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.
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?