You've heard of the Vanishing Advisor — a proud mammal, chiefly male, usually graying around the temples, whose habitat spans the length and breadth of America but who is often found grazing around affluent enclaves. You won't find the Vanishing Advisor on the endangered species list with some of his furrier brothers, the mountain gorilla or the Bengal tiger, but concern for his well-being has been growing in recent years. There are those who say his numbers are in decline, and that in 20 or more years the Vanishing Advisor's population will fall to such a level that it threatens the very health of his once-thriving economic ecosystem.
The view that financial advisors are heading into a sunset period — and that this could be crippling for the industry at large — is hotly disputed. Yes, their numbers are slipping a bit and are expected to drop in the future. But estimates of how many financial advisors are adequate to serve the market, even one that's facing the influx of 76 million baby boomers on the cusp of retirement, vary widely. Consolidation and other ongoing changes in the industry, which is tilting toward independent models like the registered investment advisory, are altering the calculus of what an advisor census ought to look like.
“If there were just fewer advisors coming in and no pickup in efficiencies or no increase in productivity as a result of that, it's going to have a major impact,” said Steve Scherbarth, vice president and director of Wealth Management Products & Services for RBC Correspondent Services (NYSE: RY). “But if you can help people be more efficient and more productive and help clients understand what they're looking for, then I think you can mitigate some of that.”
An Aging Animal
There's no question that financial advisors are an aging breed. Sophie Schmitt, an analyst with Aite Group, estimates their numbers may fall 10 percent in the next decade. A report this winter by Pershing Advisor Solutions and FA Insight found that the share of advisors aged 56 and up had grown from 32 percent of the market in 2007 to 36 percent in 2009. The share of advisors aged 45 and younger actually declined a bit, from 36 percent to 34 percent. In 2009, 1.2 advisors left the business for every one hired, the report says. Cerulli Associates says that the total number of advisors in all channels fell a little more than 1 percent between 2004 and 2009, to 334,000. Meanwhile, a survey sponsored by Genworth Financial (NYSE: GNW) as part of its Best Practices Study Series in 2009 said that about a third of advisors polled are planning to exit their business within the next 10 years.
Pershing and FA Insight see darker days ahead. Their report, “The Race for Top Talent II,” said that part of what's restraining employment growth in the business is the firms' practice of cutting loose low-performing advisors in order to boost profits. “Although the pruning trend has helped struggling firms maintain profitability, there are potential long-term and negative repercussions,” it says. “By eliminating a role for entry-level investment professionals and small producers in general in their organizations, broker-dealers create a heavy and unhealthy dependency on recruiting away a dwindling pool of experienced investment professionals from competitors in order to foster growth.”
If an estimated retention rate of 84 percent were applied across all brokerage types, the industry would need to hire 46,000 professionals annually just to maintain their current ranks, the report says.
“The firms perceive it as a problem,” says Danny Sarch of Leitner Sarch Consultants Ltd. of White Plains, N.Y., which recruits top talent for major brokerages. “The industry has had a tough time going back 10 years or more in training effectively. During the two really bad bear markets — the post-tech crash and the financial crisis — they essentially stopped training. It's really hard to find good three-, four- and five-year brokers. They don't exist, largely.”
But Sarch draws a distinction between the problems of wirehouses that need to step up recruitment, and the needs of investors whom they serve. Large firms that are publicly owned face pressure from shareholders to grow their bottom lines. That's particularly a problem if new wealth isn't being created, and wirehouses must meet their goals by drawing brokers and their clients from competitors, he says. These are great days for recruiters, Sarch says wryly, but the staffing issue that wirehouses face doesn't mean that investors are likely to have trouble tracking down people to manage their money. “I have yet to hear of a shortage of financial advisors,” Sarch says. “If you want to spend the time, you can interview 10 different people who want to manage your investments for you.”
