With the decline in the ranks of financial advisers showing no signs of abating, large broker-dealers and individual investment advisers are faced with the stark challenge of figuring out how to bring fresh blood into the investment advice business.
The numbers paint a fairly bleak picture.
The ranks of financial advisers in the United States are expected to shrink by 18,600 over the next five years after dropping by roughly 4,000 — or 1.3% — in 2011, according to global research firm Cerulli Associates Inc. Wirehouses and independent broker-dealers will suffer the most from the shortage, according to Cerulli.
The challenge for the investment advice industry will only increase in the coming years. The average age of an adviser was 51 1/2 in 2012, according to Cerulli, and advisers typically plan to retire at 68. The consulting firm expects close to 8,600 advisers to reach this retirement age each year over the next 13 years.
“Just the basic requirements, such as the regulations and other hoops that people have to jump through just to get into the business and their name on the business card are very difficult,” said Mal Makin, president of Professional Planning Group, which controls close to $850 million in client assets.
“In the 1980s and '90s — the good old days — advisers came from insurance or brokerage firms and converted to financial planning. It was a move away from the sales-oriented culture,” said Mr. Makin, who is 68 and has three sons in his practice. “The regulations and processes were a whole lot easier, and today there is also a much more sophisticated consumer.”
“It's a very different market for an adviser to start out in,” he said. “The cost of running an office is simply much more significant than it used to be.” And the lack of fresh talent can pose problems for advisers who want their firms to grow, Mr. Makin said. “Right now, I'm looking to hire a couple of advisers in my office and there's not really a lot to choose from.”
Danny Sarch, an industry recruiter who also writes a blog for InvestmentNews, concurred.
“There are very few new advisers coming into the business,” he said. “The reduced supply means that everybody's is competing for same adviser. The industry is concerned, but we don't know how much this potential shortage matters much to consumers.”
Hanging onto the clients of older advisers who retire also is difficult, Mr. Sarch said.
“What's really scaring firms is when an adviser actually retires,” he said. “The odds of the adviser's accounts staying with the firm are less than 20%. Clients have been dealing with a patriarch, and those accounts spread to the wind. That's terrifying the wirehouses right now.”
The lack of new talent is undermining the entire industry, according to Cerulli. “The continual aging of the industry is not being offset by the influx of new talent,” said Cerulli associate director Tyler Cloherty. “The wirehouses are starting to train people again, but it's just not enough to make up for the number of advisers retiring and leaving the industry.”
Part of the problem is that independent broker-dealers and registered investment advisers don't have the means or model for training new people. They depend on the wirehouses and insurance companies to do it, and there are not enough new people to go around.
“Ultimately, the indies and RIAs have to find a new way to bring people in,” Mr. Cloherty said. “They have to go from a centralized training model to a decentralized one to stave off attrition.”
Mr. Cloherty projects that total head count in the industry will fall to 297,515 by the end of 2016, from 316,109 at the end of 2011. Independent broker-dealers and the wirehouses will see the biggest declines. The four wirehouses — Bank of America Merrill Lynch, Morgan Stanley, UBS Wealth Management Americas and Wells Fargo Advisors — had 51,450 advisers at the end of 2011, and are projected have 45,580 by the end of 2016. That's a 2.4% annual decline as advisers continue to retire or migrate to other distribution channels.
The independent broker-dealers will suffer an even-more-dramatic decline, according to Cerulli projections. Mr. Cloherty said he expects that, in aggregate, they will lose 18,000 advisers by the end of 2016, an annual attrition rate of 5%.
The RIA and dually registered adviser channels are expected to buck the tide. RIA numbers are expected to grow by 4.7% annually over the next five years to more than 36,000, and dually registered advisers will increase 5.3% to nearly 24,000 by the end of 2016. Once seen as a way station on the path to becoming an RIA, dual registration has become a more popular option for advisers.
“People thought the dual registration model was a stopover to the RIA world, but it may be seen as a choice for the long term,” Mr. Cloherty said. “It allows them to piggyback on broker-dealer services and lets them keep the option of doing fee-based or commission business.”