Jenine Garrelick:
Hello, everybody. Thank you for joining Straight Talk. And as you can see, I don't have my normal sidekick, Brad Rutan. Instead, the ladies are in the house because today we are not talking about the markets, we are not talking about interest rates — we are talking about advisor trends. And so I am super excited to introduce Sheridan Culhane, who is a colleague of mine with MFS, Senior Business Development Strategist. I should know that because that department reports to me. But, so tell the audience what you do.
Sheridan Culhane:
So there's about six people on my team, and what we do is we travel across the country, meeting with financial advisors, speaking at conferences, and we interview them to figure out best practices in terms of what's working, what's not working, and how people are effectively growing their business.
Jenine Garrelick:
And you heard I said, "ladies," because we have Ashley Wood from Broadridge, who is a managing principal at Broadridge, on the data and analytics team. So for those who aren't familiar with Broadridge, really quickly, how would you describe your shop?
Ashley Wood:
Perfect. Well, thank you for having me, first of all, I'm super excited to be one of the ladies.
[RI1] At Broadridge we have a broad suite of capabilities that we work with asset managers on. I've had the pleasure with working with firms like MFS and others for over a decade now, but we run the gamut from investor holdings information to product and asset trends and flows information. Today though, we're really going to be focusing in on two key pieces of data that span really the key topic areas for today. Number one, we interview advisors and investors, thousands of advisors and investors every single year. We also analyze actual investment holdings of over or of about 50 million US retail investors. So today what we're going to go through, and really what we'll have a dialogue on, is a combination of qualitative and quantitative, ultimately sourced from those two sets of data.
So where I'd love to start is just some of the macro developments we're seeing. So the focus or one of the key focuses of today is going to be the evolution of the advisor-investor relationship. As many I think listening in can relate and are feeling day to day, investor needs have shifted quite a bit. They're more complex than they ever have been. We have investors who are expecting a more personalized experience, again based on other facets of their life where that is a given.
We are also coming off years of unrelenting bull markets, so in some cases we have unrealistic performance expectations. And finally, investors themselves are just more knowledgeable than ever, right? So that creates a challenge and an opportunity for advisors really in terms of how do you level up and meet those evolved investor needs.
So if we start with the first slide around some of the data that we can bring to bear here, again at Broadridge, this comes from our investor interview data. We spoke to over a thousand retail investors in the US, and we really asked what drives your satisfaction with your advisor relationship? What you can see on the left-hand side here: performance, no surprise, results, you make me money, that's table stakes, that's critical.
What's perhaps more important though, or equally important here, is good communication. So it's just worth noting — performance in a vacuum, it's simply not enough. You need to have that strong communication, proactivity, responsiveness, that's really coming through as equally important. And the final note I'd mention here is around some of the generational differences, and we're going to dig into this in more detail. Really when you look, down market's the wrong word, but if you look down generation if you will, at some of the younger generations — Gen, X, millennials, Gen Z — as you sort of scale down in terms of investor age, actually having an advisor who's knowledgeable and provides good advice jumps into that number one position. So it actually matters more even than investment performance. So that's something critical that, and I think Sheridan has some comments around what we're seeing playing out in reality from the advisor perspective, but really critically important to be knowledgeable, to be able to span a wide variety of topic areas and have expertise at scale.
Jenine Garrelick:
And it's interesting, Ashley, when you look at that slide, the reason, the good communication almost tied to performance, but it's also the number one reason why someone is dissatisfied—
Ashley Wood:
Correct, correct.
Jenine Garrelick:
So that's really amplified to have a strong communication process.
Ashley Wood:
Exactly. So it's one of those things where you might not, well, you do get some extra credit, but you can get significantly dinged or downgraded, if you will, for not meeting the expectation, which as I mentioned, is a higher expectation than we've ever seen in terms of the level of communication and the personalized approach.
Sheridan Culhane:
And that plays out with what I typically see with advisors, which is those that have some sort of communication plan for how they're going to engage their clients' prospects and centers of influence, they tend to drive more business than those who don't. And it reminds me, there was a study that was in the Journal of Financial Planning a couple years ago, and it said that advisors that contact their clients one to two times per month, so 12 to 24 times per year, they get more referrals than those who don't.
Jenine Garrelick:
Really?
Sheridan Culhane:
So in terms of driving assets, getting in front of new people, making sure that an advisor has some sort of plan for it, great way to hit their acquisition and retention goals.
