It’s a simple equation: more financial advisors retiring + not enough new faces to take their place = shrinking advisor headcount. It’s an old story that never gets old due to the profound importance this issue has on the future of the financial advice profession. In a recent report, Cerulli Associates quantifies the problem, describes its causes and offers possible solutions.
The Boston-based consultancy forecasts headcount to keep declining through 2016 at a compound annual rate of 1.2%. That would mean 18,600 fewer advisors than the 2011 total of 316,109.
Cerulli expects that with an average retirement age of 68, 8,600 advisors will hit retirement age each year for the next 13 years. That’s an annual reduction of 2.7% in the number of advisors. New blood will help offset that to some extent, but not enough to reverse the shrinkage unless the industry does a better job hiring and retaining more people.
The root causes for headcount shrinkage are several. For starters, the wirehouse firms that traditionally were the entry points for many new advisors have shifted emphasis from hiring and training new people to retaining their top producers or poaching top producers from their rivals. Additionally, training methods often used at the bigger brokerages led to high washout rates.
In response, some brokers have adjusted their training structure by teaming new hires with experienced advisors. That’s been helpful, but Cerulli suggests that brokers need to train the right people and not just anybody they can get. For example, it notes that successful advisors frequently come from the ranks of career changers within the 28- to 45-year-old demographic. And given the increased emphasis on providing advice and financial planning rather than on portfolio management, more trainee time should be spent in front of existing and prospective clients instead of on refining their investment strategy.
Tyler Cloherty, associate director at Cerulli, says he expects the RIA channel (including dually registered advisors) to see a net gain in headcount through 2016. That said, a lot of those new people are successful advisors transitioning from other advisory channels, which doesn’t add new bodies to the industry. “There’s no systematic method to bring new advisors to the independent side,” he says. “There are no training classes or generally accepted ways of hiring.”
Cloherty believes RIA custodians can play a key role in helping their advisors grow their headcount. “[Custodians] putting their resources into helping their advisor clients understand what the best practices are, where to find people, and how to hire and train them will go a long way to supporting the growth of their advisors,” he says. “Hiring new advisors is a critical component to helping their underlying advisors succeed.”
Given the industry’s current demographics, the ongoing headcount shrinkage issue seems to be an intractable problem. Cloherty won’t go that far, but he emphasizes that all channels will have to find ways to hire new people rather than just recycling existing advisors from the various channels.
But as shrinkage occurs, he expects more investor assets will coalesce around the more productive advisors and that firms will focus more on wealthier investors. In turn, he predicts that greater numbers of less-affluent investors will turn to self-directed discount brokers such as Charles Schwab, Fidelity and Merrill Edge.