Adviser head count fell in 2007, Cerulli study finds

As the number of people who need investment advice grows, the number of advisers has dropped.

Adviser head count fell slightly over the past two years, according to a recent analysis done by Cerulli Associates Inc. of Boston. Cerulli estimates that the total number of financial advisers in all delivery channels in 2007 dropped to 245,831, down from 256,461 in 2006 and 256,569 in 2005.

“It seems surprising that an industry so remarkably poised to take advantage of the massive demographic shift of retiring baby boomers would actually be shrinking,” the firm said in a report.

“With good times in 2006 and 2007, you would expect [the adviser population] to be growing,” said Philip Palaveev, a partner at Moss Adams LLP in Seattle.

The decline is an “aberration” from historical trends, said Scott Smith, a senior analyst at Cerulli. It is the result of brokerage firms trimming lower producers, mergers and experienced brokers becoming so frustrated with regulatory burdens that they are leaving the business, he said.

Cerulli also said that it is tougher to get established as a new adviser than in years past, and consumers are more demanding and less likely to deal with rookies.

“A lot [of firms] have said, ‘we’re not even going to try’” to train new people, said Chet Helck, president and chief operating officer of Raymond James Financial Inc. of St. Petersburg, Fla.

‘SEVERE SHORTAGE’

Another 50,000 advisers will be needed during the next four to five years to handle an estimated $5 trillion of new retirement assets that will be looking for a home, Mr. Palaveev said.

The result is a “severe shortage” of advisers, he said.

That shortage is why recruitment packages are so rich, Mr. Smith said. “The adviser has the market power,” he said.

Consumers and the industry may have to adjust, Mr. Smith said.

“It may be a matter of how [financial advice is delivered], whether through a phone call from a [representative] at [a discount firm] with 1,000 clients or a rep [at a wirehouse] with 100 clients,” he said.

Individual advisers are handling more assets, Mr. Helck said.

“We’re getting that technology dividend with advisers being able to handle more products, services and more higher-net-worth clients,” he said. “But there’s a limit to how much you can push the productivity thing.”

AGING POPULATION

Meanwhile, the population of existing advisers is aging.

“Most of the larger [brokerage] firms feel better off recruiting top people from other firms” rather than hiring trainees, Mr. Smith said. “There’s a vacuum at the entry level.”

While brokerage firms have made some headway in adding junior people to existing teams, those junior people themselves tend to be older, Mr. Smith said.

Wall Street is trying to target people with some experience in the financial services industry, he said, “rather than just anyone with a pulse and a college education.”

This decade, 19% of new entrants to the industry were between 41 and 50, versus just 6% in the 1980s, the Cerulli report found. The aging advisor issue is more acute at the independent firms, said David Goad, president of Succession Planning Consultants in Newport Beach, Calif.

At independent broker-dealers and registered investment advisers firms, “there is an 80-50 rule” in effect, he said. That is, “80% of revenues come from advisers 50-plus in age.”

Wirehouses tend to have a younger rep base because they train new people, Mr. Goad said.

“The independent channel has a real challenge ahead,” he said. “They’re not tooled up to recruit advisers and offer training programs.”

To meet demand, advisers will have to be trained from the “ground up,” Mr. Palaveev said.

And the job can’t fall just to the wirehouses.

The typical RIA firm has more than $2 million in revenue, Mr. Palaveev said, and can afford to train.

Internal Revenue Service rules prohibit independent-contractor firms from hiring trainees for reps, Mr. Helck said.

But independent reps themselves can pay to have their firm do the training.

Raymond James is also developing an apprenticeship program that will target recent graduates to work in the firm’s financial planning department, with the goal of ultimately joining a producing team.

“There are more than 90 colleges graduating [certified financial planner] candidates,” Mr. Palaveev said. “If the industry can offer them careers, it’s a great opportunity” to build the ranks of advisers.

But college students are avoiding the traditional brokerage firms.

Citing educators, the Cerulli report, said that young people may have an “outdated” perception of the industry as a high-pressure sales career.

However, although wirehouse trainees may get more support and time to build a clientele than in years past, they are still on their own to drum up business, observers say.

OTHER CHANNELS

In recent years, new entrants have been seeking positions through other channels, most notably at RIA firms, Cerulli said.

RIA firms’ share of new entrants increased to 10% this decade, from 2% in the 1990s.

“A lot of those grads are turning toward RIA firms [because they] don’t want a job where they’re being handed a phone book on their first day,” Mr. Smith said.

“College grads have learned that there’s more opportunity if they go into the independent channel,” Mr. Goad said.

Of recent college graduates going to a brokerage firm this decade, 40% started at an independent firm, and 60% started at a traditional firm, according to Cerulli.

That contrasts with almost three-quarters who started at traditional firms in the 1980s.

This is a significant change for traditional channels such as national full-service firms, regionals, banks and insurance companies, Cerulli said, “because most advisers in independent channels do not move to a more structured channel” later in their careers.

E-mail Dan Jamieson at [email protected].