Jenine Garrelick:
And contact doesn't mean physically meet and have that many meetings.
Sheridan Culhane:
Correct. It's all encompassing. This is meetings, this is telephone calls, this is social media posts, letters, calls that you do to people. So it's really all-encompassing of all of those. So while 24 may seem high at first glance, when you actually break it down, it's not that significant.
Jenine Garrelick:
You want to be top of mind.
Sheridan Culhane:
Exactly.
Jenine Garrelick:
Which is pretty challenging knowing what the clients look like. So we have a slide, I mean right now, and I don't think we talk about this enough, but when you look at the average age of an advisor, the average age, and let me clarify, it is a young what, late 50s, early 60s?
Sheridan Culhane:
Yeah.
Jenine Garrelick:
And so those advisors tend to have clients who are about 10 years older themselves. So you have a lot of these clients that are in the older generation, that I guess we call “mature” (I think my father would be happy to be finally called “mature”). But then you have Baby Boomers, Gen X, millennials, Gen Z, and so you were talking about going younger, but there's a lot that's happening. So you have advisors who are in their role, they're not retiring.
Ashley Wood:
Correct.
Jenine Garrelick:
I mean, we keep talking about advisors retiring.
Ashley Wood:
It's the trend that has yet to happen, exactly.
Jenine Garrelick:
Yeah. And their clients are living longer, but then there's this transfer of wealth that's happening. So as an advisor, I have to meet my clients to where they are, but then I have to think about those next generations, and I know we're going to talk about the opportunity in one of those in particular, but it's really challenging when you think about: how are you going to communicate and be front and center?
Sheridan Culhane:
Yeah, so with this, it's like the numbers behind it. So a hundred trillion dollars is moving hands over the next 20 years. So that's the opportunity for advisors.
Jenine Garrelick:
That sounds ridiculous. A hundred trillion dollars—
Sheridan Culhane:
A hundred trillion. But then, so that's the opportunity that's out there. We all know that one. The problem is that 80% of the time when the assets transfer from the parents to the kids, they end up firing the parents’ advisor. So that's the risk. So the way that I see teams effectively handling this is through personalization and customization. So this is making sure that rather than cast a wide net and try to be everything to every investor that's out there, developing a niche market, a target that you're going after that can actually lead to more business for teams.
Ashley Wood:
A hundred percent. And if we pull up the next slide, just to put a little bit of data behind the content needs and really what we're seeing play out across various generations, we asked about this at Broadridge. So first and foremost, if we sort of set the foundation here, when we asked advisors, "Do you feel that the needs and service expectations of the younger generations are fundamentally different from the older generations when they were that same age?" It was a resounding, "Yes." The vast majority, almost a hundred percent of the advisors we spoke with confirmed that that is in fact the case.
The majority of advisors also feel that we are largely not meeting the disparate needs of these younger generations, and that's largely because the asset levels just haven't been there. So just to put a point on that, when you look at millennials as an example, we see at our data at Broadridge, when we look at the actual holdings, we see a median asset account size of about $17,000, whereas the Boomers and Silents are eight to 10 times the size of that.
Gen X is an interesting cohort, and we're going to dig into that in more detail. This is certainly the fastest-growing segment we see from an age demographic perspective. The asset share among this group, just in the last five years, has increased from 20%, all the way up to 27-28%. That said, the needs are becoming more complex, they're using more products, they need advice in more areas than ever before.
So when we look at this slide, just a couple things to point out. Number one, if you look at Gen X, and then even more so Gen Z, millennials, you'll see that the average number of topic areas that they tell us they need advice from their financial advisor on continues to increase. So you have to be nimble as an advisor, right? You have to be able to navigate more topics, more client pain points, than ever before.
The other one key point, if you take nothing else from this slide, would be that 77% circled on the top of the chart. When we look at Gen X specifically, as I mentioned, huge asset growth in play, to Sheridan's point, impending wealth transfer is only going to amplify that. Currently, 77% of Gen X investors who work with an advisor today feel that they are not getting enough advice or they're underserved when it comes to tax-optimized investing strategies. So that's a huge opportunity to be aware of and to focus on from a value prop and a narrative perspective.
Jenine Garrelick:
So, Gabby, can you bring that slide back up real quick? So if I'm reading this and listening to you, because I think I've felt this for a while. So I am a Gen Xer, and what you are saying is that's the fastest growing segment?
Ashley Wood:
Correct.
