From the March 2014 issue of Investment Advisor • Subscribe!

Aging Advisors: Bad News for Indies, Good News for Wirehouses

Aging advisors threaten the viability of both custodians and IBDs, Cerulli suggests, while wirehouses are resurgent

While the aging of the advisor work force is not a new issue, new research suggests that the key partners of independent advisors — custodians and broker-dealers — face a serious risk to their business models as advisors age, while dually registered advisors, the biggest growth channel within the business, are facing increased scrutiny by regulators. Moreover, the wirehouses remain the largest channel by assets and have seen new growth through their “right-sizing” efforts, though they are focused more on retaining current advisors than recruiting new advisors to their model.

A recent study by Cerulli Associates found that nearly half of the advisor work force is at or near retirement, which makes it even more urgent that firms recruit younger advisors to accelerate their succession plans, and puts BDs and custodians at risk of losing assets under management.

“The average age of financial advisors is 50.9, and 43% are over the age of 55,” reported Kenton Shirk, associate director at Cerulli, in releasing the research firm's newest study, “Advisor Metrics 2013: Understanding and Addressing a More Sophisticated Population.”

The study found that nearly one-third of advisors fall into the 55 to 64 age range.

Cerulli focused on advisor trends and consumer information, including market sizing, advisor product use and preferences, and advice delivery.

“As the advisor population ages, broker-dealers and custodians are at risk of losing AUM as advisors exit the industry,” Shirk explained. “The independent channels are most at risk because they have the oldest advisors on average.”

Broker-dealers, Shirk added, “continue to struggle to recruit new young advisors into the industry to offset those advisors who are nearing retirement.”

Cerulli says that firms should encourage “advisor teams to bring in junior advisors and train them in a specific area of expertise in order to increase the success rate of these new recruits.”

To guard against asset attrition, broker-dealers and custodians need to provide support and resources to help advisors tackle succession planning and develop internal succession candidates.

Cerulli noted in a separate study, “Challenges to the Advisory Industry,” that because one-third of advisors plan to retire within the next 10 years, “it behooves them—as well as broker-dealers and custodians—to prepare now,” as it can take one year or longer to identify a successor, conduct due diligence, strike a deal and execute a transition.” Cerulli pointed out that the timeline is “much longer” for those grooming an internal successor. “To maximize value, advisors should take proactive steps even sooner to build buyer appeal and maximize future client transfer.”

Dually Registered Advisor Growth

Over the course of 2012, the dually registered channel, within which advisors operate their own RIA practice while also affiliating with an independent broker-dealer, experienced the largest growth rate (21.5%) as the channel's assets surpassed $1 trillion for the first time, Cerulli found.

Initially, many observers assumed that the dually registered channel would be just a way station on the transition to becoming “pure” RIAs, Cerulli noted. “However, due to their legacy assets and some products offered solely through commission-based platforms, many advisors with their own RIAs anticipate preserving their IBD affiliations for the long term to maintain product access and, in some cases, as an acknowledgment of the value that their IBD home office can provide,” Cerulli said.

So while these dually registered advisory practices generally brand themselves as RIAs, bound by a fiduciary duty to put clients’ best interest first at all times, Cerulli said, many are choosing to keep traditional brokerage relationships in order to maintain maximum portfolio selection flexibility.

However, Norm Champ, director of the SEC's Division of Investment Management, noted at the SEC's recent compliance seminar that the agency is watching the “significant movement” by dually registered advisors and broker-dealers of client accounts from brokerage to advisory accounts. “We get why this is going on … because with advisory accounts you get an [ongoing] advisory fee, and that is good for revenue,” he said. However, Champ warned compliance officers to think about “where the advisor's fiduciary duty occurs” when “recommending to move a client from a brokerage account that costs nothing to an advisory account that can cost 1% per year.”

Wirehouses vs. Independents

Despite the growth of independent channels, the wirehouse channel still controls the largest slice of the advisory segment, with more than $5.3 trillion in client assets, Cerulli found. “The four firms that comprise the channel—Morgan Stanley, Merrill Lynch, Wells Fargo and UBS—have lost overall market share in the last several years, but outperformed overall industry growth rates in 2012 as their right-sizing efforts began to pay off.”

When asked by Cerulli which channel advisors were most likely to move their practice to if they were to leave their current broker-dealer, advisors in the independent broker-dealer, dually registered and registered investment advisor channels answered they’d prefer an independent channel. “When the IBD and RIA options are added together as their own category, it is the most preferred option across all channels, even including the wirehouse channel,” Cerulli said.

This should serve as a warning to the four wirehouse firms listed above, Cerulli said, as they need to recognize this trend, especially as recruiting deals start to expire, and react accordingly. Recruiting deals, Cerulli said, are key to maintaining market share at the wirehouse firms, but do not mean that a large advisor team won't decide to open up their own RIA. “Excluding advisors who are already in the wirehouse channel, no channel had more than 6% of advisors showing interest in moving into the wirehouse channel,” the Cerulli report noted.

Said Cerulli: “This is a clear sign that the wirehouse channel is all about retention and not about targeting other channels for new advisors.”

The Cerulli analysts said that they anticipate an “ongoing slow migration of investor assets away from employee channels toward the more independent advisory models and direct distribution models.”

The ubiquitous growth of consumer technology has eliminated many of the hurdles that had limited growth of smaller practices in the past, Cerulli said. “Not only are a wide variety of products available to advisors in each channel, but technology developments have greatly lowered the barriers to entry to the advisory space,” according to the Cerulli report. “An advisor doesn't need a Wall Street pedigree, just an Internet connection and the trust of their clients. Regardless of the delivery method, financial relationships are about trust and value.”

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