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Why advisors need to change the way they operate

With money now shifting hands between numerous generations, you’ll need to focus on more than just investing your clients’ money.

By: VIKRAM BARHAT

Date: April 22,2015

There is a large demographic shift taking place in Canada. People born in the 1990s are now entering the work force, boomers are starting to retire, and their elderly parents are beginning to pass away, leaving money to their children and grandchildren.

The shift has implications for financial advisors, of whom the vast majority have offered investment advice only to the boomer set, which has seen its incomes rise steadily over the past couple of decades. Now that group is starting to draw down its savings, but requires advice on where to put any inheritance coming its way.

The new demographic landscape is reshaping the role of the advisor and the needs of the client like never before. Increasingly, financial advice is becoming about managing family finances and intergenerational flows of wealth.

Canadian-based advisors have to address the needs of three different sets of clients, says Peter Drake, vice-president of retirement and economic research at Fidelity Investments.

“First are clients who are in retirement, primarily concerned about generating retirement income; the other is a set of people very near retirement, who really need to get serious about retirement planning,” he says. “Then, there are the millennials, or Gen Y, who are starting their careers, some with families, and who have a very long investment horizon.”

The millennials, he notes, face challenges such as high housing prices, and require advice on how to allocate resources as opposed to putting money away for retirement.

Plan for a partnership

The diverse needs of these groupings underscore the critical push for the advisor-client relationship to evolve into a partnership, says Mr. Drake. Advisors who are working to build deeper engagement through more frequent and wide-ranging conversations have the best chances for long-term survival.

“People in retirement are going to need more time from their advisors with regards to generating retirement income in a sustainable way,” he explains. “The advisor needs to know the individual circumstances of the client.”

Make room for millennials

The popular perception that millennials are living in their parents’ basements playing video games all day is inaccurate.

“Obviously, they’re not making as much as the boomers,” says Mr. Drake, “but advisors need to understand that the economic circumstance of the millennials is much better than pop sociology would have you believe.”

Their starting wages may be low, he notes, “but they will be a lot better down the road as Canada’s working population shrinks.”

He asserts that advisors must be patient and reach out to this untapped segment.

Born between the early 1980s and 2000, this smartphone-wielding generation is accessing large amounts of data across multiple digital platforms and is finding traditional financial frameworks too restrictive.

“Advisors need to understand that societal values have changed and they must tune into the millennial way of thinking,” says Mr. Drake. “Technology is central to their lives and advisors have to connect with them that way.”

Planning for now and later

Simon Tanner, an advisor at Dynamic Planning Partners in Vancouver, says financial advice has moved beyond simply accumulating assets and building net worth to planning the distribution of assets both during and after their clients’ lifetimes.

“Boomers are beginning to receive inheritances and prepare for intergenerational wealth transfer with particular focus on tax efficiency in the distribution of assets,” he says. “While boomers want to ensure they have a comfortable retirement, they are also looking at their kids and grandkids and how they can help them with things like housing and education expenses.”

Some clients are now requesting that advisors work with their children to ensure “what is being passed down is well planned out for generational security so that future inheritances aren't thrown to the wind,” notes Mr. Tanner.

Mr. Drake stresses that advisors should consider the fact there will be two intergenerational wealth transfers taking place in most circumstances.

“People tend to think mostly about what happens when the last spouse goes, but there’s not been enough thinking about what happens between the time the first spouse goes and the second spouse dies,” he says. “Advisors need to be conscious that the size of the first wealth transfer may be bigger than the second.”

One way to increase the chances of retaining assets when the second spouse dies is to get the client’s family involved, Mr. Drake explains.

“Encourage them to talk among themselves so each generation understands the wishes and expectations of the other.”

If there are going to be any inheritance shocks, he adds, it’s far better to have that conversation early.

Accounting for longer life

Zena Amundsen, an advisor at Tyler & Associates in Regina, points to another key demographic factor: longevity.

“Our baby boomers will live longer and we need to ensure that their savings and investments will last their lifetime,” she says. “We also need to take into consideration that, on average, women live longer than men. The investment strategy of the past will need to be updated and modernized to realize what was once considered ‘safe’ has changed.”

Financial planning for this demographic, she adds, must incorporate the cost of long-term care, and plans should project out further than age 90.

“Long-term health care planning has now become essential,” says Ms. Amundsen. “In some cases, adult children are picking up the slack by caring for aging parents. I see it in my own practice when clients are exhausted and deciding to retire earlier to help care for a parent.”

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