Since the bear market of 2000–2003, the financial advisory industry has seen a steady decline in the hiring of young advisors. According to the Certified Financial Planner Board of Standards, today, there are more CFPs over age 70 than under age 30.
At the same time, baby boomers have begun passing their wealth onto their children who are part of the so-called millennial generation. CNBC reports that over the next several decades, Americans will transfer about $30 trillion in assets to the next generation.
With so many veteran financial advisors set to retire in the next 10 years, and the ongoing wealth transfer to millennials, the wealth management industry is facing an identity crisis — and aging CFPs and FAs are finding themselves at a career crossroads.
What’s An Aging Advisor to Do?
As veteran FAs prepare to leave the profession, they may wonder what’s next for them. After helping retiring clients for their whole career — through bull and bear markets, high and low inflation, tough times and good times — many of these advisors may not know how to help themselves in the midst of a changed industry.
As retirement approaches, some FAs may not have an adequate succession plan in place for transitioning client relationships, particularly for managing a millennial clientele who expect quick, easy and online solutions. If older CFPs have not modernized their business or kept pace with technology and trends, they may not have the resources needed to handle the financial planning and comprehensive wealth management that younger clients expect.
Similarly, many older FAs are finding that their business model is outdated. They may not have shifted their practice from transaction to recurring revenue as quickly as they should have, which makes their advisory practice less marketable for a possible sale.
On the personal side, many other questions remain. Did they save enough for retirement? Many don’t have a pension plan, some have deferred compensation, but few have saved enough for a lifestyle in retirement on par with their working years.
Where Do Wirehouses Fit In?
For retirement-age FAs working at large wirehouses, such as UBS, Merrill Lynch and Morgan Stanley, the future is even more uncertain. Several wirehouses recently announced plans to reduce their upfront payout and back-end recruiting packages. They also require a 7-, 8- or 9-year employment contract. At 65 or 70 years old, who wants to sign up for that?
As FA compensation plans have evolved over the years at the major wirehouses, it seems that advisors’ net commission has been squeezed. Advisors are no longer paid on smaller accounts or certain other products, and often feel pressured to move away from a transaction-based business to a recurring revenue model. They share an assistant and receive fewer benefits. All this can make even the most seasoned FAs feel like they are being forced out the business or feel like they must continue working well past retirement age, sacrificing their own retirement dreams after working so hard to make their clients’ dreams come true.
Where’s an Aging Advisor to Go?
For most FAs, there are four options: Stay where they are, lock into a contract with another wirehouse, create their own RIA or join an existing one.
Luckily, the industry is evolving and a major shift will occur over the next 10 to 20 years. Wirehouse advisors are not happy and if they are, they are not informed. Staying where they are or going to a competing firm is not as attractive as once thought.
Becoming an independent RIA is not easy to do at any age, but is especially unappealing for an aging FA looking for a path to retirement.
The most attractive, and for some, best option is to join an existing RIA, which tend to be smaller and nimbler than the major wirehouses. This arrangement offers an older FA more ownership opportunities, greater net income to the advisor, and lower fees to clients.
An RIA is comparable to a wirehouse in scope of services, but the FA can plug into the latest technology, rather than the older antiquated, proprietary, basic versions used at wirehouses. An RIA is the modern version of a financial services firm, and typically provides more support to clients and has CFPs to do the data gathering and financial planning, while acting as a communication link between clients and FAs. RIAs may also offer greater access to more tactical investment strategies to help manage their clients’ investments as they head to retirement. They provide a system along with the people to transition wirehouse clients to a more comprehensive wealth management firm, not only providing investment management services but more advanced planning solutions to cover risk management, wealth transfer and charitable giving.
Most importantly for the retirement advisor is that they can receive all this and work to their own schedule. An advisor who wants to dial back the work week to 20 hours or take two or three months off in the winter can do it while likely receiving more income pre-retirement. In retirement, they may also receive income for a much longer period with the possibility of a survivor benefit based on the business that is maintained.
A bonus is that they may receive ownership or the ability to purchase ownership in the RIA for a future potential liquidity event. Many are doing this to create greater value as a whole compared to the individual RIA, which has become attractive because valuations of these companies in this low-interest-rate environment have been skyrocketing. With this in mind, it’s conceivable that down the road, the FA or his family may receive a significant amount of liquidity that is possibly greater than the upfront forgivable loans that tend to blind the eyes of the advisor that hasn’t run the numbers.
Not all RIAs are the same, however, and some offer better packages, services and/or different investment management styles than others. It is important to do your research to determine which one is the right fit for you.
In the current climate, FAs are waking up to the full suite of options that are available to them. They are realizing their value and see a better place for them, their clients and their retirement dreams. The future is bright for financial services industry— and for older advisors and their clients.