Indeed, there are some who hold that the country has too many advisors right now. Stephen C. Winks, a Richmond, Va.-based management consultant for financial advisors, estimates there are 17 million households with more than $100,000 in liquid investable assets. If each advisor had about 200 clients, it would take about 85,000 advisors to serve the market, a fraction of the current population. “You can do the arithmetic very easily,” Winks says. “We've got way too many brokers.” Winks sees a future in which a smaller number of advisors provide a higher level of service, leveraging technology to provide efficiencies — software solutions for compliance responsibilities, for example.
Scherbarth disagrees that advisors' current numbers are too large — the population looks about right to him. But he says that most aren't functioning efficiently; 80 percent of advisors account for just 20 percent of production, he estimates. “There's a tremendous amount of mediocrity in the industry. That larger group of advisors is not going to have access to all these high-net-worth or ultra-high-net-worth clients,” Scherbarth says. Most of those advisors are likely to migrate to the mass affluent market because it's underserved; “There are plenty of advisors who could make a nice living serving that segment,” he says.
The Longevity Factor
The assumption that aging advisors are going to leave the industry in large numbers is flawed in another important way, according to critics. There are indications that advisors are likely to stay in the business longer than expected. Sanjiv Mirchandani, president of Fidelity Investments' National Financial unit, says the company was surprised by the results of a recent Fidelity poll of advisors that showed that 20 percent didn't plan to retire until after the age of 70, while another sizable percentage had put off retirement until 65 to 70. “So the traditional retirement age, we think, won't apply to advisors. Many of them will just keep going,” Mirchandani says. While the aging crisis is “less pronounced” than people believe, however, Mirchandani thinks it's “inevitable at some point.”
“I think people are starting to realize it's not our parents' world anymore,” says Laura Waller, who sold her Tampa, Fla. practice to her son, Jon Wax, three years ago. Waller, 65, now works for her son part-time as chief investment officer at the practice, which has more than $100 million in assets under management. (They're affiliated with Raymond James Financial Services (NYSE: RJF).) She comes into the office once a week to meet with clients; the reduced workweek allows her to pursue her interest in watercolor painting. (A local gallery represents her work.) But her transition to semi-retirement took an extended time to prepare, Waller says. She began working with her son 15 years ago, a relationship that led mother and son to combine their practices in 2002.
“Some of the planners who planned on getting totally out may have to rethink that. And bringing the younger person in and working less may be a much better transition than just going cold turkey,” Waller says. Another issue that's keeping advisors around longer: some of their key clients who have retired have become bored and want to change their plans, she says, so a one- or two-year transition becomes a five- or 10-year transition.
Raymond Grubbs, an advisor with a practice in Lake Oswego, Ore., also is considering selling his practice as he draws closer to retirement age. It's not easy. Now 63, Grubbs says he tried working with headhunters eight years ago to find younger advisors to partner with. The problem: The prospects all wanted guarantees that he would retire at a certain date and they could take over the practice, now with about $120 million in AUM. He balked at being asked to plan that far out. “In our business there are no guarantees. We'll work it out as best we can,” Grubbs says. Now he's trying to negotiate a deal with his office manager and another independent advisor he knows. His goal is to sell a piece of the business in three years, keeping the top 20 or 25 clients until he's fully paid, and then sell those to the buyers when he's 70. “We're taking it one step at a time,” Grubbs says.
Aite's Schmitt sees concerns about a vanishing advisor population as “a little overstated.” Larger firms such as LPL Financial (Nasdaq: LPLA) and Ameriprise (NYSE: AMP) can readily absorb the practices of retiring advisors, she says. Some firms are offering retirement-minded advisors bigger incentives to join teams by boosting payout for their business and extending the payout over a longer period of time — five years instead of three, for example. Selling a practice today might make more sense than doing so in 10 years, Schmitt adds. When more advisors are looking to get out, the glut of practices for sale will dampen values.
In either event, many advisors on the cusp of retiring won't be leaving the business for good, she says. “If they're still working at 70, they've probably been successful,” Schmitt says. “They're entrepreneurial. A lot of people with that mindset are not going to just quit working. Maybe they're hiring somebody younger and they're taking more of a downshift. They're still there for the big clients but they're more in a transition mode. They'll probably let it go when they can find someone they can trust.”