The 'fundamental' talent shortage looming over wealth management

The potential client base and demand for advice from wealth management firms are surging to the point that the industry must solve its "monumental" hiring problem, a new study said.

To be sure, the industry is "in a position of strength, with solid fundamentals in place," according to a study last month by research and consulting firm McKinsey & Company. However — even if wealth management firms carry out tech and team design changes to improve productivity — the industry could find itself about 100,000 financial advisors short of the number needed to fulfill customer demand in 2034, the report said.

The report followed other research studies with related conclusions, such as one estimating that roughly the same number of advisors will retire this decade and another concluding that more than 70% of rookies leave the industry within five years. 

Despite so many studies sounding similar alarms, just nine registered investment advisory firms have signed up to hire 20 interns this summer through the BLX Internship Program, according to co-founder Luis Rosa, who's also the founder of Henderson, Nevada-based Build a Better Financial Future. BLX received over 200 applications from aspiring planners and professionals.

"Believe me, there's a demand. Where's the supply?" Rosa said, describing the pool of applicants as entry-level young people and potential career changers who "are really eager to be in this industry in many ways" as advisors or in other roles. The group for Black and Hispanic interns in the planning profession perennially fields many more qualified applicants than there are slots available at RIAs.

"It's a little bit frustrating, because there's so much effort being put forth," Rosa added. "I would love to provide 100 internships this summer."

Despite some small-scale shifts and innovations, the wealth management industry has a lot of work to do. Steps the industry can take to meet the succession and recruiting challenges include: creating more on-campus recruiting at colleges, developing pathways for career-changers, establishing roles on a team that don't involve immediate sales goals and pursuing low-tenure advisors who may not fit at some firms but could still be successful elsewhere, McKinsey said. The anemic headcount ticks of recent years won't cut it.

"Without resolving this fundamental supply bottleneck, the industry will continue to find itself in a zero-sum competition for advisor talent," the authors from McKinsey's Financial Services Practice division, Jill Zucker, Jimmy Zhao, John Euart, Jonathan Godsall and Vlad Golyk, wrote in the report. "In fact, as competition for experienced advisors grows — in part, fueled by private equity investments in the registered investment advisor (RIA) model and growing awareness of the impending shortage — recruiting packages and associated expenses have been on the rise as firms compete for the approximately 27,000 advisors who switch firms or go independent each year."

READ MORE: How financial advisor compensation is crucial to succession and M&A

Key takeaways from the report

Here are some of the most interesting statistical estimates and findings from the report:

• The industry's annual fee-based advisory revenue soared by 73% over the past decade to $260 billion last year, or a compound annual growth rate of 6.4%. At a rate of 1.8% compared to 0.6%, the yearly expansion of human-advised client relationships is moving three times more quickly than U.S. population growth. The number of U.S. households with at least $500,000 in investable assets is rising at a compound annual rate of 4%- 5% — as much as 8.3 times as fast as the overall population.
  

• Citing research and consulting firm Cerulli Associates' estimate that there were 53 million advised client relationships last year, McKinsey predicted the number could jump by 28% to 34% in this decade, to between 67 million and 71 million. The share of roughly 7,000 affluent and high net worth investors participating in McKinsey's annual survey who told the firm they're seeking more holistic advice climbed to 52% in 2023 from 29% in 2018. Nearly 80% said they would pay .50% or more for human advice over robot advice for roughly .10%.
  

• Just 29% of the affluent and wealthy survey participants said they would pay 1% or more for advice, but the average fee rate for clients with $1 million to $1.5 million in advisory assets has remained about the same at 1.04% since 2019. "Increasing demand for human advice is one of the factors behind the stable to slightly increasing advisory fee rates across delivery models," the McKinsey report authors wrote. "After a period of fee compression for advisory relationships from 2013 to 2018, fee rates have stabilized, according to PriceMetrix by McKinsey."
  

• At current levels of productivity and expected retirements over the next decade in the industry, wealth management must confront a shortage of 90,000 to 110,000 advisors in 2034 — which is 30% to 37% of its headcount today. That means that the industry must boost its productivity by 10% to 20% and dramatically increase the flow of incoming talent to hire 30,000-80,000 net new advisors this decade, from only 8,000 in the previous one. By 2034, wealth management must push up its advisor headcount to 320,000-370,000 just to keep up with the demand. And that number assumes the industry accelerates its productivity at a level equivalent to picking up 30,000-60,000 new advisors.
  

• Advisors on teams manage practices that are 20% larger than solo-practitioner shops. Right now, 59% of advisors with national or regional brokerages are part of a team. "When extrapolated to apply to the broader industry, continued adoption of team-based models could unlock 3 to 6 percent of advisor capacity, assuming 25% to 50% of solo advisors switch to a teaming model," the report's authors wrote.

READ MORE: Changing careers to become a financial advisor? Here's what to know

The upshot

Even though McKinsey's study came after others that warned the industry it must usher more young people and career changers into the profession, the new figures drew attention to the fresh evidence for the need to embrace new generations in wealth management. In addition, the research further demonstrated why the industry's consolidation will likely maintain its rapid pace in future years, according to a LinkedIn post about the study by Christopher Cassidy, the head of institution business development with LPL Financial.

"What's striking is the pace at which the top platforms are leading the charge in capturing advisors who are changing firms," Cassidy wrote. "Their ability to attract talent underscores a fundamental industry trend: firms with scale, technology, and strong client value propositions are outpacing the competition. For institutions looking to stay ahead, the question is clear: Are you positioned to attract and retain top advisor talent?" 

Some firms are beginning to demonstrate that they're getting the message, according to McKinsey, noting the CFP Board's announcement last year that four brokerage firms boosted their ranks of certified financial planners by at least 200 in 2023. The number of CFPs keeps topping its prior records, with more than 103,200 now designated with the industry's most prominent and respected planning certification.

However, the staffing push represents only one side of the equation, alongside the productivity gains. Bulking up on lead-generation tools, advisor recruiting resources, the "competitive advantage" from hiring more women to be planners or other professionals, practice management and specialist support with an emphasis on teams, technology such as artificial intelligence adaptation and succession planning could all aid the industry in reaching its required capacity for the swelling base of customers, McKinsey said.

"The industry is facing a monumental challenge — addressing a 100,000-advisor capacity shortage over the next ten years — with no easy solution," the McKinsey report authors wrote. "Wealth managers will need to focus on attracting new talent to the industry, helping them be more productive and successful, and further increasing productivity of the mid-career and established advisor population. Meeting the growing client demand would not only benefit the industry economically but also help it fulfill its mission of helping American families secure their financial futures."

READ MORE: How to find the right RIA successor

Forging a career path in wealth management

The report's emphasis on creating more structure around career paths in the profession resonated with Rosa. He compared the wide differences among entry-level advisors across wealth management's various channels to the more uniform shape greeting incoming doctors or lawyers starting out in their jobs.

McKinsey's report is "bringing that awareness, and hopefully lighting some fire under some firms," Rosa said. "It's easier for anyone who is interested in those careers. There are more clearly defined career paths."

That variety further "adds to the confusion about even what a financial advisor or planner does" among young people or career-changers who are much more likely to "want a guaranteed paycheck" in their first years in the industry than to be told they must generate revenue to be paid, he said. And hiring them constitutes only the first stage on their professional journey.

"In addition to coming up with ways to attract more people to the industry, we should also focus on ways to retain and develop them," Rosa said. "I think people really are craving that opportunity to just be coached and mentored and just be developed overall and exposed to different parts of the industry. Not everyone wants to be in a client-facing role, but we need support from all over."