FOR THE FINANCIAL SERVICES INDUSTRY, the baby boomer generation holds the promise of huge riches. Some 76 million men and women born between 1946 and 1964 fall into this vaunted demographic. And millions of them are among the high net worth and nearly-wealthy — clients with substantial portfolios and decades of financial planning needs ahead of them.
But there is another side to the baby boomer story for Wall Street. The largest demographic cohort in the history of the U.S. includes the most successful producers in retail brokerage. These men and women, with 20 and 30 years of experience, have the big books and head the top teams. Many are producing branch office managers.
How these boomer brokers move into retirement over the next 10 to 15 years will change the face of the industry in many ways. For example, because many brokers of this vintage maintain transaction-based practices, as they segue out of the business, the shift to a fee-based model should accelerate. (Indeed, because of their clout within the firms, top-producing boomer reps have had more latitude than younger brokers in doing business the way they prefer.)
But the most important effects of the aging of boomer brokers will stem from how (and when) they wind down their businesses. Like other boomers, they may be more likely to stay on the job well past traditional retirement age. A 2002 AARP study of workers aged 45 to 74 found that eight out of 10 boomers plan to work past 65, at least part-time. Only 16 percent said they don't plan to work at all.
After building the retirement nest eggs of their boomer clients, these brokers may feel inclined to stand by them as they move into the next critical phase — making sure those investments produce retirement income. “I can't leave. Most of my clients are in their late 60s and 70s, and it's not that I don't trust anyone to take them over, but these are 25- and 30-year relationships — I owe them that for their business,” says one 54-year-old UBS broker.
Even if they do walk off into the sunset, the heavy hitters may negotiate for better terms than the traditional send-off — dividing accounts among younger brokers and getting a descending percentage share of the commissions over four or five years. At Smith Barney, for instance, the “franchise protection” plan offers a senior rep transitioning his book to a team a five-year pay down of 70 percent the first year, descending 10 percent each year until the fifth year when it reaches 30 percent. “It works out to be about 50/50 split of production over the five years,” says one rep. “The incentive for the departing rep to ensure clients stay and the book succeeds is obvious.”
Brokers who don't like those deals might figure they can do better by moving to an independent, from which they are free to sell their books, says Mark Tibergien, a consultant with Moss Adams, a Seattle-based consulting firm. “For wirehouses and other non-independents the issue could become whether they have to change their business model entirely so reps can command real value for [their books] — and I think more of the firms will be looking at that,” he says.
The Boomer Challenge
Clearly, boomer rep retirement poses management issues for major firms as well as independents — all of which need to keep the assets in those big boomer books. It's simple to divvy up clients when the gray beards leave; it may not be so easy to keep those accounts. “I'd say this demographic issue for many brokerage firms is one of the most pressing attention points for the industry,” says Tibergien.
Firms are certainly aware of the situation, but few want to talk about it. A Morgan Stanley spokesman says the company is aware of the issue but declines to share age data or offer an executive for further comment. Merrill, too, declined to discuss the topic and refused to provide data about the average ages of their reps. Smith Barney will only say that its average FC is “in the mid 40s.” UBS just completed a 12-month demographic study to determine potential business risks an aging rep population could pose, and found that “76 percent of its FAs are less than 55.”
Pinpointing the size of the boomer cohort in the brokerage business is not easy. The Bureau of Labor Statistics (BLS) says the median age of “securities, commodities and financial services sales agents” has increased from 37.6 in 2000 to 40.1 in 2004. Of this population, the BLS finds that 33 percent are over the age of 45 and 15 percent are over 55. But those statistics, which include thousands of insurance agents, don't accurately reflect the brokerage industry. “The average age of wirehouse reps is roughly 46 years old. At regionals, the average age is roughly 51,” says Chip Roame, managing principal of Tiburon Strategic Advisors, a California-based consulting firm. “However,” says Roame, “the asset-weighted average age of both groups is over 60, which presents the firms with a serious succession planning issue.”
