The financial advisor industry is facing a looming crisis. Advisors are getting older, and there aren't enough talented young people entering the field to take the reins as these older advisors retire.
According to a Cerulli Associates report, the average age of advisors in 2011 was nearly 50. The study showed that only 22% of financial advisors were under age 40, and only 5% were under 30.
Meanwhile, the total number of advisors reportedly fell 4.3% between 2004 (334,919) and 2010 (320,378) due to a combination of retirement and consolidation in the industry. The Bureau of Labor Statistics is projecting that, thanks to the wave of baby boomers approaching retirement age, there will be a demand for 66,400 new advisors by 2020.
"You see the continuing graying of the industry," says Tyler Cloherty, a Cerulli senior analyst. "There's not a whole lot of new talent coming in on the low end. You're going to see a shrinking of the advice industry."
Moreover, industry experts say that a new regulatory environment, new products and a new generation of retirees with different needs, is creating a need for a new class of advisors.
Clearly, a need exists for training new advisors. "It's time for a different paradigm," says Craig Pfeiffer, founder and CEO of Advisors Ahead, a firm that trains new and existing advisors and can provide broker-dealers and banks with advisors during their training and break-in period on a temporary basis.
A 29-year veteran of the financial services industry, Pfeiffer says, "We had a financial advisor model that worked well for 30 years, but clearly we need new advisors as those older ones age out, and we also need advisors who can work more as parts of a team." (He was formerly a vice president and executive board member of Morgan Stanley Smith Barney but left last year to start Advisors Ahead).
"For years, when organizations hired advisors, they looked for people who had autonomy traits - who could go out and run their operation more or less as an independent business," he says.
"The need now is for people with more collaborative traits, who can work with different departments and who can handle specific competencies and specific niches in the market."
Pfeiffer argues that the best place to look for new advisor recruits is among younger people under 30. "The people who are in the 30 to 40 year age bracket typically don't want to start out all over at entry level," he says. "At the same time, you have a university graduate population that has technical proficiency but little or no experience."
His model, which he compares to the training of lawyers and doctors, is to start these young wannabe financial advisors off as interns during their college summer breaks, and then to put them into advisor positions as "associates" for six months to two years with guaranteed salaries to allow them to do on-the-job training, which his firm supplies, and to work with mentors at the employment site.
"The whole idea of hiring people on a sink-or-swim basis, which was common in this industry, won't work. People need to be put in a structured training program- what I call a resident development model," Pfeiffer says.
Pfeiffer is not alone in thinking that the training of advisors needs to be changed.
Raymond James, for example, has shifted from a four-week to a two-year training regimen, including assigning of a mentor. New hires are also allowed to stay on salary for three to five years after being hired on.
Larger broker-dealers and wirehouses are doing this kind of thing already on their own, in a sense, Pfeiffer agrees, but particularly for smaller organizations or banks, where there may not be the resources to run such a training program, he says an operation like his can "aggregate the resources" and provide the necessary training.
Advisors Ahead, he says, has online instruction resources and professionals who can develop a training program at the job location.
During the training period, the associate is paid by Advisors Ahead, freeing the bank or broker-dealer of any HR problem.
Then at the end of the period, the company can decide to hire the trainee as a full-fledged advisor, paying Advisors Ahead an employment service fee as with any temp agency hire.
Pfeiffer says training includes teaching "emotional intelligence," communication skills, listening skills, self-awareness (how to spot one's own weaknesses), relationship-building and rapport.
Skip Massengill, senior vice president at wealth management firm Robert W. Baird & Co. and a founder of the Retirement Education Institute, agrees that there is a dire need for training young entry-level financial advisors.
But he also notes that there is a gap in the area between the advisors, particularly in the bank channel who often serve small investors with minimal assets, and wealth managers who manage the funds of high-net-worth individuals.
"What you need," he says, "is a SWAT team of just a few advisors who are really working with the bank's lenders on an exclusive basis, as a team, to deal with people who will be clients, not just customers."
Massengill explains, "A big portion of the baby boom generation doesn't want an advisor who works holistically with them."
Instead, he says that they want someone who will put their money into a diversified package of equities and bonds so they can see it grow, and also be protected against too much downside risk. That kind of investor, he says, can be handled by any advisor. "But with those people linked to the bank's lending relationship, they're looking for more of a client relationship with their advisor," he says.
"They want someone who will build a relationship, who will listen to them, and ask tough questions. But you have to do it all with sincerity."
By filling that gap between the basic advisor for the majority of a bank's customers and the wealth manager for its well-heeled investors, and by setting up a training program to bring in new blood at the entry level, experts like Pfeiffer and Massengill say banks should be on course to weather the financial advisor shortage and to grow their investment programs going forward.