Take even a cursory look at the demographic data on financial advisers, and the wealth management industry appears to be at a critical inflection point.
The aging ranks of advisers — almost one-third of U.S. advisers plan to retire in the next 10 years, according to Cerulli Associates Inc. — coupled with a lack of enough new entrants to restock the business, suggest that the industry is headed for a serious labor shortage just as the demand for financial advice from retiring baby boomers is rising.
“The aging of advisers is the most significant challenge facing the profession and every firm in the industry,” said Tash Elwyn, president of the private-client group at Raymond James & Associates Inc. “Too many people are exiting the business, and not enough are entering it.”
The data are sobering.
The number of advisers in the country fell to 307,623 in 2012, according to data from Cerulli.
That was down 4.4% from 2010 and a staggering 9.4% from 2004, when the company started collecting data on the industry.
The trend will get worse before it gets better.
The average age of advisers in the country is 50.9, up a full year since 2010, and 43% of advisers are over 55, according to Cerulli.
Just 11% are under 35, its data show.
Based on the expected number of retiring advisers, the entrance of new advisers to the industry and the growth in demand for financial advice, consulting firm Moss Adams estimates that the industry will face a shortfall of 238,000 advisers by 2022.
“As the adviser force moves toward retirement, it's going to be a growing challenge for the industry,” said Kenton Shirk, an associate director at Cerulli. “In the next five to 10 years, we'll really start to see it.”
As dire as the situation seems, and as slowly as firms and solo practitioners appear to be addressing the problem, the industry will evolve to meet the challenge, according to Craig Pfeiffer, chief executive and founder of Advisors Ahead.
“Everybody has at least embraced the problem intellectually,” he said.
Mr. Pfeiffer thinks the advisory industry needs to become more like the medical and legal professions, where younger people serve as residents and associate lawyers before becoming full-fledged professionals.
Firms such as his are matching up college graduates interested in financial planning with advisory firms that need them and are willing to foster their career development.
“There is progress being made,” Mr. Pfeiffer said.
The progress at large, employee-based firms is mainly in accepting the fact that past recruiting and training practices don't work anymore.
“The graduation rates from wirehouse training programs are dismal,” said Tim Welsh, president of consultant Nexus Strategy. “The big firms need a new model to teach young advisers the ropes in the business.”
And they seem to be hearing the call. As wirehouses are shifting their orientation to fee-based planning, they also appear to appreciate the need for new training models that offer more support and a clearer career path.
“In the past, we would hire 1,000 people, give them phones and see who made it,” said Jason Chandler, head of the Wealth Management Advisor Group at UBS Wealth Management Americas. “We needed to change that.”
The Wealth Planning Associate program the firm launched two years ago doubled the length of time that trainees are paid a full salary while studying to be financial planners. They then get aligned with an existing advisory team but continue to draw some salary for two more years.
The other wirehouses are making similar changes to their training programs in the hope of improving their success rate.
Merrill Lynch has hired between 1,200 and 1,500 people for its Practice Management Development program every year since 2008, said Racquel Oden, managing director and head of the development program at Bank of America Merrill Lynch.
The 43-month program emphasizes “goals-based wealth management” and encourages Merrill Lynch advisers to take on Practice Management Development trainees to assume roles in their practices.
“We've always been committed to an organic growth model, but we've shifted our focus a lot toward teaming,” Ms. Oden said. “Who better to groom the next generation than our own financial advisers?”
Teaming theoretically could address both the succession issue for older advisers and new-adviser development. Of course, experienced advisers have to buy into the idea.
To that end, Merrill Lynch and the rest of the big firms are sweetening the incentives they offer older advisers to stay with the firm until they retire and transition their clients to other colleagues.
Registered investment advisers, the fastest-growing channel in the wealth management industry, may have the toughest challenge when it comes to business continuity.
Most RIA firms don't have the resources to identify, train and develop young advisers. And solo practitioners, for the most part, don't have the inclination to try.
Surveys of RIAs by Moss Adams continue to show that only about 30% of RIAs have a succession plan in place for their practice.
The custodians continue to push their client firms to draft a succession plan and prepare for a transition of leadership. Fidelity Investments, Pershing, Schwab Advisor Services and TD Ameritrade Holding Corp. are all offering reams of white papers, practice management resources and even financing in some situations for succession transactions.
As a group, however, advisers are still dragging their feet on the issue.
“We've been beating the drum on this with founders [of RIA firms] for years,” said Gabriel Garcia, director for Pershing Advisor Solutions.
“They will eventually have to leave their businesses,” he said. “The question is whether they have an orderly transition.”
As the advice industry approaches this crossroads, two options exist.
The industry can commit to developing a kinder, gentler path for younger people to learn the business and fill the void left by thousands of retiring advisers. Or it can push off the coming crisis for another day — and then another day — ultimately making transitions very rocky for both advisers and their clients.
Andrew Osterland is a freelance writer in New York.