If the numbers crunched by McKinsey & Company are to be believed, millions of wealthy retirees and near retirees could be desperately searching for a financial advisor by 2034.
In my warped mind, that conjures hordes of gray-headed placard carriers loitering on city streets and clogging freeway exits, begging for financial help. That’s not the dire picture McKinsey envisions when it says the wealth management industry “is facing a monumental challenge—addressing a 100,000-advisor capacity shortage over the next 10 years—with no easy solution.”
The problem is the aging advisor population at wirehouses and other large broker/dealers, whether advisors are employees or independent. With few small broker/dealers remaining, the headcount at larger brokerages (I use that term to distinguish them from pure RIA firms), continues to shrink for three reasons: Current advisors see a substantial financial incentive to shift to the RIA channel or to go independent at a hybrid and fewer younger people are attracted to brokerage advisor jobs when they learn that their early years will typically involve more selling than advising. Many mid-career job changers can’t afford to take a chance on something that may take several years to generate the income they are looking for.
So, where will near-retirees and retirees find advice if the giant firms continue to shrink? Ironically, another McKinsey study points to the answer: DC plan record keepers.
McKinsey notes that as the defined contribution plan market has grown, the business of administering plans has grown, becoming much more commoditized and less profitable. As part of a move into ancillary businesses to compensate for the margin compression in recordkeeping, McKinsey says that record keepers have increased their revenues from the retail wealth business from a negligible amount in 2013 to $45 billion in 2023.
The nation’s leading record keepers include Fidelity, Empower, Vanguard, TIAA, Voya, Principal, Bank of America and Schwab. These firms have plenty of marketing savvy and deep pockets, some of which they no doubt will allocate to technology that, combined with a patina of human advice, can create service offerings that many plan participants will find attractive. It’s already happening, and more will come because the economics favor it, and younger investors seem less inclined to have “my guy” at a Merrill or a Morgan than their fathers did.
McKinsey says more than half of plan participants would be comfortable receiving financial advice from their retirement solutions provider. Since the government estimated there were 92.6 million active private sector DC-plan participants in 2022, that’s a huge market for recordkeepers to tap.
Will all plan participants use record keepers for advice? Probably not. Some will no doubt wind up at wirehouses and large firms due to their reputation, referrals from friends and outreach efforts by advisors. Many very affluent investors will also continue to opt for wirehouses and large firms because of their vast array of services (although I bet big RIAs will continue to pick up more of the ultra-wealthy). So, while the largest brokerage firms are shrinking regarding advisor headcount, they are not disappearing. But several forces are at play that are likely to encourage larger numbers of about-to-be retirees to choose individual financial planners and small financial-planning firms, as well as RIAs of all sizes, in addition to simply staying with their 401(k) provider, which will provide them with a broader array of services.
Technology has made it possible and economically feasible for individual advisors and small groups of advisors to go out on their own. Modern marketing techniques, mainly social media and content marketing, have made cold-calling and other hard-sell tactics passé. What’s more, a growing number of younger advisors are entering the field who have studied financial planning at the many colleges and universities that now offer a major in the area. Many of these graduates will go to work for record keepers, beefing up their advice offerings. Others will go to existing planning firms or start their own and seek out younger clients like themselves.
It seems unlikely that a line of work that often provides professional satisfaction and financial success will suffer from a dearth of new entrants, or that providers won’t find a way to help someone banging on their physical or metaphorical door for advice. I hope I’m around in 2034 to see what happens to the advisor headcount, but in the meantime, I won’t worry about potential clients being unable to find an advisor.
Comments, observations, suggestions? Please email [email protected]
#McKinsey #Future #Retirement #Advice