The financial advisory industry is on the brink of a major disruption with firms at risk of losing billions in annual revenue, according to the J.D. Power 2016 U.S. Financial Advisor Satisfaction Study.
A significant number of advisors nearing retirement, a growing investor preference for robo-advisors and advisor defection to competitors are setting the stage for this sea change. “No doubt, the wealth management industry is in the eye of the storm right now, and the implications are far reaching for firms that have been rooted in the traditional financial advisory services business model,” Mike Foy, director of the wealth management practice at J.D. Power, said in a statement.
“Financial advisors will obviously still be a critical part of the future of the business. However, key industry trends—such as the availability of low-cost robo-advice, the rise of so called validators who want to make more of their own financial decisions even while supported by an advisor and the new fiduciary rules putting clients’ best interests ahead of an advisor’s own profit—set the stage for fewer and different kinds of advisors and an increasingly exclusive focus on the high-net-worth segment where advisors can add the most value,” he added.
For more about the changes facing the industry—the insight of which could help firms adapt to stay relevant—read on. (For related reading, see: Top Trends for Financial Advisors in 2016.)
The study measured satisfaction among advisors who are employed by an investment services firm and independent advisors based on seven key factors: client support, compensation, firm leadership, operational support, problem resolution, professional development support and technology support. Satisfaction was measured on a 1,000-point scale.
Independent advisors overall are more satisfied than their employee advisor counterparts, though not as much as in last year’s survey. Overall satisfaction averaged 722 among employee advisors, up 21 points from 701 in 2015. For independent advisors overall satisfaction averaged 755, down 18 points from last year.
Here are some key findings from the study.
- Large-scale retirement: Almost one-third (31%) of advisors are set to retire in the next 10 years. Between 2014 and 2016, the number of advisors who plan to retire in the next one to two years rose to 3% from 2%.
- Advisors moving to independent registered investment advisor (RIA) firms: The number of employee advisors who say they will likely go independent in the next one to two years doubled from 6% in 2014 to 12% in 2016. Another 12% say they are likely to join or start an independent RIA practice in the next one to two years, up from 7%. (For related reading, see: What the Next Decade Holds for Financial Advisors.)
- Billions at risk: At the current expected rate of attrition due to retirement and advisors switching firms, a firm with 10,000 advisors may have approximately $585 million in annual revenue at risk during the next one to two years. This highlights the crucial need to retain top producers and effectively manage succession planning to transition assets to newer advisors, the study points out.
- Advisor retention and loyalty: Because the stakes are so high, firms need to figure out how to satisfy their advisors. Among employee advisors who are highly satisfied, only 1% says they “definitely will” or “probably will” leave their firm in the next one to two years. This compares with 46% of dissatisfied employee advisors who say the same. The same holds true for independent advisors, 2% and 45%, respectively.
“These changing dynamics in the advisory business create new challenges for firms to focus retention efforts on top producers, attract new talent with skills aligned with the direction the business is heading and create or refine hybrid business models that incorporate more technology and self-service options into their offerings,” said Foy.
The Bottom Line
The traditional financial advisory industry is about to experience a sea change and firms are at risk of losing billions in revenue thanks to advisor attrition and the growing popularity of robo-advisors. Firms will need to retrench in order to keep top advisors, attract new ones—as well as clients. (For more, see: Trends Challenging Financial Advisors.)