If you look around any brokerage branch, it is indeed clear that the 80/20 rule applies: The top 20 percent of producers have 80 percent of the business. And, mostly, those are boomers and older reps. “Because it takes so long for reps to get up and going, this group definitely handles close to 80 percent of the industry's production revenue,” says Louis Harvey, president of Dalbar, a Boston-based research firm.
A 2002 study by the CBM Group, a consultant to the financial services industry, provides a clearer picture of how much they do in fact have. It found that assets under management peak for most reps in years 20 to 25 in the business. At the wirehouses, reps in the business for 25 years, on average, had nearly $120 million under management. The gap between moderately experienced and highly experienced reps was remarkable: For reps with 15 to 19 years, the average was $80 million. For those with 10 to 14 years in the business, the average was $60 million. Part of that is explained by natural selection — reps that have not built a sizable book after 20 years of trying give up. But it is still noteworthy.
Succession Issues
These older reps are, almost literally, a dying breed — stock-pickers or muni salesmen who build portfolios and earn their living mostly from commissions. Indeed, the percentage of advisors who derive more than 50 percent of their business from fees has increased from 30 percent in 2002 to 43 percent in 2004, according to Cerulli Associates, a research firm in Boston. Because it depends on a variety of factors, including recent regulatory interest in fee-based business practices, analysts are wary of making more than near-term projections of further increases. “We do anticipate that advisors will continue to go fee-based, and we will see an increase in the next couple of years,” says Kirby Horan, a Cerulli analyst. And barring some Spitzer discovery of widespread “reverse churning” in these accounts, growth is inevitable.
So, when today's older brokers are gone, a way of doing business may also pass into history. “This handoff will be a windfall of assets for a lot of young reps brainwashed by endless marketing of the fee-based model — and I know a lot of them don't know what the heck they're pushing,” a veteran Oppenheimer broker in Miami says.
There is more than a whiff of intergenerational resentment as the boomer transition approaches. Many older reps don't like the new style of fee-based business and many do not hold their younger colleagues in high regard. “Guess what? They're not teaching them how to build stock positions in training programs anymore, it's fees, fees, fees,” says one 46-year-old Smith Barney rep. “My book's 40 percent fees and I'm sure it will be nearly double that in five years when I begin transitioning it to my junior partner,” he says.
A 59-year-old Wachovia rep, with a $300 million book, echoes those concerns. He plans to turn over his business to his son, who is now in the company's training program, but he worries about how his clients will react to the business model his son is being taught. His book is 80 percent commission-based and thinks clients may balk. “I bet the whole industry goes to 50 percent fees and then, when clients like mine, who got big discounts from their broker, start asking the new rep ‘where's the performance to justify this higher cost?’ the pendulum's going to swing right back,” he says.
Obviously, firms see the handoff in a more positive light. Phil Sieg, head of business development and strategy for Merrill Lynch's private client group, says the changing business model as younger brokers take over is not an issue. “Maintaining the client relationship through the younger advisors is of greater importance than the compensation switch,” says Sieg. At Merrill, Sieg points out, 50 percent of advisors are in teams, which he says facilitates a “holistic” approach to client service and brings younger reps into client relationships, easing the transition when the senior rep leaves. At UBS, 53 percent of reps are in teams, according to Doug Black, head of strategic business development, who says that percentage is much higher for older reps.
Not all older reps are fans of the team approach. One 60-year-old UBS rep says that while his firm is pushing partnerships to smooth the intergenerational transition, he will resist. He says he'd rather do business the way he likes, and he will simply walk away from his book when the time comes.
Just exactly how and when these older reps “walk away” will undoubtedly be in the forefront of concerns at all brokerage houses over the next decade. More importantly, says one former Merrill Lynch branch manager, is how the firm's deal with this potentially large group of retirees. “When these transitions are handled well it can be a nice circumstance for the branch, even result in more robust and trusting client relationships — but when it's not, it can blow up big in your face.”