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There’s an accelerating trend in the financial advisory space you can’t afford to ignore. According to The Ensemble Practice’s most recent Pulse of the Industry study, the typical financial advisory firm lost 31 clients in 2023. That represents a 3.6% reduction in client base. In 2022, client loss was 3.3% and in 2021 it was 2.5%. It’s an upward trend deteriorating the bottom line.
Many firms try to offset churn by focusing on new client acquisition. While that’s certainly an important practice for overall growth, it’s not the solution. Client retention is key to profitability.
Why?
Not only is the cost to acquire a new client 5x the amount of retaining an existing one, but, according to Cerulli Report - U.S. Adviser Metrics 2024, 55% of new clients come by way of referrals. The success of your firm depends on your ability to retain clients.
Here are 5 of the top reasons your financial advisory firm is losing clients—and ways you can prevent it.
1. Client loyalty is not with the financial advisory firm
Investors tend to be highly loyal to their financial advisors, with trust rooted in long-standing relationships built on tailored financial advice and a deep understanding of their specific financial goals. And the data backs it up. A recent JD Power study revealed that 63% of investors would likely leave their firm to follow their advisor if they left.
That’s because advisors, not the firm, are the ones going above and beyond for the client. Advisors often provide more than just investment advice. They also serve as key strategists for holistic financial planning, including tax optimization, estate planning, risk management, and more.
If you’re an advisor, this might feel really nice to hear. If you’re leading a firm, you may be feeling a little uneasy—especially if your advisors are unsatisfied. The J.D. Power 2024 U.S. Financial Advisor Satisfaction Study reports that “34% of employee advisors and 41% of independent advisors who are more than two years from retirement say they may not stay with their current firm in the next one to two years.”
So, what can you do?
Focus on the advisor experience. Craig Martin, executive managing director and head of wealth and lending intelligence at J.D. Power said, “Aggressive compensation offers, a promise of better technology, or support and flexible business models can all tempt advisors to change firms.”
Give your advisors the support they need to be successful. When you invest in creating a healthy work environment, providing leading technology that makes work smoother, and equipping advisors with better insights to serve their clients, their loyalty to the firm increases as well.
2. The Great Wealth Transfer is underway
The "Great Wealth Transfer," a massive shift of wealth to younger generations, poses significant challenges for financial advisory firms, particularly in terms of client retention.
According to a report by Cerulli Associates, an estimated $84.4 trillion is set to pass from older generations to heirs by 2045. When 75% of clients say their children have never met their financial advisor, it comes as no surprise that only 2% of beneficiaries retain their parents’ advisors upon wealth transfer.
The best way to address this head on is to set up a meeting with your clients and their beneficiaries.
These meetings not only create an opportunity for you to start building relationships with the next generation of stakeholders, it also provides an opportunity for everyone to understand and discuss the family’s wealth for future planning purposes (not just the next generation) and to solve for…
3. Misaligned goals and experiences
Financial advisory firms are also losing clients due to misaligned legacy and sustainability goals. Gen X, Millennials, and Gen Z, often have different financial preferences and expectations than their parents, so they often go looking for advisors that more closely align with their values. A 2024 Morgan Stanley survey showed that 96% of Millennial investors are interested in sustainable investing, not just because they feel it’s the responsible thing to do but also because they believe ESG-conscious companies will outperform others in the long run.
That’s not all.
Younger investors, who are more likely to embrace technology and have a preference for digital tools, may not feel as loyal to traditional financial advisors who rely solely on face-to-face interactions. Millennials, for example, expect financial advisors to provide tech-enabled, streamlined, and accessible experiences. They appreciate real-time communication and prefer using interactive client portals, mobile apps, and email over phone calls.
As younger generations become the recipient of the largest wealth transfer ever, it’s important for advisory firms to understand and adapt by equipping advisors with easy-to-use technology that meets the growing demands for personalized support and fast communication or risk an outflow of clients and assets.
4. Wealthy clients like to walk
A recent study by PWC found that 45% of high-net-worth investors plan to change/add wealth relationships in the next 12-24 months and that 39% have already switched in the past 3 years. The reasons for switching?
- 28% said previous advisor’s inability to support client’s changing financial circumstances
- 27% said desire for access to different products and services
- 22% said improved digital capabilities
So, what can firms do?
Anticipate client needs; provide additional services, including succession planning, tax planning, and elder care services; adopt new technologies that reinforce your commitment to providing top-of-the-line experiences. Clients want to know their getting the best service and options available to them.
5. Major life events cause shifts for financial advisory firms
As investors look to retire, they often look to financial advisors for guidance. That’s one of the major life events they know they need financial support with. But what about other life events? Perhaps even unexpected ones?
Significant life events—whether the birth of a child, divorce, selling a business, or something else—often create an opportunity for people to reflect on their financial strategy, including who they’re using for a financial advisor. These intersections present real risk for churn.
For example, a 2021 report by Transamerica found that an estimated 70% of women change advisors after their spouse’s death.
The opportunity here is for firms to understand life journeys. More and more firms are also investing in data and capabilities to anticipate these events, allowing advisors to enter the conversations earlier and as a trusted partner rather than in a reactive role.
The common technological thread
There’s no way around it. Client retention matters, and the common thread to retaining clients today is technology. The technology you invest in will play a major role in advisor happiness and client satisfaction. And to be more specific, we’re talking about AI technology.
With AI’s ability to capture and surface meaningful client insights and automate workflows, advisors and clients are enjoying elevated interactions. Not only are advisors spending less time on manual admin work, they’re now also better able to focus on nurturing client relationships and giving them more personalized attention. And the firms implementing the most secure and accurate AI solutions will win clients over. Every time.
Want to see how AI can improve the client and advisor experience? Start your free trial of Zeplyn.
