Financial advisors from brokerages to independent firms are in for stark changes, according to a Cerulli study

6 major trends for financial advisors in 2022: Cerulli study

February 21, 2022 6:00 AM

What should financial advisors keep their eyes focused on in coming years?

There’s a lot to consider: Aging Boomers are retiring and kicking off The Great Wealth Transfer to heirs. Advisors are increasingly embracing a “wear two hats” model of fee-only services and commissions. Independent advisory firms are merging left and right. Computer-driven robo advisors, such as those at Vanguard, Fidelity and Schwab, are competing ferociously for investors’ wallets.

Affluent earners want a full buffet of services, from estate planning to tax strategies. And more than one-third of advisors will retire by 2029, a changing of the guard that will prompt the transition of nearly 40% of the industry's assets, according to research firm Cerulli Associates in Boston.

“The last five years is probably going to look a lot like the next 10,” said Matthew Crow, the president of Mercer Capital, a business valuation and financial advisory firm in Memphis, Tennessee. “Advisors continue to have a growing, profitable model to implement, especially firms that have modeled themselves on sustainable practices, which are grounded in the development of the next generation of leaders.”

In a new, data-driven study, U.S. Advisor Edition, Q1 2022, Cerulli lays out the granular details of this big picture. From the war for talent and where the growth will be to shifting investor preferences and the practices that work best for high net worth clients, here’s what every advisor needs to know — regardless of where they work.

Expansion and contraction

The advisor population will fall -0.9% between 2020 and 2025.
Although the retail advisor headcount rose slightly in 2020, Cerulli projects that it will begin to decline starting in 2024. The advisor population at employee-based firms is expected to shrink while independent firms expand their ranks.
As of 2019, more than one-third of advisors are expected to retire within 10 years, setting up the transition of nearly 40% of industry assets.
As advisors continue to seek more autonomy, higher pay and better work-life balance, independent channels — especially hybrid registered investment advisors — are poised to continue growing their assets and advisor headcount at the expense of traditional wirehouses.

Changing of the guard

Employee-based firms — wirehouses, national and regional broker-dealers (BDs), and insurance and retail bank BDs — have been diverging from those of independent rivals, such as independent broker-dealers (IBDs) and registered investment advisors (RIAs).
Wirehouses, the wealth management world’s traditional powerhouses, will lose 2.4% of their advisor populations between 2020 and 2025.
Headcounts at insurance- and retail bank-based BDs will shrink 0.3% and 5.6%, respectively.
National and regional BDs will see gradual declines in headcount after 2023. Cerulli said that their vast scale means these firms will continue to boast more than half of the industry’s advisor force by 2025.

Advisors vs. brokerages

Retail direct distribution channels, like those of Schwab and Vanguard, are expected to continue taking market share from retail advisor channels, in part because their technology and low fees appeal to younger investors. Asset managers must dedicate resources and personnel to distribution efforts in the retail direct channel as its assets continue to grow.

When it comes to share of assets, the retail direct channel, including discount brokerages, has been gaining significant ground on retail financial advisors and is poised to continue doing so.
Even as independent and employee-based firms pursue competing initiatives to attract and retain advisors and assets, the retail direct channel presents a growing threat.
As a new, truly hybrid approach for the future of financial services takes shape, two-thirds of distribution executives agree that the hybrid wholesaler will become more important to distribution.

Follow the money to independence

Between 2020 and 2025, the advisor populations at hybrid RIAs are expected to gain 2.2%, while those of independent RIAs are on track to grow 2.1%. IBDs, meanwhile, are projected to expand by 1%.

Independent firms’ high payouts are a selling point that broker-dealers are not structured to match.

Why playing nicely in the sandbox works

Advisory practices oriented toward serving HNW investors are more likely to operate as a team.

43% of practices with core markets between $500,000 and $2 million, and 60% of practices with core markets between $100,000 and $500,000, are run by a solo advisor.

Meanwhile, only 29% of advisor practices serving more affluent investors operate as solos.

Solo advisors must act as generalists, while teams provide an opportunity for specialization according to services. “This can drastically improve the quality and range of financial advice that is administered, particularly among practices with fewer home-office specialist resources,” wrote Cerulli Associate Director Michael Rose in the report.

Teams work well for HNW households because they’re more likely to need sophisticated tax planning, charitable planning, equity-based compensation planning and advanced estate planning.

Merger frenzy

Consolidators play an increasingly important role in the RIA ecosystem as firms tout centralized services, professional management, growth capital and succession planning to bring additional RIAs into the fold.

Platform providers, in which the consolidator allows RIAs to rent operating and support platforms, have experienced the strongest growth during the past five years.

Cerulli expects all consolidator segments to grow in 2022, but that the platform provider model will remain the most popular in the near term.