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The Advisor Retirement Crisis

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The looming shortage of financial advisors has generated all sorts of talk, research, concern — but precious little in the way of an industrywide response.

“Not only are we at a crossroads, we are in crisis mode. Firms aren’t going to feel the effects for a decade, but we need to plant the seeds today. It takes five years, even longer, to bring someone into the business to be competent,” notes Dennis Gallant, president of GDC Research in Sherborn, Mass.

The stakes could not be higher. The shrinking pool of skilled advisors coincides with the highest demand ever from clients seeking advice. One risk is that a talent shortage could drive financial advice further up-market to the detriment of Main Street Americans. Already, in advisors’ offices across the nation, clients have begun to query their advisors about their succession plans. They don’t necessarily like what they’re hearing.

One advisor associated with Schwab recently lost two $10 million accounts. Why? “His clients told him no one else in his organization could take care of their assets the way he could,” said Dave DeVoe, managing director of strategic business development for Schwab Advisor Services. They just didn’t like that the advisor lacked a succession plan. “The bench was very thin after him,” DeVoe added.

While many firms — the wirehouses, in particular — are focusing on career changers as the next-generation advisor, many consultants strongly believe that young people with three to seven years’ experience represent the candidates with the right stuff.

“They know enough to come in and do some planning, but not so much that they think they should be a 30 percent partner and make all these demands,” according to Stephanie Bogan, who heads the Southern California-based consulting firm Quantuvis. By contrast, she considers the career changer a “newbie in the body of a 40-year-old” who’ll demand a $125,000 salary when worth one-third of that. Bogan, by the way, looks at the convergence of the upcoming supply and demand scenario as a “major inflection point” in industry history.

Wells Fargo Advisors and Morgan Stanley Smith Barney will both hire roughly 1,000 trainees this year with amped up programs that include dedicated coaches for each rookie advisor and deep educational tracks that highlight business development and practice management. Notably, the wirehouses are placing more trainees with established teams as a way to build a career path and ensure a higher success rate.

The washout rate of trainees is widely known. The average trainee at Wells Fargo, for instance has 16 years of professional experience but one-third will fail in their first year, according to Mike Zuccarello, managing director of training and development for the firm. Just 50 to 60 percent of a typical class will remain intact after its second year. For trainees who have been placed with a team, that second year number, at 70 percent, is higher.

Unlike a lot of other firms, Raymond James & Associates has pretty much changed its stripes when it comes to its training philosophy — redesigning rather than tweaking.

As Bob Patrick, who heads education and development for RJ&A, puts it: “As an industry, we have to stop trading advisors back and forth and bring in new blood that will become the next generation of advisors.” Patrick points to dentistry as a good model. “You bring in a junior dentist who works with you five to seven years, gets to know the clients and builds the trust up — not some tertiary handoff with a check written. It has to be a meaningful process.”

To that end, RJ&A developed a two-year training program focused on process, planning and community networking. On average, trainees are 25 to 30 years old and are placed with a mentor team in a branch office. There is also on-site training at Raymond James’ headquarters in Florida. After six months, rookies must prove that they have the tenacity to be an advisor — or be booted. Importantly, the trainee is not expected to go into production until the conclusion of the two-year master’s-like program. RJ&A recently placed its first two graduates.

In the past, RJ&A trainees had a 31 percent success rate at the end of three years — a figure Patrick says is no longer acceptable.
“If you look around the industry, this is getting to a critical level. The average age of our advisors is in the low to mid-50s. Even if this works seamlessly, we’re still up against it.”

As Matthew McGinness, managing director of advisory consulting services for First Allied in San Diego, ponders the failure of advisors to plan their succession, he asks the questions that are on many observers’ lips: “Will advisors get religion, so to speak, before it’s too late? Will the industry get it?”
We asked five thought leaders on the topic for their take. Here, in brief, are their big ideas.

1. Create a next-generation environment.

In her role of placing new talent with independent advisors, consultant Angie Herbers has located many young candidates in wirehouses. Why? “It’s like all of a sudden they went to prison,” she says. (She’s also had good luck recruiting from Facebook and Craig’s List.) The headline: Young people want a flex-time workplace where they are taught to be self-directed. “This is how they’ve been educated. When they’re hired into a firm that says you have to be there from eight to five and you have to do these things this way, it doesn’t inspire people,” says Herbers, president of Angela Herbers and Associates in Manhattan, Kansas.

