Ready or not, the makeup of RIAs is set to change, with 37 percent of financial advisors expected to retire over the next 10 years, according to a new report by Cerulli Associates, a Boston-based consulting group focused on wealth management. In the long run, however, this could be good news for a new generation of advisors.
Advisors expected to retire in that time frame collectively control $10.4 trillion, or 40 percent of total industry assets (47 percent of industry assets are managed by advisors over the age of 55). Yet, one in four who will retire in the next 10 years are unsure of their succession plan.
The report was commissioned by Commonwealth Financial Network, a wealth manager that supports more than 2,000 advisors with $232 billion in AUM. Two surveys inform the report: an annual Cerulli survey of 1,500 advisors at wirehouses, independent RIAs, and hybrid firms, and a survey conducted in January and February of 2022 of 20 independent Commonwealth Advisors.
Michael Rose, associate director of wealth management at Cerulli, says the number of advisors planning to retire in the next decade without a succession plan was concerning.
“Advisors [who are] planning to retire but who haven't begun the process to make it happen represent a significant risk,” Rose said. (73 percent of practice management professionals surveyed identified the emotional aspects of transferring clients to a new advisor as a major challenge for succession planning preparation.)
Adding to that risk for the industry is the fact that advisor headcount growth is stagnant.
In 2020, total advisor headcount growth increased just 0.1 percent to 291,696 advisors, according to Cerulli. Cerulli expects that by 2023, total advisor headcount will begin to decline and will continue to decline through at least the end of 2025 (the final year of Cerulli’s projection).
Over the next few years, the industry will be at a “tipping point, in which there aren't sufficient advisors coming into the industry to make up for the advisors leaving,” Rose says. A combination of retirement, recruitment, and development issues are the cause, he adds.
Many RIAs are struggling to retain and develop talent. In a survey of 33 executives and decision makers at some of the largest wealth managers, a third reported a meaningful uptick in resignations. Compensation and career opportunities in other industries are luring them away.
The war for talent is one of the top challenges currently faced by Edelman Financial Engines, one of the largest RIAs, according to Jason Van de Loo, head of wealth planning at the firm. Engineers, client service employees, and financial advisors are currently the most difficult roles to fill, he says.
However, the mass retirement of advisors also presents opportunities in the space, particularly for the next generation of advisors, Rose says. The average advisor age is 51, a figure that has slowly increased over time, according to the report.
“There’s a lot of opportunity for younger people interested in wealth management,” Rose says. Many young advisors may be able to acquire a book of business from a retiring advisor within their practice or through another internal succession mechanism at their company. Among advisors planning to retire in the next 10 years, 26.6 percent plan to transition the business to an existing advisor in the same practice, according to the report.
A key point, however, is that talented advisors will only wait so long for ownership opportunities. Communication regarding potential opportunities is essential to retention, according to the report.
Solo advisors – who make up half of those retiring within the next decade – will either need to team up with an advisor who can take over the business or seek an external acquisition deal. Currently, RIAs are in high demand, with mergers and acquisitions at a record high, according to an April report by Echelon Partners, a boutique investment bank focused on wealth management firms and TAMPs. Echelon projects a record 338 deals to acquire wealth managers by the end of 2022, up 10.1 percent from 2021. In addition, 49 percent of advisors surveyed by Cerulli identify as being open to or actively pursuing practices to acquire.
Selling to an external third party is not without challenges. Style differences with the seller (including planning and investment philosophies and personality), client transition from seller to buyer, and overall time commitment to finalize the deal, are major acquisition challenges listed by practice management professionals.
“There are a lot of potential firms you can either acquire or sell to,” says Rose. “But to ultimately have a successful acquisition and transition, the two firms need to be a good fit, and that narrows the field.”
When it comes to laggards in succession planning, Rose believes that advisors should take their own advice.
“The cliché in financial planning is that clients don't plan to fail, they fail to plan. That very much holds true for advisors when they’re thinking about retirement and succession planning,” Rose says.