Executive Summary
As the baby boomers move inexorably closer to the point where they begin to retire en masse out of the workforce, so too does financial planning move closer to the point where the majority of experienced practitioners and firm owners will begin to exit the business. Industry guru Mark Tibergien estimates that as many as 2/3rds of all financial advisors may look to exit in the next 10 years, requiring more than 200,000 new planners to enter the industry just to keep the total number of practitioners even. Yet the reality is that so far, the industry appears to be woefully behind. As a result of this prospective workforce distortion, financial planning will potentially undergo significant changes in the coming years, and not necessarily for the good. In a "seller's market" for talent, large firms that can compete with both training and resources, and that have the profit margins to absorb higher compensation costs, will survive and grow; on the other hand, smaller firms may find themselves in a plight of being "stuck" small, unable to attract or even afford the young talent necessary to grow. And in the process, the greatest loser may be the majority of the American public, who simply will not be served when a dearth of planners inevitably causes the few practitioners that remain to be attracted to the most lucrative high net worth clients.
The inspiration for today's blog post were recent comments by industry guru (and Pershing Advisor Solutions CEO) Mark Tibergien, regarding the insufficient numbers of young advisors entering the business. By Tibergien's estimates, as quoted in Financial Advisor magazine from his speech at the Pershing INSITE conference, about 12,000 to 16,000 of the 315,000 advisors/brokers working in the industry will retire next year, with more and more retiring each year thereafter for the next decade. Cumulatively, Tibergien estimates the advisory world will need 237,000 new advisors in the next 10 years - turning over nearly 2/3rds of the entire workforce given the high average age of advisors - just to break even. Growing, and reaching more of the public, would require even greater numbers.
The reality so far is that the industry is not attracting nearly this many new advisors. Only approximately 3,000 CFP certificants are added to the rolls each year, and many of them are experienced advisors who have decided to add their CFP certification later in their career. Many more enter the industry in non-financial planning roles, but many are leaving, "failing", or burning out. Tibergien estimates that about 25% of young people leave the business every year, and for many of them, the bad experience at a first employer leaves them "ruined", unwilling to find another firm at all; consequently, Tibergien estimates half of those young practitioners will never return.
The implications of a shortfall of advisors in the coming years, as so many retire and so few enter the business to replace them, are profound.
Winners and Losers in the Competition For Young Talent
In a classic supply/demand fashion, the scarcity of young financial advisor talent in the face of rising demand will begin to exert significant forces on advisor compensation. In fact, industry studies have already been showing in recent years that advisor compensation is rising, especially for experienced practitioners who can hit the ground running in an existing firm. Demand is rising for newer, entry level planners as well - in no small part because many firms already cannot afford the pricetag to hire more experienced advisors.
In this "seller's market" for talent, the tables will turn - instead of advisors competing for opportunities at the best firms, instead firms will need to begin competing for the best young advisory talent. Firms may find themselves increasingly compelled to make the case about why the young advisor should pick the firm at all, rather than the firm choosing to hire amongst prospective young advisors. Differentiators will include not only pure compensation, but the firm's support for the advisor to grow and develop his/her business, technology and resources made available, and future equity opportunities in the firm. In fact, in our New Planner Recruiting business, we are already advising some firms to adjust the job description for their entry level positions to conform to the CFP Board's new 2 year fast track experience requirement, as a carrot to attract the top young talent graduating from CFP programs.
As a result of this dynamic, firms that have the depth and resources to put together an attractive training and development program will increasingly win the lion's share of top young advisor talent. Over time, this suggests that larger firms will continue to grow larger, while smaller firms will be "stuck" small, unable to put together a compelling workplace to attract the best young talent.
Margin compression
Upward pressure on compensation - in a world where the primary expense of most advisory firms is what they pay for their professional staff - will put pressure on profit margins in coming years, making the advisory business somewhat less profitable.
For larger firms, this will be experienced as the natural outcome of the marketplace - across all businesses and industries, healthy profit margins eventually contract as new businesses rise to compete. This will not be fatal to larger firms, who are already relatively stable with healthy profit margins; it may simply mean a little less average take-home pay for owners in the coming years.
For smaller firms, however, more expensive talent and the associated profit margin compression will make it increasingly difficult to afford to grow at all. As Tibergien recently pointed out in his column in Investment Advisor magazine, smaller firms lacking economies of scale already tend to maintain staff overhead expenses that are 10% higher than their larger competitors. As a result, margin compression that might make a larger firm less profitable, potentially makes a smaller firm UNprofitable.
