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.

As it turns out, people want to meet their advisor through introductions from people they know who have had a good experience, similar to how they might want to choose a doctor, lawyer or any other professional in their life.

Those entering the financial advice industry don’t have the mentorship or sales ability of the older generation, who themselves have struggled with redefining their own value proposition as times, technology and the industry has changed.

The new crop of advisors finds it difficult or impossible to attract enough new clientele to stay afloat. After all, the way the current crop of successful advisors built their businesses no longer exists (no cold calling or cold walking) and the value proposition is certainly not what it was.

The New Value Proposition

What was the norm, is now the minimum.  Whereas advisors in the 80s merely needed a series 7 (Registered Representative license), that no longer has the draw it once had.

Today, advisors are adding more and more advanced certification and degrees in an attempt to differentiate and elevate themselves from the field.  It’s not uncommon to see Financial Advisors who also boast their CPA, CFP, CFA, CIMA, AMWA or any number of certifications.

The general idea is that individual advisors must stay a step ahead of technology and apply these new skills in a way that builds a new value proposition. This in and of itself doesn’t get it done. Remember they still need to be able to prospect with it, sell it to people, and build a business to critical mass. Easier said than done.

The Future of the Industry

I have seen very few young advisors who have put all the pieces together to successfully build a business from the ground up. Many are brilliant young entrepreneurs with a lot to offer, but the ground up approach to building and growing a business in the current environment has proven to be too steep a climb.

Those younger advisors who have survived and thrived have done it through merger and acquisition with older advisors who understand and have lived through the changes in the industry. These older advisors are starting to think about retirement and clearly recognize and appreciate the value proposition offered by the next generation.

What better way to retire than to put your existing clients and their intergenerational wealth transfer in the qualified hands of someone well versed in the new value proposition. It’s starting to become very clear that the next generation of financial advisors will have to figure out what the new paradigm of client acquisition looks like but until they do the path of least resistance and perhaps the path to survival may be through merger and acquisition of existing financial advisory business.

Jonathan Bernstein is the Sales and Marketing Director at Stringer Asset Management, a participant in the ETF Strategist Channel.

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