3 Reasons Why The Financial Advisor Market Size Isn’t Actually Shrinking

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#OfficeHours with @MichaelKitces Video Transcript

Well, welcome, everyone. Welcome to Office Hours with Michael Kitces.

For today's Office Hours, I want to talk about what I think is one of the most misunderstood and misinterpreted trends amongst financial advisors today, which is figuring out how many financial advisors there actually are and whether that number is growing or shrinking, especially in the light of the rise of robo-advisors and all of this technology automation.

And it's an important number for a lot of reasons. First and foremost, just, it speaks to the size of our industry in the aggregate, and more directly whether financial advising is growing or shrinking, which is a big deal as businesses make decisions about whether to serve us as financial advisors or not. As I've discussed on the blog in the past, I think one of the primary reasons that the financial advisor community has struggled to get better technology tools is that entrepreneurs and angel investors and venture capital funds think the financial advisor marketplace just isn't big enough to be profitable for them, and so we have to home-grow our own solutions where advisors make tools for other advisors. And the concern amongst them is not only that the advisor marketplace may not be big enough, but that if the total headcount of advisors is shrinking, they don't want to invest new capital into new businesses in perceived-to-be-shrinking marketplaces.

But the trends in the number of financial advisors matters at the individual advisor level as well. If total headcount of advisors is shrinking, almost by definition, there will have to be consolidation and mergers and acquisitions and more succession plans as the clients of those advisors who are leaving have to go somewhere. And it means competition ironically may actually get easier if there are literally fewer advisors to compete with. But by contrast, if advisor count is growing then competition actually rises. And it also means there's more room for new firms to start up. If there are more advisors coming in than there are leaving, it means just trying to find an older advisor's book of clients to take over as they retire won't be so feasible if there aren't that many advisors leaving.

And even within the financial advisor community, knowing which segments of advisors are growing and which are shrinking is important as the firms that serve us make their own resource decisions about where to concentrate. That's why it was such a big deal that even Commonwealth Financial Network, one of the largest independent broker-dealers, announced this week that it's launching an entirely fee-only RIA unit for its advisors. That's right. A broker-dealer whose functional reason for existing is to facilitate the sale and distribution of investment products for a commission made a new division to accommodate their growing base of fee-only, zero-commission advisors. Because even if the total headcount of advisors isn't growing, segments within the advisor community can still be growing and creating new business opportunities.

How Many Financial Advisors Are There Really? [02:42]

But ironically, the starting challenge to this question of whether the total number of advisors is growing or shrinking is just actually figuring out how many advisors there are in the first place. And it's a surprisingly difficult question to answer, even though we're a highly regulated industry where we all have to get registered with our regulators, because our roots as financial advisors was selling products, and consequently, we don't actually literally register ourselves as financial advisors, we register ourselves as insurance or annuities agents with the state or a registered representative of a broker-dealer with FINRA or as investment advisors under an RIA with the SEC or states, depending on the size of the firm. Which means there are a lot of different places to look just to figure out how to count all the heads.

And of course, not everyone registered with those regulators are financial advisors. For instance, the media likes to cite that there are 600,000 financial advisors because that's how many people are registered in the BrokerCheck database with FINRA licenses, except a lot of FINRA licenses have nothing to do with giving financial advice. Many of them are for narrower products or services outside the scope of traditional advice, like the Series 31 for running a managed futures fund or the Series 79 to do investment banking. And many of those FINRA-registered individuals are in non-advisor operations or oversight capacities. They've got a Series 24 principal exam or a Series 27 FINOPs principal exam. The actual number of people registered with FINRA who are truly client-facing with retail consumers and even in a position to give personal financial advice is less than half of the 600,000.

And of course, many advisors do business in multiple channels, right? We could be dual-registered with FINRA and under an RIA. Historically, many of us who were FINRA-licensed were also licensed to sell insurance and annuity products with the state. And even some RIAs today maintain a state insurance license even if they don't have a FINRA license because they're doing fixed insurance products like implementing universal life for estate planning purposes. Which means you can't even just add up the number of people who are registered under an RIA or under a broker-dealer or have a state insurance license because you have to deduplicate all the overlapping ones who span multiple channels or go into the firms directly and try to sample them to figure out how many there are.

Now, the organization I think that does the best job at trying to do all this messy counting process is Cerulli Associates. They're an industry research firm, and their estimate is that the total number of financial advisors is 311,305. Just over 300,000, spread across all the different industry channels, from wirehouses to independent broker-dealers to RIAs.

