Today, many financial advisors present themselves as holistic wealth managers. But for this to be true, advisors must address a client’s entire financial life, including both sides of their balance sheet.
Most advisors have been reluctant (at best) to proactively help clients with their financing needs, and it’s not for lack of client interest. In fact, 83% of clients said they were looking for financing solutions from their advisor, yet only 3% said advisors were meeting this need, according to a 2018 survey of 1,168 affluent investors from Spectrem Group.
Recent data from Phoenix Marketing International (which surveyed more than 11,000 affluent households), and Cerulli Associates paints a similar picture. Respondents were asked to rate the top factors they would look for if they were to choose an advisor today. “Looks at your entire financial picture (investments, insurance, credit, etc.)” ranked fourth on the list, with 60% of advisor-directed households and 49% of all households (which includes a mix of self-directed, advisor-assisted and advisor-directed households) saying this would be an “extremely important” factor in their decision.
Given this, it makes sense that Simon Torrance and Bain Capital expect "embedded finance"—or offering layers of digital financial services, including lending and borrowing, payments and insurance—to grow to be worth $230 billion by 2025 and $3.6 trillion by 2030.
So why the disconnect? For many advisors, it is a confidence issue—a fear of turning over clients to lenders who do not fully grasp the care required to build lifelong, trusted relationships. And the fear that a potential lender, lacking familiarity with what can be a client’s complicated finances, could threaten an advisor’s relationship.
Realities vs. Fears
Yet for advisors who have found lenders they can depend on, the upside is tremendous. Many advisors who have already expanded their offerings to focus on “the right-hand side of the balance sheet” say it has actually deepened their client relationships.
This was the case amid the volatility and uncertainty seen this past year. Some clients were considering whether to liquidate assets to create a temporary parachute—a bridge between “here to there.” Advisors who focused on both sides of the balance sheet were equipped to have conversations with clients in this mindset about whether credit could be used to preserve a well-planned investment strategy and offer the potential to outearn the interest expense with the assets they kept. (Given the low interest rate environment, many clients were eager to have this discussion and to consider this as one option to meet their changing needs.)
This growing trend is in line with the ongoing digital transformation of the entire industry. It is based on what the modern consumer is looking for from any financial relationship.
For example, a recent study from Aite (based on a Q1 2020 survey of 2,413 U.S. consumers 24 or older) found that about eight in 10 young millennials (born around 1989 or later), senior millennials (born around 1988 or earlier) and Gen Xers, 62% of baby boomers, and 48% of seniors believe having attractive loan/credit card rates is “very important” to “important” when looking for a new banking relationship.
The survey respondents were asked specifically: “If you were looking for a new banking relationship, how important would attractive loan/credit card rates be in your consideration?” The available responses were “Very Important,” “Important,” “A Little Important” and “Not at all Important.” On the other end of the spectrum, 32% of seniors, 19% of baby boomers, 10% of Gen Xers, 9% of senior millennials and just 4% of young millennials in the survey said it was “not at all important.”
Given this, bringing credit solutions to the table is nearly a “must have” today when working with younger generations. Indeed, clients tend to be net borrowers earlier in life when there is a proportionately larger need on the credit side of the balance sheet.
The market opportunity size is enormous; consider real estate financing opportunities alone. After all, buying a home is one of the largest financial decisions a client will ever make. While total household debt in the U.S. increased by $87 billion in the third quarter to $14.35 trillion, according to the Federal Reserve Bank of New York, mortgage balances increased by $85 billion to $9.86 trillion.
Shouldn’t an advisor be able to guide a client on this part of their financial journey? And when they do, it positions them to capture relationships earlier on—before a client’s prime investment years.
One section in a recent report from MX Technologies entitled “The Ultimate Guide to Digital Transformation” offers advice for any professionals working in financial services on how to grow relationships and trust in the digital age. For the report, MX surveyed more than 1,000 U.S. consumers and found that 93% of respondents reported that if their financial institution could offer a better deal on a product they currently have (e.g., mortgage, auto loan, savings account, etc.), they would want to know.
According to the report, “[this is] exactly what consumers want. They want to know that you have their best interests in mind—that you’re using their data to help them.”
The Definition of Wealth
I’ve had this same conversation with many advisors over the years. What usually opens their eyes to seeing the bigger picture is when I remind them that they are in the business of “managing wealth.”
Wealth is, of course, another way of saying net worth. And net worth, by definition, is assets less liabilities. So, if an advisor isn’t serving a client in both of these areas—assets AND liabilities—they are covering only half of the equation. It takes addressing both sides of the balance sheet to build and protect the net worth that meets each client’s financial goals.
At the end of the day, it is that net worth, or that wealth, that determines if and how clients realize their financial and overall life goals. From buying a first home to sending kids to college to enjoying the retirement of one’s dreams, as well as leaving something for the generations to come—these are each important pillars of financial wellness. In addition to balancing a portfolio and managing assets, the modern advisor should be guiding clients across each pillar.
Peter Stanton is CEO of Advisor Credit Exchange, a technology-empowered financing and lending network available on the Envestnet platform.