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Some professions are readily associated with shortages. Air traffic controllers (pre-DOGE at that), nurses and teachers among them. Add registered investment advisors/wealth managers to the list.
As things stand today, the advisor shortage isn’t alarming, but it soon will be. On average, advisors are in their mid-50s and two in 10 are expected to retire over the next few years. At least two factors compound that problem. First, the profession is losing population amid the great wealth transfer. So the number of advisors is declining at a time when they’re needed most.
Second, and this is a collection of related points rolled into one, not enough young people are becoming advisors, many of those that do arrive here after considering several other career paths and many of the ones that give it a try move on after their first year.
“Over the next decade, 109,093 advisors plan to retire, comprising 37.5% of industry headcount and 41.5% of total assets,” according to a January 2024 report from Cerulli Associates.
More Ominous News
A recent McKinsey survey all but confirms the above data points courtesy of Cerulli. McKinsey estimates that by 2034, the population of advisors will decrease by 100,000. That’s stunning attrition when accounting for the growth of the business or the great wealth transfer or escalating wealth and rising retirement statistics.
All four of those factors are at play and yet the advisor population is declining. Arguably, lack of interest in the profession shouldn’t be a reality because the other reality is that the industry is growing.
“In fact, we estimate that revenues generated from fee-based advisory relationships (a proxy for advised relationships) have grown from approximately $150 billion in 2015 to $260 billion in 2024 (6.4 percent CAGR), and growth in the number of human-advised relationships has outpaced population growth by three times in the same period (1.8 percent versus 0.6 percent CAGR in 2015–24),” according to McKinsey.
Bolstering that growth data is the fact that affluence is increasing in the U.S. Whether it’s by way of inheritance or earning money the old fashioned way, more prospects are in the high and ultra-high-net-worth camps – something that bodes well for fee-based models. Equally as important as that growth is the willingness of the wealthy to pay for top-tier financial advice.
“Almost 80 percent of affluent households surveyed indicate that they would rather pay a premium of 50 basis points or more for human advice than use a customized digital advice service priced at about ten basis points; 29 percent say they are willing to pay a premium of 100 basis points or more,” adds McKinsey. “Furthermore, among investors with more than $1 million in investable assets, the share willing to pay a premium of 100 basis points or more grew by 50 percent from 2021 to 2023.”
Industry Solutions Aren’t Effective
It’s not surprising that the advisory business is starting down a large shortage in the coming years because over the past decade, annual growth in terms of number of advisors can be measured in tenths of a percent. Moreover, the industry’s solutions to these challenges aren’t effective.
“To date, the industry has answered the rising demand with productivity initiatives enabling advisors to serve more clients,” concludes McKinsey. “These initiatives include advisor teaming; hiring of specialists to support advisors; rollout of digital account opening, reporting, and self-service (for example, updating basic account information, adding a dependent, requesting a wire transfer); and enhancements to advisor desktops and workflow automation (such as portfolio implementation and rebalancing). Continuing to increase advisor productivity will require the systematic application of an even broader set of levers, as most quick wins have been realized.”
Said another way, while efficiencies are increasing advisors to accomplish more work, those efficiencies aren’t solutions for aging and the desire, well-earned at that, of some advisors to simply want to retire. The industry needs to come to terms with that or risk not being able to meet increasing demand.