Now, the caveat here is that not all of those financial advisors really actually do much financial advising. Cerulli does have a pretty rigorous definition about how they count who's a financial advisor in order to count them properly, but they do set the bar fairly low. And so, consequently, when Cerulli estimates there are over 300,000 financial advisors, their follow-up research has found that less than half of them even state they offer financial planning advice to clients. Now, I don't know quite what it means to be a financial advisor who doesn't give financial advice. I think it essentially means they are financial advisors who are really just in the business of selling financial services products because they literally say they're not even giving financial planning advice to their clients as a financial advisor.

Now, the truth is, even amongst those who say they're doing financial planning, some are very in-depth and comprehensive and some aren't going that deep and most of their financial planning is probably just giving the prepackaged output from some financial planning software. But when more than half of the advisors don't even say they do that, give prepackaged software output, it means the true number of financial advisors who really give financial planning advice to clients is well under half of that 300,000 total, which isn't entirely surprising given that the number of CFP certificants is only about 82,000. So we're not even quite 30% of all financial advisors who've at least demonstrated enough seriousness about financial planning that they've bothered to get a certification in it.

And while I think there are some non-CFPs who still give good financial planning advice and maybe just didn't get the marks because in the past they weren't as significant and they don't want to go back and get them now, not all of those who are CFP certificants do comprehensive financial planning advice as well. The number of advisors truly providing advice, if I call like truly being financial advisors who are compensated for giving financial advice, is likely less than the 82,000 number of total CFP certificants. So that is a baseline. Let's talk about the trends a little.

Will The Headcount For Financial Advisors Shrink… or Grow? [07:11]

Cerulli's been predicting that the number of financial advisors would shrink significantly in the coming years. Back in 2013, when there were just over 300,000 financial advisors, they predicted that within 4 years, essentially by today, we'd be down to only 280,000, driven by the fact that nearly half of all financial advisors are over the age of 55 and there are more than 8,600 advisors hitting retirement age every year for the next decade. And when you couple the nearly 100,000 financial advisors who will hit the retirement age cumulatively over a decade on top of the rising automation of robo and other technology tools, the prediction has been that the headcount for financial advisors was just going to shrink lower every single year for years to come as the industry would continue to struggle to attract next-generation advisors to replace all those projected to leave.

But as I've maintained for the past several years, I think Cerulli's forecast is dead wrong. And I don't say that with any disrespect to Cerulli. I think they do a fantastic job with their research and I recommend them frequently, but I think the projection on this issue in particular, that the domain of financial advisors is shrinking because a big wave of them are hitting retirement and technology is rising to replace them misses some really key points. The first reason why we're not likely to see a decline in the advisor headcount in the coming years, despite being an industry where so many are over the age of 55, is simply that financial planning is not a business you retire from just because you're eligible for Medicare and your Social Security check.

After all, remember, the original reason for social insurance programs like Medicare and Social Security was that back in the Industrial Age, most jobs were manual labor and at some point, you physically couldn't do them anymore. Your body became obsolescent tools. So like old factory equipment that doesn't work anymore, you had to be retired from the factory. And most people's bodies started giving out in their 50s and 60s, so we associated retirement with being 60-something and created those Medicare and Social Security programs as a backstop for those who physically had to retire and couldn't work anymore and needed to put food on their table.

But financial planning is not exactly manual labor. This is not a business where your body gives out in your 60s. Financial advice is primarily a business of intellectual knowledge. Client relationships bolstered by experience and a lifetime building of reputation in your community. Which is why >in our recent research citing the financial planning process, we found that the average income of an advisor with 30-plus years of experience is almost $400,000 a year, and that income on average continues to increase further as they keep working past 30 years.

And not only that, but a lot of those financial advisors aren't necessarily actually working that hard after 30 years. You know, by then, you've got most of your clients. You don't have to prospect so aggressively anymore. You don't have to do as much of that time-consuming upfront work with new clients because you're not necessarily picking up a lot of new clients. You get to leverage three decades of wisdom and experience working with clients you like working with, potentially making hundreds of thousands of dollars a year and enjoying not only the financial rewards but just the psychological rewards of having great relationships and a meaningful positive impact on your clients. Who retires from that just because you're eligible for Social Security check that's only a fraction of the income you're already making from the work that you're enjoying?

Now, I do see a lot of advisors at this stage make some adjustments to their practice. Maybe you decide to start outsourcing some key parts of the business so you can focus more on just the client stuff that you enjoy. Maybe you decide to let go of some small clients that just aren't a good return on your time anymore so you can free up that time for grandchildren on top of your existing clients that you keep. Maybe you change firms or platforms one last time or tuck into a larger firm so that you can have a continuity plan if something does happen to you.

