Kitces: Why the market for advisors has never been better

Cerulli Associates estimates that there are just over 300,000 advisors in the U.S. This number has caused some hand-wringing in our industry — and, I’d argue, for the wrong reasons.

Despite forecasts suggesting the advisory industry will shrink in the coming years, there’s plenty cause for optimism. For one, a coming retirement wave will take much longer to materialize than first thought, and instead of being a threat to advisor jobs, technological efficiencies will help the industry expand into underserved markets, ultimately increasing demand for advice in the long run.

That’s why I think the market for advisors has never been better — and tomorrow’s looking even brighter.

Figuring out how many advisors there actually are and whether our ranks are contracting or growing is a big source of consternation in our field, especially in light of the rise of robo advisors and the general move toward automation.

The latter point bears some unpacking. One of the primary reasons the advisor community has struggled to acquire better technology tools is that entrepreneurs, angel investors and venture capital funds think the advisor marketplace isn’t big enough to be profitable for them. And given they subscribe to the idea that total advisor headcount is decreasing, they see no upside to investing in what they consider a shrinking marketplace.

Whatever the trend actually is, the individual advisor is impacted. If total headcount is shrinking, almost by definition there would be consolidation, mergers and acquisitions, and more succession plans, given the clients of advisors who were leaving would have to go somewhere. It would also mean competition among advisors would soften, given there would be fewer advisors to compete against for client business.

On the other hand, if advisor headcount were growing then competition would rise. And it also would make room for new firms to start up. If there are more advisors coming in than there are leaving, just trying to find a retiring advisor’s book of clients to take over wouldn’t be very feasible. Knowing which segments are growing and which are shrinking is also important, as the firms that serve us largely base their resource decisions about where to concentrate on these trends. Hence, why Commonwealth Financial Network's recent announcement that it’s launching an entirely fee-only RIA unit for its advisors was such a big deal.

That’s right. A broker-dealer whose existential functional was to facilitate the sale and distribution of investment products for a commission created a new division to accommodate its growing base of fee-only, zero-commission advisors. Even if the total headcount of advisors weren’t growing, individual segments could still be developing, creating new business opportunities.

PLAYING THE NUMBERS
Determining how many advisors there are is surprisingly difficult. Even though we all have to register with our regulators, our roots in product sales preclude a pure advisor headcount from emerging. Instead we register as insurance or annuities agents with the state or as registered representatives of broker-dealers with FINRA, or as investment advisors under an RIA with the SEC or states, depending on the size of the firm. The net: There are a lot of places to look before arriving at a headcount.

And of course, not everyone registered with those regulators is an advisor. The media likes to cite BrokerCheck’s tally of 600,000 with FINRA licenses, but a number of FINRA licenses have nothing to do with giving advice. Indeed, many cover narrower products or services outside the scope of traditional advice, like the Series 31 for running a managed futures fund or the Series 79 to do investment banking.

Some may have taken a Series 24 principal exam or a Series 27 FINOPs principal exam. The actual number of people registered with FINRA who are truly client-facing with retail consumers, and even in a position to give advice, is less than half of the 600,000.

And of course, many advisors do business in multiple channels. We could be dual-registered with FINRA and under an RIA. Historically, many of us who were FINRA-licensed were also licensed with the state to sell insurance and annuity products. And even some RIAs today maintain a state insurance license even if they don’t have a FINRA license because they’re selling fixed insurance products, e.g., universal life for estate planning purposes.

Cerulli estimates our ranks at 311,305. That number represents the spread across all industry channels, from wirehouses to independent broker-dealers to RIAs. The caveat here is that not all of those advisors actually provide advice. Cerulli has a fairly rigorous definition of “advisor,” but it does set the bar fairly low. Consequently, when Cerulli estimates there are over 300,000 advisors, their follow-up research has found that less than half of them even state they offer planning advice to clients.

I don’t know what it means to be an advisor who doesn’t give advice.

Even among those who say they’re doing planning, some are very in-depth and comprehensive while some aren’t going that deep, instead offering the prepackaged output from planning software. But when more than half of advisors don’t even say they do that, the true number of advisors who give planning advice to clients is well under half of that 300,000 total.

That isn’t entirely surprising given the number of CFP certificants is only about 82,000 — not even 30% of Cerulli’s number.

And while I think there are some non-CFPs who give good planning advice and maybe just didn’t get the marks because they weren’t as significant in the past and they now have no desire to get them, not all CFP certificants do comprehensive planning advice. That cohort — i.e., advisors who are compensated for giving advice — likely comes in below the 82,000 total CFP certificants. That is our baseline.

FORECASTING
Cerulli has been predicting that the number of advisors will shrink significantly for years. Back in 2013, when the firm estimated there were just over 300,000 advisors, it predicted that within four years we’d be down to only 280,000, driven by the fact that nearly half of all advisors were over age 55 and more than 8,600 advisors would hit retirement age every year for the next decade.

Couple those 100,000 cumulative advisor retirements with the rise of robos and other technological efficiencies, and the wisdom held that total advisor headcount would continue shrinking. But as I’ve maintained, I think Cerulli’s forecast is dead wrong — and I don’t say that with any disrespect. The firm does a fantastic job with its research and I recommend them frequently, but the projection on this particular issue misses some key points.

The first is simply that planning is not a business you retire from just because you’re eligible for Medicare and a Social Security check. This is not an industry that makes your body give out in your 60s. It’s about client relationships bolstered by experience and a lifetime spent building reputation in your community.