The end result is that, once again, is that larger firms are better positioned to succeed in the marketplace, as the dearth of young advisors leads to compensation increases that leave smaller firms unable to afford top talent. Small firms instead will be force to compete for at best "less appealing" talent that is more affordable and try to cultivate and develop it, despite lacking the time, support resources, and experience to actively train new advisors in addition to running an existing small practice. Over the next decade, this suggests that the exit path for smaller practices may increasingly be to sell out to larger firms in a semi-distressed sale, as such practices will find it more and more difficult to attract, cultivate, and groom an effective internal successor. Even young candidates who do show early promise will be at risk of being attracted away after several years by larger firms who can afford to pay well for an experienced professional.
Lack of Planners to Serve the Masses
Unfortunately, the impact of a young advisor shortage on industry compensation trends in the coming decade will not only drive a further wedge between the larger, growing firms and the smaller ones struggling to hire and grow at all. The lack of advisors may also exacerbate the failure of the financial planning profession to effectively serve the masses.
As noted previously on this blog, the primary challenge for financial planning to serve the majority of Americans is simply a lack of demand and effective marketing for financial planning. If a financial planner had a line of 1,000 clients to see every year, similar to a doctor's office, it's relatively easy to establish a profitable business model. It may not necessarily be as lucrative as an high-net-worth practice, but it would be more than profitable enough to provide a good job and a reasonable income. Just as doctors can make income/salary trade-off decisions between working in private practice or specializing, or working in a low-income clinic, so too could financial planners.
However, a shortage of talent makes this far more difficult, for the simple reason that highly profitable high net worth practices will continue to increase compensation (since their profit margins will bear it), attracting good financial planners away from alternative business models. If the income gap between a "working with the masses" job and a "high net worth private practice job" were only 20% or 50% income, some people would choose each. In a talent shortage environment, though, the income gap could become 100% or more, making it increasingly difficult for young planners to turn down incredibly lucrative positions in larger high net worth firms trying to fill the bulk of Tibergien's projected 237,000 financial advisor jobs over the next decade.
The good news is that in the long run, rising compensation will make financial planning an increasingly attractive career track for young people, attracting new people to pursue, and eventually the supply will rise to meet the demand as income increases. In the near term, though, if financial planning is going to serve a broader spectrum of the public, it needs a sufficient supply of financial planners to fill out a variety of business models; with an advisor shortage, market demands may significantly distort the distribution of talent into relatively few business models, limiting access to financial planning for a large number of Americans for many years to come.
So what do you think? Do you see the shortage of young talent in the industry? Is financial planning just not an appealing enough profession to young people today? What do you think the profession should do to attract more young people into the business? Is the problem the young people coming into firms, or the way firms are run?
It doesn’t seem like a complicated problem to me; low base pay; high turnover and no job security. I’ve encouraged young people including my step-son, a talented risk management major, to look outside the industry for a non-sales job with higher pay and a history of retaining its young recruits.
Michael,
For purposes of this discussion, what is considered a larger firm (and a smaller firm)? I have seen numerous studies that have different definitions of each and was wondering how you defined each size.
We are very fortunate at our firm because three of the five partners are under the age of 40. Even though we are young, most of us have been here since our early to mid 20’s which has allowed us to gain valuable experience (almost as much as advisors 20 years our senior).
As for a shortage, I am not sure we are there yet but I do see it becoming an issue down the road. The feedback I receive when talking to students just out of school is they have no clear career path at their current firm. I was lucky enough to create my career path at my firm (thanks to owners that allowed it) which actually ended up giving us a blueprint for future planners.
If advisors want to attract young talent, I think the career path is crucial. Post meltdown, these young people now know there is no easy ride and will pay their dues…if they are worth paying and there is an end goal!
Jessica,
The dividing line is a bit fuzzy.
Certainly, I think any firms under $1M of revenue $100M of AUM?) will be very challenged. Firms upwards of $3M revenue seem to have some ability to compete, and by $5M of revenue ($500M of AUM) I see some real career tracks emerging.
But it’s really the $10M+ revenue (north of $1B of AUM) that appear to really be systematizing the process. And it appears that a number of firms at about $25M of revenue (the ‘mega ensembles’) are starting to really systematize a consistent career track in a manner similar to how big accounting and law firms fuel the career track for those professions.
But notably, by the numbers, most firms don’t have $1M of revenue. And that sole practitioner or small partnership majority appears not to be well positioned at all.
-Michael
This is a great post Michael and it’s spot on. I’m a 31 year old MBA and CFP designee working at a smaller firm and, while I like to boutique feel of a firm like mine, I’m just not sure it will provide me with the experience and education I desire for the long-run. Not to mention the level of compensation.
I guess, according to the info above, I’m in a good position to leverage my age and skill set to obtain a position at a larger firm.