Jenine Garrelick:
Which makes sense. And I'm not saying that this is myself. However, it's the fastest-growing segment I would say for two reasons. Number one, we're entering our peak earning years. Just a shout-out to my boss, I hope I'm not peaked right yet of my earning years. But anyways, so we're entering into our top earning years, but we need the advice because the other thing — I've been having the conversation with my husband — is how much longer. We need that advice because we're going to be entering retirement maybe in 10 years, 12 years. So this is the time to form those relationships. But I feel like we get overlooked because everyone talks about millennials. It's millennials, millennials, millennials, because they're the biggest generation. I'm sounding like a Jan Brady Brady Bunch episode of Marcia and Cindy, or what have you. But I mean that's the generation to go after.
Sheridan Culhane:
I'm a millennial, so I can speak to this one. But the thing, the way that I see advisors and teams successfully going after this market, because as you said, average account is what? $17,000?[RI2]
Ashley Wood:
$17,000.
Sheridan Culhane:
So it's through working with their current clients and then using that to tap into the next generation.
Jenine Garrelick:
$17,000 is the average account for the millennial?
Ashley Wood:
Millennial, and Gen Z is $3,000.
Jenine Garrelick:
... but not Gen X?
Ashley Wood:
Correct. Gen X is closer to $65,000-$70,000, just to put a point on it, and growing at a much more precipitous rate.
Jenine Garrelick:
Faster.
Ashley Wood:
Exactly.
Jenine Garrelick:
Yep. So you are saying use that existing client …
Sheridan Culhane:
To go after them, include them in family meetings that you do, include them in estate planning conversations, CC them on marketing initiatives, invite them to events. As advisors do this with that next generation, they're showing those kids how they help their parents work towards and accomplish their goals, but in doing so, they're also just proving how and why they're such an amazing advisor in general. So done consistently over time, that's been shown to actually lead to retaining those assets and clients.
Jenine Garrelick:
It's smart. And I always do a shameless plug, so I am going to do a shameless plug, but our team — don't we have a workshop on how to host a family meeting?
Sheridan Culhane:
We do. We do have that one indeed.
Jenine Garrelick:
Wow, so we can just help these advisors in so many ways.
Sheridan Culhane:
Yeah, and that's not —
Jenine Garrelick:
So hit us up for that.
Sheridan Culhane:
... stuff that we came up with, that's best practices from advisors and teams that have actually hosted these meetings. So it's how you get people interested in doing this, because guess what: people don't like talking about money with their family. So it's how do you overcome that? And then it's, from a process standpoint, what do you need to do before the meeting, during the meeting, after the meeting? And then finally, what are those big things that you want to avoid during it in order to make sure that the meeting is successful and productive.
Jenine Garrelick:
We've been doing a lot of those. Well, I said, "we"; she and the team. That's great. That's great. What's our next slide?
Ashley Wood:
So when we come back to number one, having those conversations, the contact frequency element, but number two, making sure the topics are meaningful, and they're really hitting the needs and the common pain points. All roads lead back to tax efficiency and tax optimization. We're seeing this play out from an investor needs standpoint, we are certainly seeing this play out from a product allocation standpoint, which is what we're looking at on this slide. So this is from the advisor point of view, and this is intent to allocate client dollars. This aligns very closely. We've done sort of backward-looking, back testing on this. This aligns very closely to what advisors actually end up doing. So they do what they say they're going to do, so to speak. When you look at this chart though, what we're asking is, “where do you expect to increase or decrease your client dollars in the next couple of years?”
As you can see, active ETFs — probably no surprise there — really rule the day. 50% of advisors tell us they plan to continue increasing allocation into these vehicles. We're seeing a relatively nascent space there, but rapidly growing. So we project we're going to be at over one trillion in retail assets by 2027, which is right around the corner at this point.
We then have SMAs in the number two position. So again, that combination of active ETFs and SMAs sitting one and two really underscores that need for tax efficiency and tax-optimized advice. Those are outside of, to a lesser extent, costs for active ETFs, really tax efficiency comes to the forefront in terms of adoption or criteria to use those vehicles. On the flip side, just worth noting, where is some of the pressure? The good news, I think for everyone listening in today, is collectively there's some bullishness around pulling cash off the sidelines, moving into a little bit more of a risk-on position.
Active mutual funds do continue to be under pressure here. We see almost 30% of advisors telling us they intend to decrease client dollars into those vehicles, and really that's sort of the counterpoint to the active ETF conviction and bullishness. Finally, I'd be hard-pressed to show this slide without at least making a few comments around the private space, the alternative space. You can see semi-liquid and illiquid all sitting kind of right in the middle of the pack there.