In my recent research into the planning process, we found that the average income of an advisor with 30-plus years of experience is almost $400,000 a year, and that income on average continues to increase further as they keep working past 30 years. A number of those advisors aren’t necessarily actually working that hard after 30 years either — not prospecting so aggressively; dialing back on upfront work, leveraging three decades of wisdom and experience to become more efficient in their craft; outsourcing some key parts of their business; letting less profitable clients go; changing firms or platforms one last time; or even tucking into a larger firm to ensure a continuity plan.

Who retires from that just because they’re eligible for a Social Security check that represents a fraction of the income they see from work they enjoy?

This is why I said six years ago that forecasts portending a shrinking advisory industry and a looming succession planning crisis would turn out to be total mirages. It’s the reason that the latest FPA study still shows only 30% of advisors have a formal written succession plan, because the rest aren’t leaving. There’s no reason to. And sure enough here we are in 2019, and the total number of advisors is not down, but up.

RECRUITS AND CAREER-CHANGERS
The second reason the prediction for declining advisor headcount is overstated is that it’s based on the presumption that we won’t bring in sufficient new advisors to replace retirees. To be fair we collectively have trouble recruiting millennials. We’re still largely seen as a sales-oriented industry, and millennials don’t want to be salespeople.

This problem is compounded by the fact that, as noted earlier, more than half of advisors openly admit they don’t give any planning advice, yet they still recruit young people who then find out the hard way that they were recruited into sales jobs. Disillusioned, those young people leave the industry for good, never having seen the real side of advice.

And even with more students studying planning in school, the CFP Board found a few years ago that more than two-thirds never even took the exam after graduation.

But this trend fails to capture career-changers. As much as we talk about the challenges and risks that technology poses to our profession, technology is already impacting other industries, which in some cases is driving people to change careers. When you’re weighing new career options and the average lead advisor still earns almost three times the median household income in the U.S., that makes it a pretty compelling career track.

And it’s not just about people coming from unrelated industries, but also from our more directly affiliated professions with ties to financial services, such as law and accounting.

This is why the AICPA’s personal financial planning section is growing so much. While we’re busy debating whether robo-advisors might commoditize parts of investment management, tools like TurboTax have commoditized a lot of the accounting business, particularly when it comes to tax preparation work. And so as technology squeezes CPAs in the tax prep business, it pushes them toward becoming advisors.

This is also true for estate planning attorneys. With the estate tax exemption up to $22.4 million for a married couple from just $625,000 per person 20 years ago, the number of people exposed to federal estate tax has fallen by more than 95% in the past 20 years. According to the recent estimate from Heckerling Institute, there may be no more than 2,000 estates per year across the entire U.S. with federal estate tax exposure.

There are a lot more than 2,000 estate planning attorneys out there and most of them need more than one client per year to make a living. So where to go when you can’t even go down market to do more basic estate planning documents because technology companies like LegalZoom have already gotten there? You become an advisor.

Unfortunately, our industry can be tough on career-changers. Satisfying the CFP Board’s experience requirement when you’re making the transition is particularly onerous. And while the income potential for planners is great, in the near term it often requires a big step backward in income. That’s not always feasible with kids, tuition payments and mortgages. And that’s saying nothing about the difficulty of ramping up on a part-time basis.

The key point remains that while we fret about technology squeezing out advisors, right now it’s squeezing out even more people from other industries.

THE TECHNOLOGY FALLACY
The final reason I think we should still be bullish on job opportunities for advisors is down to the technology itself.

The dominant narrative for the past five years has been whether or how much robo-advisors would diminish the need for or replace human advisors. But technology often plays out in unexpected ways, and I think a great case in point is what happened to bank teller jobs when ATMs showed up — in theory to replace all human bank tellers.

When ATMs came online in the 1970s and ’80s, nearly 500,000 human teller jobs stood to be eliminated. And while banks did roll out almost half a million ATMs in the ‘80s and ‘90s, by the ‘00s the number of human teller jobs was up to 600,000 — despite the proliferation of ATMs. In other words, the result was a net increase in both technology and jobs.

As some follow-up economic research showed, the introduction of the ATM brought down the cost of banking. It made it more efficient — so much so that banks opened branches in communities they hadn’t served in the past. And so while the number of tellers in each bank branch did decrease on account of those ATMs, tellers were deployed to new branches, with more tellers hired on top because the branches were now profitable to run with a combination of humans and technology in a way that wasn’t possible with humans alone.

This is the kind of path I see for our industry. Given most advisors can only serve about 100 clients in deep advice relationships — and in the late stage of their careers often winnow that number down to their 50 best clients — even 300,000 advisors at 100 clients each will only serve 30 million households. There are almost 120 million households in the U.S., meaning there are barely enough of us to serve one-fourth of all U.S. households.

As mentioned earlier, half of those advisors fully admit they’re not actually giving any planning advice. Consequently, the number of households we could even possibly serve is less than half of that prior number, or maybe 15%. And if we narrow that down further to account for just the number of advisors with CFP certification, we couldn’t even serve 10%.

There’s an immense amount of room for technology to make us more efficient, bring down the cost of advice and serve the other 85%-plus of households that we don’t serve today.

And as technology continues to exert pressure on the advisor’s value proposition, it’s driving more advisors into actually giving advice. Cerulli’s own study reported that almost half of advisors were doing planning, up from only one-third four years ago. Because even as the number of advisors in total is roughly flat, the number of real advisors giving advice is rapidly growing.

That’s why the CFP Board is seeing record numbers of new people sitting for the CFP exam, and the number of CFP certificants is up nearly 25,000 since before the financial crisis — even though the number of advisors has declined by 25,000 since then.

Simply put, if you really want to measure whether the opportunity for advisors is growing, the better leading indicator is not a total headcount, but the growth of CFP certificants. That number has not only grown unabated for the past 20 years but is growing faster and accelerating as technology makes planning — and planners — more efficient and, yes, more in demand.