There has been a significant amount of conversation over the past few months concerning the troubling demographics within the wealth management industry. Specifically, the fact that the industry is old, white and male. While this certainly isn’t a new phenomenon, the pressure that firms are feeling to diversify their ranks is beginning to build. In the same way that the baby boom generation is beginning to put pressure, demographically, on different levels of society and finance – they are also nearing retirement from the advisor ranks. The problem is there are precious few waiting to replace them.
Today in wealth management a typical “team” consists of three parts (this is not to say that all teams are constructed this way – but as a larger percentage): a senior partner or two, a junior partner or two and an admin or two. Most senior partners are no younger than 55 and more often than not are in their 60s. The junior partners may be in their 40s. The general succession plan follows that the junior partner or partners will wait until the senior partners retire and take over the book while paying the exiting senior partners a sizable fee to take over their book. None of this is out of the ordinary and happens on a daily basis at every type and size of firm across the country. So what is the problem?
The problem, as I see it, is that the industry allows senior partners to stick around so long that by the time the “junior” partner takes over he finds himself in his 50’s as well. At no point is actual young blood added to the mix. Is there a specific reason why firms eschew the late 20s advisor and his involvement on teams? Is there an unspoken concern that if a younger advisor is afforded the opportunity to handle larger sums of assets that somehow clients will look elsewhere? It would seem to me that a significant shift in hiring practices at nearly every firm may be quickly approaching, as well as a shift in compensation practices. In today’s wealth management environment it is nearly impossible to build a book from whole cloth in your early to mid 20s. A small percentage of folks MAY be able to do it, but the emphasis is on small.
So what can be done to reduce the demographics of the current wealth management industry? Here are a few simple solutions:
- As unpopular as the Merrill Edge program has been within Merrill Lynch, it is actually a great idea. By siphoning smaller accounts into the hands of newer and younger advisors, you allow them to get their feet wet and learn the ropes while benefitting from a less demanding compensation structure.
- Diversity amongst both women and minorities needs to be pushed and pushed hard. Frankly, these organizations have thrived over the past 3-5 years post crisis and could stand to spend significant dollars marketing the trade to a more diverse crowd. Getting younger, more female and more ethnically diverse makes sense on every front.
- Add incentives to partnering with younger advisors. Money talks as they say. Adding financial incentives to diversify your team both ethnically and demographically should speed up the process. In this business, financial incentives move the needle, pure and simple.
So where is the next generation? They are available and willing, but need to be accommodated and not simply thrown into the old school “sink or swim” world of wealth management. They have to believe that they can trust the process and be a part of developing the culture – and the firms that get it right will benefit the most. By reconstructing current hiring practices, changing internal incentives for diversity and demographics as well as spending more dollars to market the wealth management opportunity as a whole; firms can play a significant role in ensuring that the assets they care so deeply about remain at their firms. If none of these sort of initiatives are pursued, you can rest assured that the coming demographic tidal wave will cause panic at some point in the next decade.
Andrew Parish is the CEO and founder of AdvisorHUB and managing director of Axiom Consulting. Follow him@APadvisorhub