Cerulli Associates warns that wealth managers aren’t prepared for the massive wave of advisor retirements coming in the next few years — and client assets are up for grabs as a result.
The research firm estimates the industry will see its advisor headcount shrink by 1.4% between 2018 and 2023. Over the next ten years, more than a third (37%) of advisors are set to retire.
Close to 39% of their assets would then be up for grabs, Cerulli predicts.
“While some progress is being made, the industry is struggling to recruit and retain advisor talent that is adequately prepared to inherit the businesses,” says Michael Rose, associate director of wealth management at Cerulli.
The enormity of the challenge isn’t lost on the industry.
“There’s going to be an inflection point where it’s effectively going to be a retirement tsunami of advisors,” Tash Elwyn, president and CEO of Raymond James Associates, said at a recent event in New York City.
Some of that is already beginning to be reflected in the advisor numbers firms are reporting. Advisor retirements are no longer just footnotes but are being discussed on earnings calls for listed players in the industry.
But where there is a challenge, there may also be an opportunity.
“If we look at comparing it to a baseball game, which has nine innings, the question I've been asked is what inning would we be in as it relates to the amount of opportunity left about succession planning, and I've typically said we're in the second or third and there's a lot more time left in this thing,” says Jeff Nash, a former LPL recruiter who is now CEO of consulting firm BridgeMark Strategies.
Scroll down to see an interactive chart of which advisor channels will see big advisor retirements
According to the Cerulli report, wirehouses (40.7%), independent broker-dealers (40.7%) and national/regional broker-dealers (39.7%) have the largest population of advisors planning to retire and transition out in the next 10 years. Hybrid RIAs (31.1%) and bank broker-dealers (24.7%) have lower rates of advisors looking to retire in the same period, but these rates are nonetheless high.
And Nash agrees.
“W2 firms, wirehouses and regional firms have not approached this business well. The RIA firms have done a really good job of approaching this, and the independents are in between,” says Nash.
How are firms tackling this challenge?
The industry has been trying to grapple with the spate of impending retirements for a while. Most firms are making efforts to put in place effective succession plans that will help them keep the books of the retiring advisors within their fold.
Wirehouses have sunset clauses in place that let retiring advisors transition out their books to a younger advisor. As reported, such clauses help a firm keep assets in-house, since the firm often finances the younger advisor’s acquisition of the assets.
Another way to keep assets is to offer outgoing advisors a lucrative monetary incentive they cannot refuse.
Broker-dealers are also putting in place succession planning solutions to help retain retiring advisor clients. LPL Financial announced a program for succession planning in August. Raymond James and Stifel Financial have succession programs in place and the latter boasts that it retains all of its retiring advisors’ assets.
In the last quarter, Stifel added 25 new advisors but that increase was mostly netted out due to retirements, even as the firm retained the assets.
“A lot of the retirements have been planned, and they’re into existing teams, and those books are transitioned,” Stifel CEO Ronald Kruszewski told analysts on an earnings call.
There is also a move to explore W2 or employee models for certain independent broker-dealers in a bid to retain advisors and clients. LPL announced its foray into this model with the acquisition of Allen & Company in May. Company executives admitted the move had been prompted by advisor departures to employee-based firms.
Nash feels this trend could grow further.
“I'm starting to see 1099 firms, traditional independent broker-dealers, launching a W-2 solution,” says Nash, adding that he is seeing other firms explore that option as well. “There's no question that you're going to see more of that,” says Nash.
Then there are firms offering to buy out a retiring advisor’s books. Kestra Financial wants to acquire advisor assets through its new Bluespring Wealth company and let younger advisors manage them in return for a salary. Cetera Financial also pledged to buy books — but only as a short-term solution until they can find an appropriate advisor to take on the assets.
Where are firms falling short?
Nash feels that firms fall short in what they offer, even in pairing advisors with successors.
“Succession planning at the broker-dealer level, it's more supporting the advisors. They [say] we’ll create lending solutions, we’ll give them the intellectual capital, we'll make matchmaking available, but no real firm has created an actual viable next-gen program to partner reps together,” says Nash.
Sometimes there is a mismatch between the advisor’s expectation and the succession planning offered by their firm — and this can create a hurdle for retention, even before the advisor hangs up their boots.
“I have seen the succession planning thing once or twice this year, because it is getting much more attractive for people to purchase practices. And there’s so many more buyers and sellers that sometimes the buyers are going where the sellers are,” Jodi Perry, president of Raymond James’ independent contractor division, told FA-IQ in an earlier interview.
Another issue advisors may sometimes come across is that their current firm may not have a like-minded and suitable advisor in their location.
“I had a rep — he’s 73 now — and since he’s been 70 he’s been looking for a succession person to join up with him. But the firm he was at didn’t have any people in his geography that they could match him up with,” St. Croix, Minn.-based recruiter Jon Henschen of Henschen & Associates told FA-IQ previously when asked about the challenges faced by advisors looking to transition out.
Coaxing the departing advisor to leave behind their legacy business is not the only aspect of dealing with the impending wave of retirements.
“It will be increasingly important that firms operate successful training programs in order to attract and train qualified advisors, integrate these younger advisors within teams for whom they can serve as a pipeline of potential successor candidates, and operate effective business succession programs for retiring advisors,” says Rose.