For many years, the prevailing advisory remuneration model has led financial advisors to look at just one variable – investable assets – when deciding whether or not to work with a client. One widespread truism about human behavior is that what gets rewarded gets done and inasmuch as advisors have been rewarded with a percentage of assets under management, AUM has been the North Star for determining whether or not to work with a client.

But the simplicity of this calculus has historically caused advisors to overlook those who might soon become rich or those who would be a good cultural fit for the ideals of a practice. After all, a wealthy client that’s a pain to work with may not be so enticing after a few hotheaded visits to the office. The “AUM as sole determinant” model has also excluded groups not stereotypically thought of as having wealth, despite clear evidence to the contrary. Consider the following stats from The Center for Outcomes about two such groups – women and young people.

  • Women control 2/3 of the total wealth in the US[1]
  • Women are the primary breadwinners in 40% of households[2]

…and yet…

  • More than half (58%) of women defer to their spouse to manage critical, long-term decisions[3]
  • As a result, 70% of women fire their advisor within a year of their husband’s passing[4]

The numbers don’t look much better for young people, either. Consider:

  • Young people are open to working with their parents’ financial advisors (55 percent), but only 20 percent have met them[5]
  • Just 10% of RIA clients are under 40[6]
  • 86% of children will fire their parents’ advisor[7]
  • 2/3 of those making over $150,000 have no advisor[8]

Clearly, the investable assets model is incomplete, leading us to ignore cultural considerations as well as opportunities for future wealth accumulation. But if AUM isn’t the answer, what is? Dr. Sarah Stanley Fallaw has a suggestion: behavior. Dr. Fallaw, CEO of Data Points, sets forth six behaviors that predict future wealth creation in her fantastic new book, The Next Millionaire Next Door (2018):

Confidence – “Demonstration of confidence and collaboration in financial management, investing and household leadership.”

Frugality – “Financial behaviors associated with consistent saving, dedicated commitment to lower spending and rigorous adherence to a budget.”

Responsibility – “Acceptance of the role of actions, abilities, and experiences in financial outcomes. Belief that luck plays a small part in achievement.”

Social Indifference – “Spending and saving behaviors that reflect immunity to social pressure to purchase the latest in consumer and/or luxury goods, clothing and cars.”

Focus – “Demonstration of the ability to focus on detailed tasks through completion without becoming distracted.”

Planning – “Behaviors related to goal-setting, planning, and anticipating future needs.”

An exclusive focus on dollars and cents has led the advisor of yesteryear to size up a client simply on how much (or how little) money they have today. The advisor of the future will cast aside this outdated approach, relying instead on an understanding that today’s behavioral realities are likely to lead to tomorrow’s financial success. This behavioral approach reflects a more holistic understanding of what true wealth means, allows the advisor to serve historically underserved populations and ensures a tighter fit between client personality and firm culture. It’s time to stop asking, “What are you worth?” And start asking, “What are you like?”

The views expressed are those of Brinker Capital and are not intended as investment advice or recommendation. For informational purposes only. Brinker Capital, Inc., a registered investment advisor.

Sources:
[1] BMO Wealth Institute, “Financial concerns of women” (2015).
[2] BMO Wealth Institute, “Financial concerns of women” (2015).
[3] UBS: https://www.ubs.com/global/en/ubs-news/r-news-display-ndp/en-20190306-study-reveals-multi-generational-problem.html
[4] Smart Women Finish Rich: 9 Steps to achieving financial security and funding your dreams. Bach (2002).
[5] Broadridge: https://www.broadridge.com/press-release/2018/millennials-most-confident-in-savings-accounts
[6] https://www.cnbc.com/2015/01/29/millennial-millionaires-to-be-neglected-by-advisors-study.html
[7] https://www.investmentnews.com/article/20121028/REG/310289970
[8] https://www.cnbc.com/2015/01/29/millennial-millionaires-to-be-neglected-by-advisors-study.html

Post author: Dr. Daniel Crosby