The Demographic Challenge Facing The Wealth Management Industry^©

By David Greene | October 8, 2024

YEARS

The wealth management business has seen stunning growth over the past 25 years.

In fact, according to research published in the Financial Times, the average annual financial market growth of over the 10-year period from 2012-2021 pushed global private client wealth to an estimated level of $360 trillion.¹

But there are significant headwinds. First, and easiest to recognize, is the fact that much of this growth has been spurred on by the strong growth in the financial markets themselves. Research from Fidelity Institutional shows that market action has outpaced the organic growth achieved at most wealth management firms. Equally deceptive is the growth of many large wealth management firms whose primary source of AUM growth has been through acquisition rather than true organic growth through net new client asset acquisition or net new household acquisition.

Underneath these facts are two troubling headwinds.

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Population Demographics Advisor Demographics

Population Demographics

The baby boomers are aging! While no surprise, it reveals an interesting challenge facing advisors and the industry. The wealth created by the patriarchs and matriarchs of the baby Boomer generation will transition to G2 in the not-too-distant future. The chart below shows a dramatic shift – in the US today, there are 7 million more people in the 45-55 age bracket than there are in the 65-75 bracket.

As older clients have aged, they’ve moved from accumulation to distribution of their wealth. And eventually that wealth will be passed to a generation that in most cases has no relationship with the children of the families they are serving today. Without that relationship or connection, advisors and organizations sitting on large AUM balances will inevitably see that wealth move to new advisors.

Which leads to a second, maybe even more strategic challenge in the industry.

Advisor Demographics

According to recent Cerulli research published in Investment News, “advisors across all channels 55 and older manage 56.7 percent of all assets despite representing only 42 percent of advisors.”² Compounding this statistic is another published in a J.D Power study of the wealth industry showing that the average age of U.S. financial advisors is 56 years old. More importantly, 20% of advisors indicate that they are five years or less away from retirement. And these retiring advisors will be those that are at the top of their career, managing large books of business. While there will certainly be a succession strategy in place, the question is, are there enough younger advisors ready to fill the gap and lead these relationships?

Historically, many of the most successful wealth advisors in the industry started during a period of commission-based compensation. They learned to sell products and were able to generate enough revenue to stay in the business, build relationships and have now transitioned their model to fee-based relationships with large clients. Many younger advisors entering the business during the transition from commission to fee-based have found it difficult to make a good living and left the business within 2-3 years. While firms have developed new compensation structures to support new advisors, there’s clearly a gap in the scope of truly qualified, fully competent wealth advisors population that will be ready to deliver advice in a way these potentially transitioning clients want and expect.

Two Key Strategies to Address these Challenges

Click on each of the key strategies to learn more.

1. Connecting to G2

Organizations, teams and advisors alike need a specific strategy for how they will make deep connections with the next generation inheriting wealth. If that doesn’t occur, those assets will move from one firm or advisor to another. For smaller and mid-level firms, they could see significant asset attrition as this transition occurs. Large firms might face a zero-sum game as the assets simply move to another advisor at the firm. Yet this transition still poses a significant challenge that must be strategically addressed … which leads to the next need in our industry – developing the next generation of advisor.

2. Developing New Talent

As previously stated, legacy advisors have had the ability to develop their advisory skills over time as they grew in their careers and learned to address the increasing array of wealth issues facing their clients. As these advisors retire, firms MUST have a strategy around developing talent internally. And it will need to be developed internally as the dwindling number of mature, well-heeled advisors will command significant compensation and likely have retention covenants that incent them to stay where they are. Firms will no longer be able to “attract or buy top talent” going forward.

The challenge for the industry is developing an infrastructure that supports younger, less-experienced advisors with the broad scope of technical acumen as well as the relationship skills and practice management disciplines that will support their ability to be successful in the future. And there is no short-term fix that can be deployed. The breadth of knowledge, skill and application exposure needed to deliver comprehensive wealth management advice to wealthy clients requires a disciplined, well-structured and systematic approach that can take 2-3 years or more. Failure to have that program in place or ignoring the inevitable need for developing the internal bench strength required to support the coming transition will result in firms struggling to support their business model long-term.

At Greene Consulting, due to our recognition of the importance of addressing this industry challenge, over the past 4 years we brought together a group of over 30 leading industry executives to collaborate around questions such as:

What does the advisor of the future need to be successful?
What do current advisors lack today and need to develop to enhance their approach?

And based on those conclusions …

Specifically, what are the most vital elements of wealth management knowledge, practice management disciplines, EQ and relationship skills, and digital acumen that the next generation of advisors must develop?

The resulting answers to these questions has led us to the development of the advisor2.0^©program, designed for “next gen advisors,” experienced advisors seeking to growth their business, and firms seeking to develop the full breadth of capability that supports the fulfillment of comprehensive wealth management by the rising population of advisors.