients over the age of 65, Van Tonder revealed that over 60% of clients across various product types fall into this age group, indicating a substantial portion of clients with retirement needs. This indicates that sooner or later there will be a large wealth transfer from the current client base to a new generation. 

Historically, advisers primarily served clients within South Africa. However, as beneficiaries began residing abroad, another paradigm has shifted. The challenge now is to ensure the financial conversation continues across borders and generations. While this presents challenges for financial advisers, to prevent wealth from leaving the adviser there is a need for products and strategies to cater to the new client base.

There is a common misconception that this new younger client base prefers AI-driven or robo-advisory services. However, studies indicate that 75% of millennials would seek independent financial advice once they inherit or have accumulated substantial wealth. This challenges the assumption that younger clients have completely different preferences compared to the generations that advisers are currently serving. 

To cater to this younger generation, a common strategy is to match younger advisers with younger clients. However, Van Tonder emphasised establishing independent long-term relationships with both the primary client and the younger beneficiary was more important. This ensures the financial conversation continues seamlessly as wealth transitions between generations.

Another crucial aspect discussed was the gender gap in wealth transfer. Smith spoke to the fact that women are expected to control a significant portion of wealth in the coming years. However, studies reveal that only 7% of advisers have strategies to cater specifically to women’s financial needs. Recognising the differences in preferences of women, such as a preference for ESG (Environmental, Social and Governance) investing and earlier wealth transfer, is essential to bridging this gap. 

Succession planning 

If we look at the next 10 years, we may see a lot of advisers who, despite not planning to retire soon, wish to reduce risk and continue working beyond the age of 65 while safeguarding the legacy they’ve built. To do this, advisers need to have a robust succession plan. There are two ways to achieve this – an internal succession plan that involves having another adviser to hand over your responsibilities, or an external succession plan that would entail selling the business.

Selling a business an adviser has spent years building isn’t easy. Smith emphasised the importance of seeking guidance from individuals who have traversed the same path to better understand potential pitfalls and unintended consequences. Van Tonder pointed out that “succession planning for a firm is almost as complicated as building the business itself”. Adequate time and planning are essential, often requiring five to 10 years. Delaying planning until age 65 can leave advisers in a vulnerable position.

Internal succession planning is a route many advisers consider. However, there are challenges to finding and retaining suitable successors. Hiring individuals fresh out of university may not yield the desired results, as they often leave for better offers. The gap in generational thinking between older advisers and younger successors can also create friction.

Succession planning is not a one-size-fits-all endeavour. Contrary to the common belief that financial advisory is dominated by older professionals, Van Tonder stated there is a balanced distribution of advisers across various age groups. The platform’s (Ninety One) data indicates advisers of different ages.

Our changing industry

This discussion has highlighted the ever-changing dynamics of this industry, as well as the concerns that advisers have regarding these changes. These concerns aren’t new – the evolution of technology was a worry
20 years ago and still seems to be the top concern
among advisers.

While the transformative potential of technology and AI within the industry can be daunting, these advancements may enhance your practices and client relationships. It’s also essential to align with evolving client preferences, including intergenerational financial conversations. In addition, careful consideration and a clear vision can ensure the continuity and success of advisory practices.

Visit the official COVID-19 government website to stay informed: sacoronavirus.co.za