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This is the time of the year when we start reflecting on the year’s accomplishments and memorable events. We also look ahead to the New Year to revise business plans, create goals and develop budgets. In a recent conversation with Michael Kitces, he told me 2014 will be a transition year where we pay more attention to, and start to really notice, the coming generational age crisis that the advisory world is facing.
The average age of a financial advisor is about 50 (See Will your advisor retire before you do? or Advisor Succession Planning: Managing the Retirement of Baby Boomer Advisors) and has been rising every year as the industry fails to recruit enough young people to balance out the aging of existing advisors. While this graying of financial advisors and the difficulty in attracting young talent is not a recent phenomenon, Michael told me that it seems to be gaining momentum.
“We are seeing a transition as industry consolidation continues,” Michael says. “A recent Moss Adams benchmark study found for the first time there are more employee advisors than owner-advisors. Yet this is heightening the awareness about the struggles to find talent.”
An increasing number of advisors are now working in consolidated firms. Small to mid-sized advisors are being “acquired” through this industry consolidation, and growing firms are hiring employee advisors to provide capacity and service clients. Junior talent is being recruited out of school and staying with their firm as their careers progress. According to Michael we’re beginning to experience a serious talent squeeze as a result.
Michael believes “The industry has reached a culmination point where the idea of a talent shortfall is not something that may happen in the future, it is happening, now. The growth in undergraduate and adult education CFP certification programs is not enough to replace the outflow of retiring advisors that will be coming.” Adding to the dilemma is that fact that while the number of academic programs for financial planning at degree-granting institutions has exploded in recent years, many students don’t necessarily go on to become financial advisors.
Attracting the next generation of financial advisors
“Part of the challenge is that the industry is doing a terrible job at communicating what we do to the next generation,” says Michael. Paradoxically he tells me, the financial advisor profession has many of the qualities that the Gen X and especially Gen Y generation are looking for. These next generations are entrepreneurial minded, want a healthy work/life balance, are much less money centric than Baby Boomers, and want to accomplish something meaningful with their work. The reality as Michael points out is that the financial planning profession lets them have significant personal meaning in terms of helping people, lets them do it with the lifestyle they want, etc. “We have all the right traits, but we don’t communicate it properly,” Michael suggests. “The industry in aggregate is still using traditional messages focused on making money and unlimited income potential, and it’s a real turn-off to younger advisors.”
The impact of the generational talent crisis on M&A activity
The squeeze is on — the difficulty in attracting new talent fast enough to replace the outflow of retiring advisors is starting to put pressure on entry level salaries and margins. In addition, the talent dearth constricts available buyers for established firms.
“We are starting to see a slow and steady bleed of people who want to exit their businesses but can’t find the talent to come in and take over,” Michael says. The biggest trend he sees coming are the larger firms gobbling up, consolidating, or otherwise servicing smaller ones because they have the resources to do that. “If you are a 40-year old advisor with the money to buy your own business and the skill-set to run it then you have a huge number of firms to pick from.”
Improving operational efficiency and business valuation simultaneously
One of the ways to combat margin pressures (e.g., due to the talent shortage) is to use technology and cloud-based capabilities to become more efficient.
As Michael noted, “A recent Fidelity benchmarking study said the average Gen-X practice is more profitable than a baby boomer one because of its use of technology. From trading to rebalancing to aggregation software, becoming paperless and outsourcing can improve efficiency.”
Michael pointed out that for firms who already have in-house staff doing operations that the firm wants to outsource, outsourcing can be a bit sticky. Eventually firms reallocate these team members to do something else, but that’s difficult if the practice isn’t growing and creating new staff opportunities. In addition, Michael said, “A more efficient practice that makes it easier for a new buyer therefore increases the valuation multiple of the business. The technology savvy Gen-X advisor is not interested in purchasing an inefficient baby boomer practice, which would just force them as the buyer to do the investing in technology anyway.”
Change can be uncomfortable for some. For others, it represents opportunity. My personal view is that demographic changes, both on the advisory side and also on the client side, are going to bring great change to the advisory world over the next decade. Advisors who anticipate, embrace and plan for these shifts should be well positioned for the future.
Michael Kitces is a Partner and the Director of Research for Pinnacle Advisory Group, and publisher of the financial planning industry blog Nerd’s Eye View. You can follow him on Twitter at @MichaelKitces, or connect with him on Google+.
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