Jul 30, 2019

White Paper: Complex Challenges Facing the Advisory Sector

The advisory sector has change to spare. But who will adapt?

Most of us don’t recognize change until we’re immersed in it. But is that too late? What’s the biggest change facing RIAs and IBDs today?

It could be a simple lack of willingness to adapt.


The Change You Seek

The Registered Investment Advisory and Independent Broker Dealer sectors are changing fast.

Unfortunately, many professionals, concerned with the day-to-day management of their firms, aren’t even aware that a substantial evolution is occurring.

Briefly, while most small and medium-sized firms are struggling to attract new clients, the mature savings accumulations of Baby Boomers, coupled with the 10-year bull market, have driven a large percentage of new asset growth, which has not only resulted in an increase in revenues, it’s pumped advisory firm values to record highs.

While this sounds like a good thing, the peaking assets of Baby Boomers, along with the blistering market, have camouflaged three major issues in our industry.

First, an astonishing half of all new advisory assets under management are the result of gains in the stock market (and not new clients). (1)

Second, 10,000 Baby Boomers retire every day. (You would assume with all that money in transition, advisors would be flooded with new assets.)

And, third, the average advisor is now 52-years old, meaning our profession is comprised of an aging workforce and is facing a major talent drain in the not-too-distant future.

What many retirement-age advisors may not want to face, is that with such a large percentage of growth tied to the surging market, and with so much wealth controlled by Boomers (who are about to start spending their savings), the combination of asset draw-downs and any substantial market correction would result in firm values, incomes and revenues all plummeting just as thousands of advisors are themselves preparing to retire.

Key Statistics About Our Industry

  • Total number of RIAs: 12,578
  • Total number of IBDs: 3,600 plus
  • Average age of advisors: 52
  • 40% of all advisors expect to retire in the next 10 years
  • 10% of all advisors are under the age of 35
  • Total number of advisors: @300,000
  • Average tenure of advisors: @20 years

Complex Challenges Dead Ahead

Complex issue #1:

We’re not only facing a talent drain, advisors retire in place because there’s no succession plan.

The median age of advisors is increasing because recent college grads aren’t entering the industry.

Many advisory firms lack any succession plan and have failed to hire, mentor and train college grads who could eventually become the face of their firms.

For years, near-sighted principals have focused too much on immediate goals by only recruiting established advisors with existing books of clients. Later, with no clear path (or plan) to succession, many older advisors simply cut back their hours and “retire in place,” which negatively impacts their clients, thwarts any possibility for future growth, and can ruin the hard-earned legacy of even the best firms.

Complex issue #2:

There are more options, there’s less loyalty, and most people simply can’t hear above the noise.

With massive numbers of new retirees each day, why are new client acquisitions not fueling growth?

Many advisors (who’ve failed to scale their businesses) lack the capacity to take on new clients. Others lack the know-how to acquire new assets because, first, their marketing muscles have atrophied, second, the investor landscape has changed, and, third, many advisors have neglected to embrace digital approaches to marketing that are key to finding new assets to manage.

Complicating matters further is that, for those who are motivated to learn, digital marketing takes expertise and a serious investment in infrastructure to master.

Additionally, client loyalty is a thing of the past.

In 2015, just 10% of new clients came from a competing firm. But that number jumped to 35% in 2018. (5)

The #1 reason clients now leave firms is because their advisor doesn’t pay enough attention to them. (2) This is backed up by a recent study which found that 66% of High Net Worth Baby Boomers said they would fire their advisor if he or she didn’t return their phone call within a day. (3)

Mobile, educated, intrigued by robo-advisors, more likely to do it themselves, and more willing to make big changes in a hurry, the modern client insists that advisors no longer rest on their laurels.

Retiring in place, once the domain of blue blood advisors with stables of long-time clients, is no longer viable.

The increasing migration of clients from firm to firm (or entirely away from traditional firms altogether), and a reliance on the cyclical stock market for growth, are proof that aging principals are not paying enough attention to their clients.

What the Future Holds:

While the Registered Investment Advisor and Independent Broker Dealer sectors are changing, the negative trends are not entirely without hope.

Along with 10,000 new retirees each day, in the next 20 years, more than $40 trillion in wealth will change hands from one generation to the next. (4)

Opportunities abound, but small and medium-sized firms must adapt or become extinct.

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