There are five forces of change affecting the advice industry over the next five to 10 years, Sanjiv Mirchandani, president of Fidelity Clearing and Custody, said in a webinar.
“Generally, things are pretty good for advisors,” Mirchandani said of the current situation. Growth has been strong since the crisis, and between 2009 and 2013, industry assets have grown 8%, advisor income has grown 9% and average book assets are up more than 11%.
However, “things are not as bright as they seem,” he added. About half of that growth is from improvements in the overall market. “When you look to the future, we see great opportunities but also great risks coming together to create a very different landscape for the future.”
He warned advisors not to rest on past success. “A comfortable position may not be one that puts you in the best position for the future.”
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Here are the changes all advisors will need to grapple with:
1. Enormous consumer opportunity. As advisors’ oldest clients continue to age and pass away, there’s a huge intergenerational wealth transfer opportunity, Mirchandani said: 70% of heirs fire a financial advisor with 12 to 18 months of the client’s death.
With baby boomers, Mirchandani said, “what is vastly underestimated is I believe when boomers enter retirement, the opportunity for advisors is much richer than many believe, and the risks are greater, too.”
Gen X and Gen Y can’t be approached the same way advisors have approached their parents, he said, “and we certainly can’t afford to give them at this point the same level of service.” However, “advisors who have a significant proportion of clients under 45 grow at an average of 14.1% a year, compared to a 7.7% annual growth rate for advisors who serve older clients.”
Women have greater influence, too. “There’s an enormous shift of wealth underway to women in the United States as they increasingly come to earnings parity and outlive their partners. They are an ideal client, yet they are tremendously underserved,” Mirchandani said.
The result of those demographics is that there will be “an enormous amount of money in motion” over the next decade.
2. Looming advisor transformation. The advisor population is shrinking by about 2.9% a year and the next generation of advisors is not keeping up, Mirchandani said. Furthermore, advisors over 60 hold $2.3 trillion, and many don’t have a succession plan. By 2020, the industry will be short 10,000 advisors.
He suggested the No. 1 thing the industry needs to do to meet that demand for advisors is to make advisors more productive. He pointed to wirehouses as an example of a model that has the most productive advisory force. “They’ve accomplished this by cutting small producers and clients, retaining top producers with retention bonuses, targeting high-net-worth clients and deploying cost cutting measures,” he said. The problem, though, is that most of their growth “comes from market action, not flows” and they’re still faced with the problem of an aging client population.
The keys to productivity, he said, are being planning centric, working on advisory teams, segmenting clients, outsourcing investment management and maximizing technology.