But this is why I said six years ago that all these hand-waving predictions of a shrinking advisory industry and a looming succession planning crisis was going to be a total mirage. And that when the time came for the wave of retirements, advisors wouldn't be retiring, because for a lot of advisors, there's no reason to do that yet, at least not in your 50s and 60s, maybe in your 70s and 80s at some point. But that means this wave of retiring advisors might actually stretch out not just over the next 10 years, but the next 20 to 30 years. It's the reason that the latest FPA study still shows only 30% of advisors have a formal written succession plan, because the rest aren't leaving. There's no reason to. And sure enough, here we are 5 years later from when Cerulli made that prediction that advisor headcount would be down almost 10% due to a wave of retirements, and the number of financial advisors is up over the past 5 years from when that prediction was made.

Technology Is Squeezing In More Financial Advisors Than It’s Squeezing Out [11:47]

The second reason that I think the prediction for declining advisor headcount is overstated is that it's based on the presumption that we're going to continue to fail to bring in enough new people to the industry to replace the wave of retirees. Now, it's fair to point out that we are having a lot of trouble collectively as an industry recruiting Millennials . We're still largely seen as a sales-oriented industry, Millennials don't want to be salespeople. And it's made worse by the fact, as I noted earlier, more than half of financial advisors openly admit they don't give any financial planning advice, but they're still recruiting young people to be financial advisors who then find out the hard way that they got recruited into a sales job and then those young people leave the industry for good, thinking that's all we do, and they never see the real side of financial advice.

Not to mention that even with more students studying financial planning in school, the CFP Board found in a study a few years ago that more than two-thirds of them never actually even took the CFP exam after they graduated. Now, I don't think this is entirely surprising. A lot of us don't go on to do careers in what we happen to major in as undergrads, but it means we have an even bigger shortfall of students we need if two-thirds of the ones who actually graduate from financial planning programs still don't actually come into a career in the industry anyways. But what this trend fails to capture in a word, career-changers. All right, maybe a hyphenated word. Because as much as we talk about the challenges and risks of what technology might do to the career of a financial advisor someday, technology is already doing that to a lot of other industries now, and it's driving people to change careers. And when you're trying to decide what career to change to, the average lead advisor still earns almost three times the median household income in the US, that makes it a pretty darn appealing career to transition into.

And it's not just about career-changers coming from unrelated industries, also career-changers coming from our more directly affiliated professionals that tie to financial services: lawyers and accountants. This is why the AICPA's personal financial planning section is growing so much in recent years. Because while we're debating whether robo-advisors might commoditize parts of investment management, we already know that tools like TurboTax have commoditized a lot of the accounting business, particularly when it comes to tax preparation work. And so as technology squeeze a lot of CPAs in the tax prep business, it pushes them towards becoming a financial advisor with more upside potential.

And the same is true for attorneys, especially estate planning attorneys. With the estate tax exemption up to $22.4 million for a married couple from just $625,000 per person 20 years ago, the number of people exposed to federal estate tax has fallen by more than 95% in the past 20 years. The recent estimate from Heckerling Institute was that there may be no more than 2,000 estates per year across the entire U.S. who died with federal estate tax exposure. Two thousand estates a year. There are a lot more than 2,000 estate planning attorneys out there and most of them need more than 1 client per year to make a living. So where are they going to go when estate planning is in decline and they can't even go down market to do more basic estate planning documents because technology companies like LegalZoom are taking over the low end of the market? They become financial advisors instead.

Now, unfortunately, our industry isn't great to career-changers. It can be tough to satisfy CFP Board's experience requirement when you're making the transition. While the income potential for financial planners is great, in the near term, it often requires a big step backwards in income for a career-changer to take two steps forward, which isn't always feasible with kids and college and mortgages. And it's tough just to ramp up to be a financial advisor on a part-time basis if that's how you're trying transition. But still, the key point remains that while we talk about the risk that technology will squeeze out financial advisors, right now it's squeezing out even more people in other industries and into being a financial advisor, especially given what is still an incredibly well above average income potential.

Technology Doesn’t Replace Financial Advisor Jobs, It Increases Them! [15:39]

But the last reason that I think we should still be bullish on the job opportunities for financial advisors is technology. The dominant theme in the media for the past five years has been whether or how much robo-advisors would knock out or replace human advisors by automating the tasks we do for our clients and reducing how many advisors we need. But technology often plays out in some unexpected ways. And I think a great case in point example here is what happened to banks and teller jobs when the automated teller machine or the ATM showed up, in theory, to replace all the human bank tellers.