Certainly we do project some growth here, although it's more tempered growth relative to SMAs and active ETFs. There's some acute hurdles here that revolve around advisor and investor education, as well as implementation and administration hurdles. So while this is a growth area, there's a high degree of intentionality needed there just to secure the path forward because of some of those challenges to adoption.
Jenine Garrelick:
So I would be remiss if I did not mention the fact that you had a slide up there that talked about mutual funds going down and active ETFs and SMAs going up. The good news is we continue to roll out many, many active ETF strategies and SMA strategies. So make sure you open up those emails from us to see what's coming, because we continue to launch—
Ashley Wood:
And I would just add that no matter how we slice that chart, because we sometimes get the question of, "Oh, well, is that the sort of longer tail, smaller advisor presence?" No. No matter how you slice that chart, whether it's by channel, by asset level, active ETFs far and away come out number one in terms of product conviction on every slice of demographics you can think about there. So it's a pure high conviction space. MFS and others are obviously positioning against that, so really critical to have that tax-optimized active ETF narrative down.
Jenine Garrelick:
Makes sense.
Ashley Wood:
And at the end of the day, this seems to be all about the client, right? They want those tax-optimized vehicles. So that's really the route that advisors are going with it. And when you kind of think about it from a practice management standpoint, how can they better their business to capitalize on that opportunity? What I tend to see teams doing is: they are coming up with ideal client profiles, so they really know sort of who is that target market that they're serving, and then they're also making sure that they have a defined value proposition.
We provide customized wealth management solutions and build portfolios to their long-term goals. That's table stakes, that's sort of what you need to have. So teams that are doing the work right now to figure out who their ideal client is, what their value proposition is, how it's different and better from the competition — those teams will really be the winners long term.
Jenine Garrelick:
Yep, I'm hearing the word “teams” a lot. So I think that segues into our other slide.
Ashley Wood:
It does. And so this is kind of the culmination, I would argue, of everything we've been talking about so far in this conversation. We've talked about the complexity of investor needs, we've talked about the increased complexity and personalization, to some extent, of the product landscape. And we've talked about the increased pressure that's putting on you all, the advisors, to expand your toolkits and to “level up” to adapt and keep up with some of these trends and changing behavior.
One of the primary ways that we're seeing that play out is through advisor teaming. We continue to see about 60% of advisors today are part of teams. An additional 15% tell us they are going to team in the next year. So you do the math on that, three-quarters of advisors a year from now will be joining or have created a team. Additionally, I won't go through every stat on the page here, but you can see that the size and complexity of the teams continues to increase: more states, more people, particularly that 5+ segment. So more than five people on an individual team, that is one of the fastest growing segments.
Sheridan Culhane:
And to take that one step further, it's not just five people, it's five advisors. So the size with two advisors, three advisors, yes, that's growing, but not nearly as fast as teams with five or more advisors.
Jenine Garrelick:
And you don't necessarily mean that team looks like they are all in the same office.
Ashley Wood:
No, increasingly that is not the case at all. And the reason why is you have to go to the center of this, which is why are advisors teaming in the first place? There's really two key reasons. One is succession planning. We can talk about that. As we've talked about, we have a mature — not aging — a mature advisor population here, but we have folks aren't really retiring. And when we asked, 50% of advisors told us they don't have a succession plan in place. Teaming is one of the key ways that advisors are looking to mitigate that.
The second key piece is expertise and specialized advice. So whether you're sitting in Massachusetts or California or Michigan, if you are an expert in a particular topic area and you fit well in a team, that has really been, actually the premium skill set that people are focusing on with teaming as opposed to gender or geographic location, which did come up, but to a much lesser extent relative to expertise and succession planning.
Jenine Garrelick:
And that sounds like it plays into what you were saying before, that niche client and really specializing to go after them.
Sheridan Culhane:
Completely. And in terms of what advisors are doing, designations is really a simple way to broadcast this and communicate it to clients and prospects. If they see an advisor's name with a comment, some letters after it, you immediately know that they have that knowledge. So things like the CFP, the CFA, the CMA, the exit planning one — the CEPA — there's the divorce one, the CDFA, those are really, really on. So many more people are pursuing those, and that's a trend that I expect to continue.
Jenine Garrelick:
Yeah, there's a lot of initials out there.
