The advisor industry is facing seismic change over the coming years, yet few within it recognize the coming transformation, and even fewer are actually prepared for what's to come. According to Accenture, some $30 trillion dollars is expected to change hands as retiring Baby Boomers transfer their wealth to their children and grandchildren.

At the same time, the industry itself is graying. The average age of advisors today is 50 years old, and the average age of advisory firm owners is 61. Nearly a quarter of all active advisors are age 60 or above. Conversely, fewer than 25% of current advisors are under age 40 and just 5% are under 30. (For more, see: Tips for Advisors Who Retire & Sell Their Practice.)

Recent research by Pershing Advisor Solutions suggests that the industry will need to add over 230,000 advisors over the next decade just to maintain current levels, given the forecasted wave of retirements. Of the 42% of advisors who intend to retire within 10 years only 19% have a succession plan in place, according to Jamie Price, CEO of Advisor Group. Advisors in the 60-and-over age cohort manage over $2.3 trillion in wealth altogether, according to Accenture.

The upcoming change in demographics and imminent convergence of succession issues will fundamentally transform the industry of financial advice in the coming years. This transformation will be made even more profound by the increased prevalence of fintech and the newly expanded Department of Labor fiduciary regulations.

Firms must prepare today to meet the coming challenges of the great transition.

Brace for a Rapidly Changing Industry

Pershing Advisor Solutions’ CEO Mark Tibegien recently noted in a speech that about 16,000 advisors and brokers will retire this year, a number he expects to increase every year for the next decade. Yet statistics show that just 3,000 CFPs are added to the industry each year, and in many cases this is simply experienced advisors adding a new credential to their resumes, rather than new entrants to the industry.

For every newly-minted financial planning graduate who enters the workforce, two advisors reach Social Security age. The number of financial advisors has actually decreased 4.3% in the past decade.

These demographic shifts are occurring in the midst of the greatest generational wealth transfer in history. Ernest & Young forecasts that Gen X and Gen Y investors will amass $46 trillion in assets by the end of the decade, including some $18 trillion in inherited wealth.

Younger investors overwhelmingly prefer working with a younger financial advisor. Research also suggests that investors in lower age demographics develop the strongest relationships with their financial advisors, and generate 80% more referrals than their two preceding generations. (For more, see: Fintech: Why Advisors Should Be Embracing It.)

It is clear that the financial advising industry must recruit younger talent to fill the estimated 64,000 positions that will open up by the year 2020. This will require firms to focus on investments in technology that will attract Millennial talent. For example, although leaders in the industry have begun to migrate to digital transactional platforms that can be accessed via mobile, roughly 70% of advisors still use paper transactions. This will not be a selling point for recruiting a younger generation of advisors, so being able to offer advanced and useful fintech systems for operations will help your firm during the recruitment process.

The new generation of advisors places a premium on transparency and outcomes, a leading driver in the fee-based compensation trend. Fee-based revenues grew from 59% to 66% between 2015 and the end of 2016, a trend that is expected to continue.

Putting It All Together

To succeed in this new environment, advisors must take steps to proactively prepare for the changes facing the industry:

Embrace the Digital Disruption: This is the most important step: to address the convergent forces of demographic change in the emerging investor class and the need to attract a younger FA workforce.

Moving from a traditional wealth management model to a digital one is more than just investing in the right suite of tools - it's a cultural change that requires commitment to a data-driven mentality. A cloud-based platform that offers flexibility, scalability, and ease of deployment makes the transition less painful. It also offers access to business intelligence and seamless integration with other systems such as CRM, portfolio analytics and rebalancing software.

Others may prefer to join the robo-advisor wave, either by offering a white-label robo-advising platform on their own website or by embracing robo-advisor platforms to work in conjunction with their own FAs in the "cyborg" model.

Prioritize the Next Generation: The generational shift involves both nextgen investors and the FAs who will service them. This means evaluating products and services to ensure they align with the changing priorities of the emerging investor class and designing the type of transparent fee structures that they prefer.

Prioritizing the client's best interest is crucial for attracting both young investors and advisors. Millennial FAs place a high premium on transparency, outcomes, and client needs and interests. Revising revenue streams to encourage a higher level of fee-based services and transparent compensation schemes for FAs is another important step. (For more, see: 3 Reasons Why Advisors Need to Embrace Fintech.)

To learn more, you can watch a free webinar on “The Great Transition: Preparing for Disruption in the Wealth Management Industry” hosted by Truelytics.

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