By Victoria Reuvers, Managing Director at Morningstar Investment Management SA

Given the vast amount of change in the financial advice industry over the years, a recent NMG survey advisers asked advisers to rank what trends they are most worried about when it comes to their business. The primary worry for advisers (when viewed from an internal perspective) was technology, followed closely by clients, and then succession planning.

I had the privilege to unpack these concerns with Jaco van Tonder from Ninety-One and Georgina Smith from INN8 Investment Platform, at the recent Morningstar Investment Conference.

Where are we with technology in the financial advisory sector?

With the influx of tech providers, conferences, and products in the advisory sphere, have any of these tech solutions truly revolutionized the industry? The panel consensus was that, despite the array of capabilities offered by these products, a fundamental issue remains unsolved - data integration. Without a robust foundation for aggregating data, the outputs generated by these tech solutions might not live up to their potential. Jaco van Tonder highlighted the paradox where technology can automate complex tasks like writing a college math paper but struggles to seamlessly handle data transfers. This deficiency in data integration acts as a bottleneck, holding back the industry.

Platforms play a crucial role in integrating the various tech tools that advisers use. Georgina Smith highlighted that an integrated dashboard of all client information is something that advisers are still seeking. However, the challenge remains: many advisers continue to operate across multiple platforms, leading to a patchwork of integrated and non-integrated tools. There is a clear need for standardization in data transfer protocols to ensure this seamless integration that advisers seek.

Shifting the focus to Artificial Intelligence (AI), there are several practical applications of AI in advisory practices. There are opportunities for leveraging AI to automate tasks that don't require human intervention, in order to enhance efficiency. For example, AI could be used to transcribe and analyse meetings, saving advisers valuable time and effort. Another example is how AI can be used to optimise client-adviser interactions by providing insights and suggestions based on client data. However, while AI's potential is vast, it needs to come prepackaged with a level of trust.

Ensuring that AI provides factually accurate information is vital, given that AI can produce convincing but erroneous results if trained on incorrect data. The absence of standardized checks and verification mechanisms presents a significant challenge that must be addressed for widespread AI adoption in the advisory sector.

Wealth transfer and client preferences

When looking at the percentage of clients over the age of 65, van Tonder revealed that over 60% of clients across various product types fall into this age group, indicating a substantial portion of clients with retirement-oriented financial needs. Furthermore, this indicates that sooner or later there will be a large wealth transfer from the current client base to a new generation.

Historically, advisers primarily served clients within South Africa. However, as beneficiaries began residing abroad, this is another paradigm that has shifted. The challenge now is to ensure that the financial conversation continues across borders and generations. While this presents challenges for financial advisers, in order to prevent wealth from leaving the adviser there is a need for products and strategies to cater to the new client base.

There is a common misconception that this new younger client base prefers AI-driven or robo-advisory services. However, studies indicate that 75% of millennials would seek independent financial advice once they inherit or have accumulated substantial wealth. This challenges the assumption that younger clients have completely different preferences compared to the generations that advisers are currently serving.

In order to cater to this younger generation, a common strategy to ensure that wealth does not leave the adviser or the practice is to match younger advisers with younger clients. However, van Tonder emphasized establishing independent long-term relationships with both the primary client and the younger beneficiary was more important. This approach ensures that the financial conversation continues seamlessly as wealth transitions between generations.

Another crucial aspect discussed was the gender gap in wealth transfer. Smith spoke to the fact that women are expected to control a significant portion of wealth in the coming years. However, studies reveal that only 7% of advisers have strategies to cater specifically to women's financial needs. Recognizing the differences in preferences of women, such as a preference for ESG (Environmental, Social, and Governance) investing and earlier wealth transfer, is essential to bridging this gap.

Succession planning

If we look at the next 10 years, we may see a lot of advisers who, despite not planning to retire soon, wish to reduce risk and continue working beyond the age of 65 while safeguarding the legacy they've built. In order to do this, advisers need to have a robust succession plan. There are two ways in which advisers can achieve this - an internal succession plan which would involve having another adviser to hand over your responsibilities or an external succession plan which would entail you selling their business.

Selling a business, that an adviser has spent years building is no easy task. Smith emphasized the importance of seeking guidance from individuals who have crossed the same path. Learning from those who have faced similar challenges can help advisers understand potential pitfalls and unintended consequences. Van Tonder pointed out that “succession planning for a firm is almost as complicated as building the business itself”. Adequate time and planning are essential, often requiring five to ten years to successfully transition. Delaying planning until age 65 can leave advisers in a vulnerable position.

Internal succession planning is a route many advisers consider. However, there are challenges to finding and retaining suitable successors. Hiring individuals fresh out of university may not yield the desired results, as they often leave for better offers. Furthermore, the gap in generational thinking between older advisers and younger successors can also create friction. For example, younger advisers are often eager to develop their careers and may want to take on more risk, whereas older advisers tend to be more risk-averse and want to preserve what they have built.

Succession planning is not a one-size-fits-all endeavour, van Tonder emphasized the importance of targeting successors who are slightly younger and closer in age to the adviser. Such successors are more likely to understand and align with the adviser's vision. Contrary to the common belief that financial advisory is dominated by older professionals, van Tonder stated that there is a balanced distribution of advisers across various age groups. The platform's (Ninety One) data indicated that advisers of different ages, attributing to the fact that there are advisers who have the necessary experience to act as a successor.

In conclusion

This discussion has highlighted the ever-changing dynamics of this industry, as well as the concerns that advisers have regarding these changes. It is worth noting that these concerns are not new - the evolution of technology was a worry 20 years ago and still seems to be the top concern among advisers. However, this seems to be a byproduct of being in an industry that is evolving.

The discussion highlighted the transformative potential of technology and AI within the industry, emphasizing the need to overcome challenges like data integration and ensuring AI's accuracy. However, this panel emphasizes that embracing these advancements may enhance your practices and client relationships. Additionally, the discussion stressed the importance of aligning with evolving client preferences, including intergenerational financial conversations. Panellists also highlighted that while succession planning is not one-size-fits-all, careful consideration and a clear vision can ensure the continuity and success of advisory practices.