Have fee minimums left young investors at risk?

Segmentation has underscored much of this industry’s evolution from a distribution business to a service business. Fee compression, margin pressure, and the widening scope of work entailed in ‘holistic wealth management’ have all lent themselves to a focus on higher net worth clients. The calculus is simple enough, by limiting the client pool to those with more assets, advisors can spend the time required to plan for people with greater financial complexity. This logic has reached a point where some dealers will set account minimums to ensure that all their advisors focus on the segment of the market that is deemed to be the most valuable. Adam Elliott, however, sees some unintended consequences as a result of those firm-level minimums.

Elliott is the President & CEO of iA Private Wealth. In a post on his LinkedIn a few weeks ago, he reacted to what many of Canada’s securities commissions have cited as a worrying rise in ‘finfluencers’  on social media and the ways that unregulated financial information passing as ‘advice’ can shape the investment decisions of many young Canadians. Elliott’s view is that firms’ decision to limit the account size of the clients they serve has prevented many young Canadians from accessing credible financial advisors at an early stage in their lives. That, in turn, has contributed to the growing problem of financial misinformation among young Canadians.

“A lot of firms will make decisions to discourage smaller accounts, they'll say, unless an account generates X amount of revenue, that revenue does not go to the grid… [Advisors] can work with those people that you want, they’re not going to get any compensation for working those because you're trying to discourage certain behaviour. From my perspective, that is very short term explicable but long term it’s a huge mistake,” Elliott says. “If you want to build an advisory practice that is sustainable in the long=term, you would be naive to think that a client or a potential client who's 20 or 30 today is suddenly going to be interested in working with their parents advisor when they're in their 40s, or they inherit money.”

Elliott acknowledges that a short-term view inherently incentivizes advisors to focus on older, wealthier clients at the expense of the next generation. He says, though, that rather than putting a firmwide account size limit, iA Private Wealth lets individual advisory practices decide. Moreover, he says that the trend towards building larger advisory teams can help address some of these issues. More junior associate advisors can spend time on younger clients with less financial complexity while senior advisors can stay focused on that older, wealthier generation.

Encouraging teams, Elliott says, is part of how his firm is encouraging advisors to build relationships with the next generations of client families. Rather than just assuming that a young person can use a discount brokerage app until they get wealthy enough to need an advisor, they see relationship building at an early stage in clients’ lives as key to capturing both the intergenerational wealth transfer and the eventual wealth these younger clients should build for themselves in their careers.

In working towards that goal, Elliott explains that his firm also encourages advisors to go and meet younger clients where they are, in the same place where they are being driven towards finfluencers by algorithms: social media. They’ve prioritized allowing advisors to post on TikTok, YouTube, Facebook, Instagram, and LinkedIn while staying onside with compliance. Moreover, they’re encouraging content that goes beyond just the ‘article of the week’ thought leadership syndication.

“We've made a concerted effort here to allow our advisors to be more creative, to basically play in that same field that the unregulated influencers are, while ensuring that their content is approved, that they're not going off the rails,” Elliott says.

Some advisors, he explains, have said that in competing for the minds of this new generation of clients they’re ‘fighting with one hand tied behind their back.’ Younger Canadians, Elliott notes, are at serious risk of falling victim to scams or misinformation peddled on social media. He notes, for example, that investors who follow influencers trend to trade significantly more than investors who don’t, which can lead to underperformance. There may also be misconceptions about the risks associated with crypto-assets, because of the share of voice that category occupies in online investing discourse. Equipping advisors to push back on some of these ideas before they become set in young investors’ minds, Elliott argues, is an important part of this industry’s future.

“A great advisory practice is going to make sure that they got clients of all different ages. If your entire practice is made up of clients in their 70s and 80s, you might have a profitable business today, but you might not have a profitable business for very long,” Elliott says. “So if you're looking at the long-term sustainability of your practice, I think you need to be willing to look at clients with accounts of all different sizes, and you need to tailor your value proposition and the time you spend with them accordingly.”