Print this article

The "Hidden" Issue Behind An Aging Advisor Workforce

Eliane Chavagnon

3 July 2012

The World Wealth Report 2012 highlights that although the median age of high net worth individuals is declining the same cannot be said of advisors.

While older, successful advisors play a “crucial role” in maintaining and expanding the existing client base, as well as “grooming” young advisors, the Capgemini/RBC report warns that essential client needs could go unmet if the more “tenured” advisors opt for advisory methods which don’t resonate with younger HNW individuals.

“Firms will therefore need to map advisors to the appropriate category of clients to ensure the relationships are well-matched, and perhaps develop a younger advisor workforce for younger HNW individuals to relate to,” the report recommends.

The notion that the average HNW individual is getting younger is significant because the current and next generation of advisors must adapt to clients’ changing financial needs and objectives.

However, the number of advisors in the US representing the 60 to 69 age range actually fell from 24.1 per cent in 2008 to 16 per cent in 2011, according to figures from the College for Financial Planning.

While this is an important find, the underlying issue is that high and ultra high net worth individuals tend to want “very sophisticated relationships and don’t necessarily want to work with someone who is up-and-coming,” Rowan Taylor, vice president at Capgemini Financial Services, told journalists during a media briefing on the global report.

With this in mind, it is somewhat unsurprising that data from Cerulli Associates shows that last year over one-fifth (22 per cent) of all advisors were in fact at least 60 years old.

"In the US, the financial advisory workforce is certainly aging across the board and even more quickly in specific segments. The average advisor age has crept from 48 to 53 over the past decade, implying limited recruiting of younger advisors," Chip Roame, managing partner at Tiburon Strategic Advisors, told this publication.

"The wirehouses have cut back substantially on recruiting programs and have also laid off many underperforming younger advisors. The net result has been a decline in the numbers of wirehouse advisors," Roame continued. "Similarly, the independent rep and RIA channels have aged. And very important, if the client assets of advisors are dollar-weighted, the average age across the board is closer to 60. The industry has a recruiting challenge."

Demographics “continuously skewed”

While the demographic makeup of the world’s workforce is changing because people are living and working for longer, the demographics of the financial advisory industry are “continuously skewed towards older advisors,” explains Tyler Cloherty, senior analyst at Cerulli, speaking to Family Wealth Report.

As the current cohort of senior advisors edges closer to retirement, firms must find ways to ensure that younger advisors are properly trained with the skills to successfully follow in their predecessors’ footsteps, safeguarding both new and existing client relationships.

However, trust – a crucial aspect of wealth management - “comes with many years of experience,” he explains. “Clients want to give their money to someone who has grey hair, not to someone who left college two years ago and has no experience.”

Younger financial advisors, even though some may be very good, aren’t able to generate the measure of trust necessary, he says, adding that it’s a challenge which hasn’t been easy to overcome.

“Most clients want to deal with someone who is about their age, and people’s financial wealth peaks in their fifties and sixties, which is why you see assets peaking for advisors within those age ranges as well.”

If it is true that people want to deal with an advisor of a similar age – although it’s worth noting that some in the industry contest this – then this presents a significant problem. In the coming years, according to The Bureau of Labor Statistics, the primary driver of growth within the personal financial advisory space will be the aging population.

“As large numbers of baby boomers approach retirement, they will seek planning advice from personal financial advisors,” the organization says in its Occupational Outlook Handbook for 2011.

This is perhaps why the Bureau forecasts job growth in the industry in the period 2010 – 2020 that is much faster than the average in the US.

However, the top-line numbers of the industry are beginning to stagnate and even decline to some extent, Cloherty warns. “More advisors are retiring and leaving the industry as they grow old, compared to new talent coming into the industry.”

Human capital management as risk management

The financial turmoil of 2008 resulted in many of the programs for new trainees being cut or “brought down significantly,” which Cloherty asserts is where the hidden issue lies. The volume of new talent has taken a beating, but the industry has yet to establish an effective way of recruiting new and successful advisors.

This idea ties with the view of Dr Jim Grubman, of FamilyWealth Consulting, who says: “If you don’t look ahead five years or more, making sure you are developing a deep bench of capable client advisors, the aging of the senior people is going to become a serious risk to the firm’s longevity.”

Interestingly, however, Grubman advocates a slightly different view about the concept of an aging advisor workforce. He believes the demographics in wealth management are “actually bifurcating,” with a large volume of senior advisors and firm owners reaching their sixties while a new and “equally large” group of young advisors fill many of the client-facing positions.

Yet Grubman acknowledges that the statistics on client retention when an advisor leaves or when generational wealth transfers occur “aren’t great.” In response to this, many firms have started to gravitate towards a team-based model in a bid to boost the expertise of younger advisors.

Emotional intelligence versus technical skills

The team-based approach involves one senior or “lead advisor” collaborating with specialists and, most importantly, junior-level advisors. This gives junior advisors the opportunity to meet top-level clients whom they perhaps wouldn’t get the chance to meet otherwise. Nevertheless, there are important questions to address about the effectiveness of such training.

A training model focused on mentoring and modeling client relationship skills “has its risks,” Grubman says. “There are potential problems with that, because a lot depends on the individual capacities of both the trainee and the mentor.

“For example, we know that emotional intelligence makes a big difference in this area, but many younger financial advisors aren’t necessarily skilled in emotional intelligence versus technical intelligence. Just because someone is teamed up with a more senior advisor doesn’t mean they’re going to be able to pick up on the mentoring and the modeling,” he says.

Rather, Grubman raises the question of how the current successful, more senior advisors initially developed their own expertise in this field.

Often, this was more of an informal “apprenticeship” model whereby skills such as listening, how to draw out clients’ concerns, and how to interview appropriately may not have been taught very well. “A lot of what is attempted to be mentored are the client relationship skills, not just technical skills. But not everyone with good client skills is good at teaching them.”

However, even the traditional informal apprenticeship model may not be sufficient for the modern firm or the modern investor, he remarks. “What’s happening in the industry now is a better combination of more formalized assessment of emotional intelligence capacity in potential hires, along with better methods for teaching these skills using effective techniques.”

He also observes that young advisors have “quite literally never encountered a sustained bull market and don’t know what it’s like or how to do planning for it. At some point, those skills will be needed again.”

Advisors working for longer

Cloherty anticipates that the average age of financial advisors will gradually “tick up” further, as advisors find it increasingly difficult to retire when confronted with issues such as the value of their practice not matching their expectations.

In turn, more advisors will probably “phase out” over time, taking part-time roles or transitioning slowly while still retaining a portion of their income. In doing so, with the assets they generate they’ll be more inclined to boost the size of their team, taking on more junior advisors, which will help “stem the tide” of an overall decrease in advisor population.

But despite these forecasts, as Grubman says, it’s a complex situation which in part relates to normal demographics - the fact that senior people are often more experienced and skilled - but equally, and perhaps most crucially, that firms must plan ahead for this in the modern era.

Indeed, the very concept of an aging advisor workforce is encouraging firms to recruit more “up-and-coming” advisors with greater emotional intelligence and skill capacity, but there’s also a growing emphasis on the need to train them effectively, over a longer period of time, to prepare them for handling the “client of the future.”