When the ATMs first started showing up in the 1970s and '80s, the prediction was that soon banks would completely replace all the human tellers with technology tellers and that nearly 500,000 human teller jobs would be eliminated. And while in practice banks really did roll out almost half a million ATMs in the 1980s and 1990s to replace the humans, by the 2000s, the number of human teller jobs was up to 600,000 on top of all of the ATMs. We went from half a million teller jobs to more than 1 million in combined teller and technology teller jobs. In other words, the net result of all the increase in the technology to replace the humans was an increase in the technology and the humans.

And the reason, as some follow-up economic research showed, was that the introduction of the ATM brought down the cost of banking. It made it more efficient. So much so that banks opened new branches in new communities they didn't serve in the past. And so while the number of tellers in each bank branch did go down because they were partially replaced by technology, the tellers were just deployed to new branches with more new tellers hired on top because the branch was now profitable to run with a combination of humans and technology in a way that wasn't possible with humans alone.

And this is the exact kind of path that I see playing out with technology amongst financial advisors as well. Because when most financial advisors can only work with about 100 clients in deep advice relationships, and in the late stage of our careers we often winnow it down to just profitably serving our 50 best clients, the reality is that even 300,000 financial advisors at 100 clients each is only serving 30 million households. There are almost 120 million households in the US, which means there are barely enough of us to serve one-fourth of all U.S. households.

And as we mentioned earlier, half of those financial advisors fully admit they're not actually giving any financial planning advice. So realistically, the number of households that we could even possibly serve with real financial planning is less than half of that prior number or maybe 15% of households. And if we narrow that down further to the number who have CFP certification, we couldn't even serve 10% of all households. Which means, simply put, there's an immense huge amount of room for technology to make us more efficient, bring down the cost of financial advice, and serve the other 85%-plus of households that we don't serve today. Just as ATMs brought down the cost of banking and allowed banks to expand into more communities they hadn't previously serviced and hired more human tellers to do it.

And on top of that, as technology continues to put pressure on the financial advisor value proposition, it's driving more advisors into actually giving advice. Cerulli's own study that reported barely half of advisors were doing financial planning was at least up from only one-third of advisors saying they were doing financial planning four years ago. Because even as the number of financial advisors in total is roughly flat, the number of real financial advisors giving advice is rapidly growing within that number. That's why CFP Board is seeing record highs in the number of new people sitting for the CFP exam in recent years, and the number of CFP certificants is up nearly 25,000 since before the financial crisis, even though the number of financial advisors has declined by 25,000 since then.

Simply put, if you really want to measure whether the opportunity for financial advisors is growing, the better leading indicator is not looking at the headcount of total financial advisors, many of whom aren't actually in the business of advice in the first place, but the growth of CFP certificants. Which is not only growing but growing faster and accelerating as technology comes and makes financial planning more efficient, reduces the cost of overhead on giving advice, but it doesn't eliminate human advisor jobs, it eliminates back-office jobs and overhead expenses that make it possible to hire more human advisors instead.

The bottom line, though, is just to recognize that even with this looming dual threat that almost half of advisors are over 55 and the rise of robo-advisor technology, that there's good reason to be incredibly bullish about financial advisor job opportunities and the size of the financial advisor marketplace. Not only because the projected wave of advisors retiring just isn't materializing because advisors don't have to retire just because they're 60-something, the retirement wave may still be 20-plus years out, but just as we saw with ATMs, technology, including robo-advisor tools, aren't a threat to financial advisors, they're back-office efficiencies that bring down the cost of advice, expand the market we serve, and increase the demands and hiring potential for advisors. Which I think will increasingly fill not only from the rapid growth of undergraduate financial planning programs, thanks to CFP Board's great efforts, but the squeeze that everything from technology to tax law changes are causing in other professions, driving more of them into financial planning as career-changers.

And if you want the best perspective on the opportunity in whether the market for financial planning advice is growing in the aggregate, the bottom line is we shouldn't be looking at the total headcount of advisors, but the total headcount of CFP certificants. It's the best leading indicator of the market for financial planning advice, and it has grown unabated for the past 20 years and is accelerating now as the CFP marks become the accepted standard and technology forces all of us as advisors and "advisors" to step up and deliver real advice.

So I hope that helps a little as some food for thought. This is Office Hours with Michael Kitces. Thanks for joining us, everyone, and have a great day.