Among her other suggestions: Before training begins, teach the person the importance of being a good employee. Make sure everyone has a mix of creative and mundane tasks. Consider revenue-based bonuses, a preference of young employees. Replace out-of-date technology. “Advisors don’t want to hear it,” Herbers says. “But most of this stuff needs to change for the next generation.”

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2. Develop your employees.

The industry has done a poor job of developing talent, with many advisors failing to eclipse the producer/sales assistant model. “I’m surprised at how much of the industry, even well intentioned independent RIAs, haven’t evolved away from that,” notes Rebecca Pomering, CEO of Moss Adams Wealth Advisors. “Even organizations that say they’ve put in multiple levels of staff and advisors still don’t know what to do with them, how to use them, how to coach them, or how to evaluate them. They don’t know how to improve performance.”

For starters, Pomering says, recognize that there is something between a sales assistant and a producer: a paraplanner, for example. Develop a structure that lays out responsibilities and accountabilities for each position and what it takes to get to the next level. Assign a well-trained performance coach — someone in a supervisory position — to each employee and look for feedback on a daily or weekly basis. “We can’t be lazy about how we develop people anymore or we’ll get 10 years down the road and we’ve plundered the value of our organization,” she adds. “We can’t stumble around. We need to be directed in our behavior.”

3. Support the academic programs.

In the future, people who give financial advice will require formal academic credentials, according to financial planning pioneer Deena Katz, whose financial planning curriculum at Texas Tech University is the nation’s most robust. Roughly 60 people graduate with a bachelor’s degree in financial planning from the institution each year and Katz places 95 percent of them.

“Our folks are obviously novices but they are starting out with a lot more education than the people they’re working for. They’re the future,” says Katz.
Notably, advisors across channels have enrolled in online master’s courses or “executive” courses at the university to get training that wasn’t available when they entered the business. This fall, Katz will produce campus programming on management succession for a broker/dealer. “Some of their people are going to go through the class. Our kids will attend the same class,” she says. “That’s how they’ll meet the next generation.”

4. Find the right candidate and avoid the wrong one.

It’s critical to be methodical when searching for the “right fit.” Schwab Advisor Services’ Dave DeVoe suggests creating a profile that goes beyond investment management capabilities or client relationship and business development skills. “You want someone who can manage the organization, who can be the COO,” he says. “You want leadership qualities. That’s the person who can take your organization to the next level.”

To start, DeVoe says the senior advisor should clarify his or her roles and responsibilities and begin to think about migrating those least enjoyed to someone else. “That clarity about what you’re seeking in a candidate helps you to be much more disciplined in finding that candidate,” he notes.

One blind spot to watch out for: When thinking about a successor, don’t look for someone who reminds you of who you were 15 or 20 years ago. “In many cases that’s not applicable. The principal was an entrepreneur, someone who could build this business from scratch and who could eat ramen when times were tough,” DeVoe adds. “In many cases, entrepreneurial skills are no longer what’s needed.”

5. Chart your path.

Mark Tibergien, CEO of Pershing Advisor Solutions, offers this blueprint for succession planning: 1. Begin with the end in mind — meaning the end of your life as an advisor and what that means for your clients. 2. Evaluate your present: where you are now. 3. Determine the gaps between your present and your end. 4. Create a systematic process for closing those gaps. 5. Hold yourself accountable to doing the right thing for your clients.

Looking ahead, Tibergien says a widespread failure to build a track for next-gen advisors puts into jeopardy the existence of the independent advisor.

“The crisis is in the independent channel. The employer channels will just ramp up recruiting,” he says. “I think that frankly what we are going through is this molting period. We’re shedding the old skin. What will emerge is a different type of animal. What we’re going to see are true middle market, mid-size advisory firms that can afford to hire more people and present continuity plans. That isn’t to say solos are dead, but they will be a smaller percentage of the total advice population. Overall, that’s a good thing for the business and a good thing for clients.”

Illustration by James O'Brien