Jeremy,
Indeed, practitioners at about 5-10 years of experience have an increasing number of opportunities out there – either to become a successor at their current firm, or to transition to another firm with a stronger offering.
-Michael
Jeremy,
As a quick followup, it’s worth noting that I don’t think small firms are universally ‘bad’ to work at. In fact, a number of close mentoring and successor ownership opportunities are better at small firms. But it’s very inconsistent and hit-or-miss, which means on average the larger firms have better odds.
-Michael
Michael —
Your words “the failure of the financial planning profession to effectively serve the masses” cite a terrible problem in the years ahead for the great majority of the people, the economy and the nation.
While retirement studies focus on $1mil or more, most folks may hit retirement age with less than one tenth of that.
From the ivory tower, what drops down on the masses is focus on short-term fears, aka “risk,” instead of future $$ needs and goals. In other words, proceed toward the future blind.
You’ve written about this problem in prior posts. What do you now see as current or emerging best answer(s) to this problem?
Dick Purcell
As we contemplate our plight, five new start ups are pushing online tools. Whoopee. People want a human, but the economies of scale for bringing advice to the masses requires the appropriate use of technology and training in the clinical practice of financial advice. If we do this, the public will get personal attention. If not, we’ll watch the public grapple with “tools”. Sheesh.
Michael,
Great piece! You’re correct that there will still be potential opportunities at some of the smaller firms around the country, although as a great baseball man once said, “Potential just means you ain’t done it yet.” (Keep in mind there are pros and cons to both small and large firms)
In addition to more attractive compensation, bigger firms will also have a system down for creating tracks to firm equity. While I believe that as a mid-30’s planner there will be tremendous opportunity in the next decade for possibly buying a smaller practice, one of the biggest pitfalls to these transactions is agreeing on a value for the firm. When it is only one owner (versus multiple owners in a bigger firm), there are a lot of stories out there about “unrealistic pricing expectations”.
Thanks Michael!
This does not worry me that much because the majority of our youth that I have seen, have brilliant minds and have grown up having access to technology right at their fingertips. I do notice that teens today seem to have more entitlement issues than my generation and may not be as motivated to work hard for their pay, but this is nothing that good parenting can’t fix. It is the parents that need to take action now to ensure that their children become responsible adults that can take care of us as we age.
Lack of career paths and good employee-development programs plague all professions, of course, not just financial services. My experience is that firms that do a good job of this are rare in any industry.
In addition, I’ve been surprised to learn, in interviewing candidates for an associate-planner position for our small firm, that even some behemouth planning firms apparently lack good employee-training programs. To my mind, this gives smaller firms a chance to fill the void, perhaps by pooling resources and helping each other develop tools for career paths and investing in employees.
I am a younger advisor, 31 years old and six years into the business. I appreciate this piece because I somehow survived my first four years and as such I will be well positioned to buy up practices left and right if this comes to pass. But the problem isn’t simply a matter of higher income. It’s a matter of how supportive hiring firms are of young advisors in the difficult process of building a book. The old approach of hiring as many people as possible simply to see who sticks on a low draw income isn’t attractive to talented youth. Neither is a slimy sales environment. Firms need to selectively hire youthful talent, produce a livable salary commitment for 3 to 5 years and then let production metrics define compensation, while also letting an advisor focus less on commission business and more on sustainable fee business.
“Tibergien estimates that about 25% of young people leave the business every year, and for many of them, the bad experience at a first employer leaves them “ruined”, unwilling to find another firm at all; consequently, Tibergien estimates half of those young practitioners will never return.”
^^^So true, I have personally seen this with friends and acquaintances. The key to adding more planners is attracting finance majors coming right out of college, or a few years out of college, to small to medium RIA’s and branch offices. Most CFP program grads plan on staying in the industry for years, but this is a small group compared to the plethora of grads entering the workforce from finance programs.
Many recent finance grads do try the financial advising business right out of college, or a few years out of college, because: #1 Companies are increasing their hiring of potential advisors while analyst positions at wall street firms are disappearing. #2 It sounds more exciting and prestigious to work with investments vs working on a endless supply of excel sheets in a finance role at a non-financial services company.
Unfortunately, as you explained in the post, the companies hiring are not normally smaller practices. The companies that are hiring are usually wirehouses or insurance companies that have them prospect to their personal network or cold call for seminars and appointments. The burnout and turnover is inevitable. They often leave the business 2-6 months later and I have not personally seen one of them go back to a advisor or advisor support role.
It is critical that we have more small to medium RIA’s and branch offices hiring directly out of college or a few years out of college. This will help fill the void and ensure there are enough planners since these practices are more likely to create a career plan for the potential advisors. The problem persists because the jobs are hard to find and the small to medium practices are less likely to be hiring.