The U.S. wealth management industry started the new year with solid fundamentals in place, according to a new report from McKinsey & Co. As Americans have become wealthier and their needs more complex, their demand for services is growing, and they are increasingly willing to pay for advice delivered by humans.
The report noted, however, that the industry will be hard put to supply the advisors needed to meet this demand over the next decade. McKinsey estimates that by 2034 at current productivity levels, the advisor workforce will face a shortage of some 100,000 advisors.
To address this gap, the industry will have to change the advisor operating model to increase productivity and attract talent much faster than before.
Surging Demand
McKinsey’s research showed that revenue from fee-based advisory relationships rose from $150 billion in 2015 to $260 billion in 2024, and the number of human-advised relationships grew three times faster than the population over that period.
The management consultant estimates that the number of advised relationships could climb from 53 million in 2024 to between 67 million and 71 million in 2034, an increase of 28% to 34%.
Firms across delivery models have taken note, it said, rolling out new advice propositions. Traditionally digital/direct wealth managers are rapidly expanding their full-service advice offerings, for instance.
Advisory firms have also been enhancing the depth and breadth of their planning services, such as basic financial, philanthropy, tax, family governance, trust and estate planning.
Headcount Challenges
The advisor population has grown by only 0.3% a year over the past decade and is expected to decline by 0.2% annually over the coming 10 years, according to the report.
McKinsey attributes this to retirements outpacing recruitments, estimating that 110,000 advisors — 38% of the current total, representing 42% of total industry assets — are expected to retire by 2034.
The report said that the industry previously has been able to meet rising demand by making slow but steady gains in advisor numbers and productivity. To date, the industry’s productivity initiatives enabling advisors to serve more clients include advisor teaming; hiring of specialists to support advisors; rolling out digital account opening, reporting; and enhancements to advisor desktops and workflow automation.
“However, capturing the advice opportunity will be more difficult as the advisor population ages and their numbers start to decline, and as the immediately accessible productivity gains are realized,” the report said.
According to McKinsey, firms will need to increase productivity by 10% to 20%, and attract 30,000 to 80,000 net new advisors over the next 10 years, compared with 8,000 in the past 10 years.
“All told,” the report found, “if the productivity gains are realized, the industry will need between 320,000 and 370,000 total advisors to meet demand by 2034.”
Where will this new blood come from? McKinsey said that firms should look to on-campus recruiting, structured internships and rotational programs. Another source is U.S. direct brokerages, which have trained more than 5,000 new advisors in the past five years. Career changers may provide another source of good talent.
Firms should also consider individuals who have failed out of major advisor development programs, as these candidates could excel in a different firm and culture and may have already obtained required licensing and basic training.
Unlocking Productivity
Besides recruiting new advisors, McKinsey estimates that firms will need to increase productivity by 10% to 20% to meet the talent shortage.
How? Significant improvement in lead generation, teaming and practice management — optimizing skills of team members, increasing specialization and leverage; and using technology-enabled by generative artificial intelligence — with a focus on value-add activities and removal of low-value tasks.
The report noted that centralizing lead generation can improve advisor capacity by 3% to 4%, reducing the amount of time spent prospecting. Teaming, specialist support and practice management can increase productivity by 3% to 6%, while technology improvements and AI can add between 7% and 15% capacity.
Doing these things, the report says, would be equivalent to adding 30,000 to 60,000 advisors at 2024 productivity levels.
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