How to retain your clients’ kids

Relationships with second-generation clients will soon become vital. Close to $1 trillion will transfer from older to younger generations in the next decade, says Grant Shorten, director of strategic insights at Renaissance Investments. Of those transfers, an Investor Economics study reports that 85% will end up in the hands of adult children over age 34. But, a 2011 Bank of America study finds only 2% of recipients are expected to keep those funds with their parents’ advisor.

To increase the chance of keeping transferred funds in your book of business, connect with clients’ kids prior to the wealth transfer phase.

Otherwise, your first meeting with the children could be when they’re grieving, says Sajjad Hussain, vice-president, private wealth counsellor with Fiduciary Trust Canada. “The advisor and the child need to build a relationship where it’s not going to be awkward or odd dealing with that issue.”

Connecting with adult children

Shorten suggests first analyzing your book to determine which assets would be most damaging to lose. “An advisor might have 25% to 35% of their client households in the oldest generation. But those households might account for 60% or more of their AUM because they’re the wealthier clients,” says Shorten.

Then, make a list of the clients you want to prioritize. “The best candidates are those aging clients who have substantial assets with the advisor now, or who have a substantial personal net worth—or ideally a combination of the two,” he says.

Start the process by inviting the client in to discuss her estate plan. During that conversation, stress the importance of educating executors, who are often the client’s children, on basic financial concepts so they can fulfill their responsibilities.

The goal is to have your client bring her children in to meet you, says Shorten. To achieve this, you’ll need to instill a sense of urgency, so he recommends asking three questions:

• Have your children served as executors before?
• Do any of them have backgrounds in accounting or bookkeeping?
• Do any of them have backgrounds in finance?

“Then, explain the tremendous amount of complexity that comes with the role,” he says, and offer to educate her children at a family meeting. “Recommended guests at this meeting [are] executors, named alternates or co-executors, and power of attorney agents.”

Also, tell the client that the meeting will provide greater clarity and comfort about her legacy to the whole family.

“This is the advisor’s chance to make a lasting impression and create [an] enduring rapport with attendees,” says Shorten.

Start the meeting by asking all family members to identify what they’re comfortable and uncomfortable with when it comes to estate planning. Then, walk them through how your client has structured her plan.

Be sure to pause and discuss confusing concepts so you can educate the family. For instance, you can define estate planning, and explain the duties of an executor and power of attorney.

In your closing comments, let the family know you will follow up by phone or email on the topics discussed, and emphasize the value of their business. This will position you as an advisor who wants to work with the whole family, says Shorten.

He says this strategy has been successful in the past. “I worked with an advisor a couple years ago who had an elderly, ultra-high-net-worth client [who] was close to 90.” By holding similar family meetings, “he was able to turn the beneficiaries into clients and keep almost all the family’s $20 million in investable assets.”

In addition to offering more family meetings, Shorten suggests sending a series of educational emails, filming a few instructional webinars or recording podcasts to distribute to the family (either tailored to them, or generic ones you can use with multiple families). Topics could include asset allocation, the nature of risk and return, or the importance of early planning.

Another strategy to make the initial connection, says Sajjad Hussain, is suggesting the parent and child combine their assets to receive a discounted fee.

The assets would be separate, and private information wouldn’t be shared between family members, but the funds would be bundled. “A lot of the time, children want to be independent,” Hussain says. “But if there’s an incentive to pay a lot less based on what their parents have accumulated, there’s an incentive for that child to be using the same advisor.”

But, he warns, “It can’t just be about managing their assets. Let the parents know you’re more than happy to meet with the child to educate [him] about financial planning.”

And, tell them even small amounts are worthwhile. “Many times, parents feel [if] the child has $10,000 saved, it’s too little for that advisor, and it’s not. The advisor [should] be happy to [invest that] $10,000 because it’s not about the money; it’s about the future relationship.”

If the parents agree, invite the child to a meeting. “You want to be able to ask proper [KYC] questions about their knowledge about investments, what they have accumulated to this point, and what their investment goals are,” Hussain says. With the parents’ consent, you can then recommend bundling assets.

Next, suggest a follow-up session. “Keep [meetings] part of the routine; hopefully that will be enough to build a continuous relationship with that child.”

