This is the third in a three-part blog series that looks at the top issues advisors will face in 2014. In part one, we explored what may be next for ‘robo-advisors.’ In part two, we looked at the regulatory issues that may othr not be resolved this year. In this post, we will look at the challenge of demographics for the industry, and conclude with a discussion of how a bear market, especially in bonds, could affect the industry for good or ill.
The impact of “demographics” on advisors is certainly nothing new, nor is the point that the average age of advisors continues to rise every year, with not nearly enough newer/younger advisors coming in to replace those who are retiring.
But 2014 may finally mark the year when we really begin to take notice of the problem. As with the proverbial “boiling frog” in the pot that never realizes when to jump out as the temperature rises, the reality appears that we may already be past the point of no return for the industry’s demographic dilemma. Instead, the only question is how the shortage plays out until the situation rectifies itself.
In fact, estimates from Cerulli (see chart below) suggest that the number of financial advisors may have already peaked prior to the financial crisis, and has been in a steady decline since then. This trend is anticipated to continue as more and more baby boomer advisors reach retirement age and the industry attritions a net of about 2% of advisors per year through 2017.
What Your Peers Are Reading
Of course, not all “financial advisors” in the Cerulli data are providing financial planning, and overall the number of CFP certificants continues to grow. Nonetheless, the rate of growth for CFP certificants is slowing as well, as the chart below shows, suggesting that the aging of the advisor population and the increase in retiring advisors is beginning to take its toll there as well. In fact, as the CFP Board’s own certificant demographics data reveals, there are currently more CFP certificants in their 70s than there are in their 20s!
Of course, given what is still a relatively modest attrition rate, it’s not likely that there will be any sudden catalyst in 2014 (though an ‘unexpected’ bear market that puts pressure on a large number of advisory firms could accelerate the trend—see bonus 2014 outlook below).
Moreover, as I’ve noted in the past, it’s not entirely clear if advisors are even going to exit as quickly as anticipated, or if a rising number of veteran advisors will simply decide to convert their businesses into “lifestyle practices” and let them wind down slowly throughout their later years (which means the ‘great exodus’ of advisors could be less about retirement and succession planning, and instead more about holding practices until death and ‘final exit’ planning). On the other hand, the pace of baby boomers retiring from the advisory industry may accelerate now that the earliest baby boomers will be turning 70 in 2014.
The New Age of Employee Advisors?
Nonetheless, the fact that baby boomer advisors may be retiring more slowly than once anticipated doesn’t resolve the underlying problem. That is, there is a dearth of new advisors who actually have capacity to take on new clients, coinciding with a stage of industry growth where firms are getting larger and larger and are increasingly looking to hire “employee advisors” who have capacity for client growth. In the emerging “age of employee advisors” a veteran advisor at capacity with a lifestyle practice may as well be retired for a firm that’s looking to hire.
So from a practical perspective, the dearth of advisors is about to become most noticeable within firms that are actually growing and trying to hire more financial advisors for capacity. Whether trying to hire a newer financial planner or an experienced one, we’re seeing this trend play out in our recruiting businesses. The trend is also becoming apparent in the Moss Adams benchmarking surveys, which are showing upward pressure on compensation for experienced “lead” advisors that can be responsible for client relationships.
Of course, what may be a shortage of talent for firms that want to hire also paints a remarkably positive outlook for any newer advisors looking to enter (or who have recently started) in the business, as the dearth of younger advisors and competition for top talent should help to lift the financial benefits of a financial planning career in the coming years.
The Bottom Line