The Business of Financial Advice - Then and Now

By Jonathan Bernstein, CIMA, Stringer Asset Management

Help Wanted

Recent statistics in the financial services industry point to a pending consolidation of clients and client assets among a smaller and smaller group of financial advisors.

It’s common knowledge in the financial services industry that fewer new advisors are entering the industry and the failure rate of those that do is astronomically high.

As the industry ages and advisors retire, they are simply not being replaced. There are a lot of theories as to why this this happening. Many experts point to the 2007-2008 financial crisis as a deterrent to young people entering the industry. Others feel it’s a perception problem with the industry as a whole.

The high failure rate of new advisors is often blamed on poor training or generational differences in work ethic. While all these are interesting and may have merit, the real answer may simply be a function of the times.

A Changing World

According to a 2014 study by Cerrulli and Associates, the average age of a financial advisor is 50.9 years old and 43% are over the age of 55. That’s certainly an interesting statistic and that simple fact can provide some real insight into why the industry hasn’t replaced itself with the next generation of financial advisors.

The key is not to look at the age of the financial advisors today but to look at when the current successful crop of financial advisors started. We have to focus on what the industry looked like back when these advisors were building their practices.

Let’s assume most of these 50 something year olds started when they were in their early 20s. If most started right after college we can deduce that that on average a large percentage of FAs started in the mid to late 80s, at a time when the majority of retail investors were dependent on a Registered Representative to transact business, conduct research or even get a quote.

Thinking about the wealthy prospects and clients they were trying to attract, many of those folks were certainly older than the young FAs they were dealing with and only knew one way to access investment advice and transact business: through a broker. Think about what that was like when home computers were not common and smartphones did not exist. Investors actually needed an advisor for even the most basic investment functions.

The Value Proposition

In the 80s and early 90s, most advisors built their practices based on salesmanship. They had something very valuable to sell because financial information, even the most basic, was very hard to come by. It was not unusual to see someone successfully cold-calling or cold-walking to politic, forge relationships and build a business when the FA was the only game in town for quotes, transactions and timely research. Add a little bit of salesmanship and personality to the equation and it was actually “en vogue” to have a broker. They really had a wonderful value proposition as a registered representative. Once they built a base, word of mouth and referrals kicked in and there you have it. A business! Fast forward to today and retail investors have access to information 24-7.  They have computers and smart phones, can pull up quotes, make trades and do research wherever and whenever they want. A large number of potential prospects and clients have been cut out by the DIY crowd and the general curiosity about markets and business can be satiated by countless media outlets providing 24-hour access to news.

The Sale

The rest of the American public is hard to get to. Cold calling isn’t effective and years of abuse has created a stigma around people who do.