Connecting with young kids

While it’s important to build rapport with adult children, making a connection with younger kids can be beneficial for future business, says Ty Cooke, vice-president and portfolio manager with Orlic Harding Cooke Wealth Management.

Cooke has helped children younger than 10, as well as teenagers and those in their early twenties. “If the second generation has seen what successes or what experiences their parents have had with their advisor, the children feel a lot more comfortable.” His strategy to get to know the second generation starts with asking their parents about them. “Every parent likes to talk about their children. It’s a natural progression from learning more about the clients’ children, and what they’re doing, to being able to help them.”

He recommends finding common ground based on the child’s age. For example, Cooke’s colleague and a client both have daughters who are about 10 years old. “They were talking about something that was completely off topic, and then they realized [the two girls] liked the same things, and that the client’s daughter had an account [made up of] gifts from grandparents or birthdays.

“It progressed to saying, ‘Are there certain companies she’d like to invest in?’ ‘Yes, she likes Lululemon and she likes Disney.’ We opened an informal trust account.” Since the child is a minor, the account is in her mother’s name. The mother also signs paperwork, though the account is tracked using the daughter’s SIN.

Cooke’s team set up a formal meeting in the boardroom with the 10-year-old and her parents to discuss the trust’s asset allocation. Choices were based fully on the daughter’s interests, with input from Cooke. “We try to use terminology that [the daughter] would understand and clarify it all the time,” says Cooke. For instance, instead of using words like “standard deviation” and “volatility,” Cooke would use “risk” because she’d understand what that meant. He’d also use “down” and “up” versus “increases” and “decreases.”

And, he encouraged the child to ask questions. To boost her comprehension, he created charts of her favourite companies. “A lot of investors, regardless of age, are visual. We can put up the chart of what the company looked like and you [can] see where it went up and down,” he says.

In this case, the daughter and her parents pay commission on a trade-by-trade basis, but Cooke says every family will have a different compensation scheme, depending on total assets invested.

He and his team keep in regular communication with young clients through phone and email. “We know how electronically minded all children are these days.”

But Cooke cautions that, if the child is under 18, the parent must also be present for the conversation—whether on speakerphone, another line or in person. He says conference call updates may last 15 minutes, while in-person account overviews can last between 30 and 90 minutes, depending on the child’s age and the topics covered.

During those conversations, Cooke will update the child on the progress of the account. “We perform a current snapshot picture. You can go through it line by line with them to put a little more colour behind it.” Though the report will include details such as dividend earnings, earnings per share and current share value, he finds most children—and adults—focus on the bottom line.

He estimates between 10% and 15% of his book of business is second- and third-generation clients. “Intergenerational wealth transfer is going to be a big part of [work done by] investment advisory teams going forward,” he says. “Make sure you have a strong relationship with families from top to bottom.”

Consider testamentary trusts

If you wait until the estate planning stage to make a connection with a client’s kids, you’ll have less time to build a lasting relationship. So, you’ll need a strategy to quickly establish yourself as the family’s advisor.

Sajjad Hussain, vice-president, private wealth counsellor with Fiduciary Trust Canada, says one way to do this is by suggesting the parents create a testamentary trust for the kids.

With such a trust, “if the parents want to be able to control their assets from the grave and don’t know their children’s spouses or future spouses yet, in case of [a child’s] marriage breakdown, those assets don’t leave the family line.” A trust is also beneficial “if their child has a spending problem or disabilities, and they want to guideline when the child can have access to this money.”

Once you’ve determined with the client that a testamentary trust fits her needs, you can employ the next step of Hussain’s strategy.

“When the trust structure is recommended, those assets will have to be managed by somebody; we [suggest putting] the advisor’s name in the will so they can be the advisor for the trust.”

While the children aren’t yet your clients, they are the beneficiaries of the trust that you’ll manage. “The advisor now has the ability to meet with the children on an annual basis. You give them an overview of the assets, but, more importantly, the advisor is now able to build a relationship with the [children] and have a chance [to be the] children’s advisor,” Hussain says.

Sarah Cunningham-Scharf is a Toronto-based financial writer.