Sheridan Culhane:
But the other side of this is that as teams are getting bigger and growing and more personalities coming together, communication is really the key. One of the biggest predictors for if a team is going to be successful or not, is how does information move among the team? Is everybody participating in those conversations? That is more important than skills, intelligence, talent. It's really, are you effectively communicating with one another? So that's really the premium that I'd encourage advisors to focus on.
Jenine Garrelick:
And I know that's been a hot topic we've talked a lot about, because a lot of these teams are forming very quickly. But to your point, the communication, I think our good friend Justin Hansen called it accidental leadership. One day you just wake up and all of a sudden you're responsible for not just yourself and your practice, but really this mini organization, and dealing with interviewing and hiring and roles and responsibilities and that can definitely be a challenge. Would you agree, Sheridan?
Sheridan Culhane:
I would. I would.
Jenine Garrelick:
Maybe that's why the plug of—
Sheridan Culhane:
You're just setting me up as this shameless promoter. But yes, we have a new teaming presentation that's going to be rolling out—
Jenine Garrelick:
Someone needs to be.
Sheridan Culhane:
... very soon. It's called “Lessons From High-Performing Teams,” and it's all the best tips and practices in terms of what's working for growing your business, operating more efficiently and really leading your team to succeed not only this year, but in the many years to come.
Jenine Garrelick:
I had to do it. Listen, we're not retiring anytime soon. We got to meet the needs of everybody out there. It's a challenge. This is great. And I know that we are getting to time. This was just nice. It's nice to be with the ladies. I mean, I do miss you, Brad. I do. I know that you would've had a slide and a chart and what have you, but we'll get you back soon. But before I wrap it up, do you have any closing remarks you would like to leave the viewers with?
Ashley Wood:
Yeah, so I'll start, and again, we've covered a lot of ground here, but if we were to really kind of boil things down, I'll go with two. I think long lists are too overwhelming. But if I go with two kind of key themes, this actually is akin to the advice that I often give asset managers, frankly, which is clarity and articulation of value proposition. Really have a good understanding and definition of what's your specialized niche area, where are you best served? Defining your ideal client and really making sure you demonstrate through actions, through service, the clarity of that value proposition. The second piece, I would actually harken back to the very first slide that we covered, which is just performance is table stakes. You absolutely need to have it, but it's not going to win the day for you. So really that expectation and aligning around exceptional, personalized, and tailored service for the individual investor is going to separate, I would argue, the winners from the losers.
Jenine Garrelick:
Makes sense.
Sheridan Culhane:
Yeah. My takeaway is communication. So both for how advisors are effectively communicating to their clients, one contact per month. If they're looking for a goal, that's a great place to start. And then communication with their team. If you get that sorted out, it's going to kind of figure out a lot of the other areas.
Jenine Garrelick:
I love that. I love that. So speaking of communication, here's my one takeaway as the video team and my good friend Luke keeps telling me to move my hair. I need a haircut. I need a haircut, because it was obviously hitting the microphone too much. But if you look in your console, we have three pieces we highlighted. One is Market Pulse, you're all familiar with the Market Pulse, and that is what Brad Rutan and his team puts out of the market commentary. We have Advisor Pulse, which actually ties into a lot what we're talking about. That always highlights the trends that we're hearing from when we go out and do our client meetings.
And then lastly, and I'm so glad Ashley and Sheridan were both here, but that I got to introduce you to Sheridan, because our Advisor Edge® program encompasses everything with our value add of ways that we can help your practice, and help you grow, get clients, retain clients, communicate with clients, all sorts of stuff.
Sheridan Culhane:
Educate clients.
Jenine Garrelick:
Educate clients. So please tap into that, and if you have any questions, as you know, we want to be your trusted partner, please reach out to us. We're in this journey together. It's just not getting easier, but it's a huge opportunity. How much money is out there?
Sheridan Culhane:
Over a hundred trillion.
Jenine Garrelick:
A hundred trillion.
Sheridan Culhane:
I believe that 124 is the exact one.
Jenine Garrelick:
Wow. Usually we round up — almost 130 trillion out there. All right, everybody, thanks for joining us. Have a good day. We appreciate your time.
Disclosure:
The views expressed in this presentation are those of the presenter. These views should not be relied upon as investment advice, as securities recommendations, or as an indication of trading intent on behalf of any other MFS investment product. MFS does not provide legal, tax, or accounting advice. Clients of MFS should obtain their own independent tax and legal advice based on their particular circumstances.
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