How the industry's mixed signals point to further consolidation

Despite the client assets and M&A deals of giant proportions, the wealth management industry hasn't addressed its succession and recruiting challenges, a new study said.

At least 26% of the more than 100,000 financial advisors who intend to retire within the next decade lack a succession plan, according to a report earlier this month by research and consulting firm Cerulli Associates. And the industry is struggling to replace them: More than two-thirds of rookie advisors leave the industry after less than five years. 

The study explains why wealth management firms are trying to forge more pathways into the profession while they attract continued investment across a fragmented yet profitable industry in which wirehouses, brokerages and registered investment advisory firms managing north of $30 trillion of retail client assets, according to Andrew Blake, an associate director in Cerulli's wealth management practice and Kevin Lyons, a senior analyst in the unit.

"That's a bit of a concerning number," Blake said of the fact that more than a quarter of the advisory practice founders said they had no succession plans in place. "Private equity firms and practices that are looking to make an acquisition see that as a number showing that there's a great opportunity to acquire those practices that are unsure of their next stages."

READ MORE: Wealth management M&A hits high in 2024, 2025 growth expected

The main challenges in advisor recruiting and M&A

With those retirements and exit deals looming, the industry still has "a disconnect" between its ability to usher young people and career changers into the profession and its need to recruit and retain talent, Lyons said. The total advisor headcount barely ticked up between 2013 and 2023, but the fact that 48% of the advisors now work in teams suggests that could shift in the future.

More firms are "trying to pair younger or newer or rookie advisors with established teams" to give them "exposure to successful financial advisors," and, maybe some day, part of their book of business, according to Lyons.

"They're actually getting some of those clients. You're not starting from scratch and fully reliant on that kind of rich family and friends network," he said. "I do think we're at a point where at least there's more structure and more foundation in place than certainly five to seven years ago."

The findings about the difficulty of closing a deal reflect an ongoing "maturation journey" among RIAs, according to Corey Kupfer, who advises them and other wealth management firms on M&A and succession as the founder of law firm Kupfer. While RIA firms are gaining headcount and assets from other parts of the wealth management industry, they are only "just starting to figure out that more formal training, growth opportunities and paths to partnership/equity participation are crucial to moving to the next stage of enterprise maturation," he said.

"Those in the independent RIA space have had a mindset shift from being employees to being entrepreneurs," Kupfer said in an email. "There is an additional mindset shift to also being a dealmaker. The dealmaker mindset is different from the entrepreneur mindset. Saying that you don't have time to finalize a deal is evidence of not having a dealmaker mindset. Dealmakers make the time, build the team and allocate the resources to get deals done."

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By the numbers

Here are some of the most interesting findings from the report:

• An estimated 105,887 advisors representing 37% of the industry's headcount and 41% of its client assets expect to retire in the next decade. Out of that group, 26% said they don't have a succession plan, another 26% have picked a successor at their advisory practice, 18% anticipate passing the business to a junior advisor and 14% plan to sell to an outside firm. The average age of advisors is 49 years old.
  

• Nearly half of advisors, 48%, express interest in buying an advisory practice, with 19% searching for potential targets and the rest at least open to potential opportunities. They cited the time necessary to close a deal (67%) and differences of style and negotiation with the sellers (53%) as their main obstacles. For prospective sellers, the biggest snags are finding a qualified buyer (86%), deal structure (63%) and valuation (53%).
  

• Retail advisor-managed assets topped $31.3 trillion in 2023. Advisory practices with at least $500 million in assets under management have 67% of that AUM, even though they comprise only 16% of the total number of firms in the industry's retail channels.
  

• Cerulli's calculations for the channels' respective share of advisor headcount in 2023 are: wirehouses (15%), national and regional brokerages (16%), independent brokerages (17%), hybrid RIAs (13%), independent RIAs (16%), insurer-owned brokerages (14%) and bank-based brokerages (9%). However, those channels managed the following percentages of assets: wirehouses (33%), national and regional brokerages (16%), independent brokerages (13%), hybrid RIAs (11%), independent RIAs (16%), insurer-owned brokerages (3%) and bank-based brokerages (7%).
  

• Independent RIAs without a brokerage affiliation grabbed the largest market-share increase in client assets between 2013 and 2023, with a rise of 4 percentage points. Advisors are exiting wirehouses at the fastest rate of all channels, and those firms' slice of the headcount will drop by a percentage point to 14% in the next five years. Overall, the number of advisors increased by just 0.2% during the decade that ended in 2023.
  

• Less than half of advisors (48%) provide "comprehensive planning advice," according to Cerulli. The firm predicts that number will expand to 55% by next year. Advisors offer an average of 7.1 types of services. At least 45% of advisors serve clients with between $500,000 and $2 million in assets. And more than half of advisors' clients, 52%, are between 50 and 69 years old.
  

• More than 70% of first-year advisors will have dropped out of the industry five years later. At least 93% of them agreed that training in planning topics is important to their success. Just 55% are "very satisfied with their firm's support on the topics, highlighting the disconnect that can inhibit the development of rookie advisors," the report said.

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Questions for the future

Brokerages and other wealth management firms are beginning to develop more methods that give rookies a better chance to boost the stagnant headcount of the profession, Blake said. The methods include investing in CFP certification and more training in comprehensive planning for the incoming aspiring advisors. Otherwise, they may add to the high failure rates.

"They're going to be setting them up for failure, due to the evolving state of the industry," Blake said. "Investor demand for financial planning continues to rise year after year."

On the positive side, advisory practices across all channels are beefing up their range of services to meet client demand for "more of a one-stop shop," Lyons said.

"There's a direct correlation between an advisory team's amount of services offered and the more AUM they're able to manage," he said. "It's certainly advantageous to advisors."

As they serve clients and create more valuable businesses that attract investment from private equity-backed acquirers, advisors should keep the capital gains and estate tax implications of any succession deals in mind, according to Kupfer. 

"Those in the independent RIA space are already in a position to get capital gains treatment upon exit. Those in other models may not be and would need more tax strategy planning to be able to get capital gains treatment (for example, potentially via a personal good will sale)," Kupfer said. "I am not an estate planning attorney, but there are opportunities to transfer RIA firm ownership to family members and into trusts, family limited partnership and other vehicles while the value of the firm is lower, well in advance of a succession that could create significant tax savings/deferrals."