By Linda Koco
The incredible shrinking advisory force is not a tagline that veteran insurance and financial advisors want to see but one researcher thinks is the way things are going to be.
In a new report, Cerulli Associates predicts that intermediary distribution firms in financial services will shed more than 25,000 securities-licensed financial advisors in the next four years.
By 2017, the industry will number a little over 280,000 advisors, predicted Sean Daly, an analyst at the research firm in a statement. That’s down from 339,920 in 2005.
The advisory channels covered in the study include the insurance broker-dealer channel, with a 29 percent share of market by headcount, the biggest channel in 2012.
Running a close second are independent broker-dealers (IBDs), which had a 26 percent share of headcount last year. Wirehouses ranked third, with a 16 percent share. Other channels include regional broker-dealers, with a 10 percent share; registered investment advisors (RIAs), 9 percent; dually-registered, 6 percent, and bank broker-dealers, 4 percent.
The RIA and dually registered channels did see growth in their ranks from 2011 to 2012, by 1.5 percent and 1.35 percent, respectively. These were the only channels to do so, Daly noted.
The future declines will come mainly from the wirehouse, IBD, bank, and regional channels, Cerulli predicted.
What’s the problem?
The Cerulli report identified several factors that are feeding the decline in financial advisors. As may be expected, trimming of advisors with insufficient production is one of them, but of lesser importance.
The more critical reasons bear a striking similarity to reasons that insurance analysts often cite for the parallel decline in insurance-only or insurance-primary sales agents.
For instance, many financial distribution firms have experienced the retirement of older advisors “without sufficient backfilling of new advisors,” Daly said. (That’s a familiar cry in the insurance advisory sector.)
In addition, emerging competition and “underwhelming client demand” have caused firms to lower the supply of advisors, according to the Cerulli report. (A similar lowering of advisor “supply” has occurred in certain quarters of the life and annuity business during the post-recession era.)
Financial firms did escalate the length of their “transition and retention” contracts, but due to the aging of the financial advisor population, many advisors will be less likely to pursue growth, the analysts caution. (The implication is, with fewer advisors on a growth trajectory, there could be fewer sales — a rising concern throughout the insurance distribution system.)
Then there is the matter of focus. “In previous years, training programs have taken a back seat to productivity improvement and recruitment as sources of organic growth,” the analysts pointed out. “As a result, broker-dealers have curtailed investments in the long-term health and stability of their advisor forces.” (That should resonate with certain insurance specialists, who maintain that insurance distributors—and carriers—have been focusing more on technology services than on agent education and development, thereby weakening advisor ability to keep up and compete.)
Yet another trend identified by Cerulli was not named as a factor in the decline in advisor headcount goring forward, but it could be a complicating factor.
This is the rise of “investor apprehension” about putting money into long-term products. Cerulli’s definition of these products include not only long-term mutual funds, individual securities, exchange traded funds and the like, but also variable annuities and life insurance.
Variable annuities are still selling at independent broker-dealers and banks, but use of the products is slowing. The culture of transactional business may account for the former, while the desire to grow fee-based business, the latter, the analysts suggest.
The shift to fees has “hampered but not eliminated the use of annuities,” the analysts are careful to add.
If that is the case, it’s possible that advisor headcount at firms that now want to do more fee business may take a hit. The advisors who don’t want to work on a fee basis may leave. So might those who first try to work on a fee basis but then grow frustrated with the process or with the more limited palette of annuities with which they can work.
At the very least, wrestling with fees will create potential pressure points. As the Cerulli report noted, many advisors do want a “pure fee-only business,” but later find that a fee/commission mix is often more realistic.
News that financial advisor headcount is declining may surprise some people. That’s because government projections have been signaling growth in this field, not decline.
For instance, the Bureau of Labor Statistics (BLS) Employment Projections program projects that the number of personal financial advisors will grow by 32 percent from 2010 to 2020.
BLS bases that on anticipated need for planning advice by the large numbers of baby boomers who will be retiring during the decade. It defines personal financial advisors as those who give financial advice to people and “help with investments, taxes, and insurance decisions.”
According to the BLS website, the number of personal financial advisors should rise from about 206,800 in 2010 to about 273,200 in 2020. That’s fairly close to the280,000 that Cerulli is projecting for 2017, although BLS describes this as gain, not a loss.
BLS has another category for financial advisors, too. It is called “securities, commodities, and financial services sales agents.” It defines these workers as people who connect buyers and sellers in financial markets and who “sell securities to individuals, advise companies in search of investors, and conduct trades.”
Here, too, BLS is projecting growth in the ranks from 2010 to 2020, this time by 15 percent. This headcount would rise to 359,700 from 312,200 in 2010, according to BLS. The overall financial services industry did experience consolidation due to the financial crisis in 2008, BLS allows, but it says the industry has now resumed growth.
The BLS and Cerulli projections may reflect differences in definitions, boundaries, baselines, resources or formulas for doing calculations. Also, BLS projections go out to 2020 whereas Cerulli’s go out to 2017.
Still, the projected endgame, for advisors in the Cerulli study and for personal financial advisors in the BLS data, puts the headcount in the mid-200,000 range by later in the decade. That would seem to be a relatively small number of advisors to handle the big influx of boomers that most researchers say will surely seek financial advice at time of retirement.
Online advice services will probably fill the void for consumers who are do-it-yourselfers and those with modest nest eggs. But to whom will boomers and other people turn if they want and need eyeball-to-eyeball advice? The question is especially perplexing if the advisor workforce number continues to shrink, as Cerulli predicts it will. That’s where the headcount story is leading. At the moment, it’s an open question.
Linda Koco, MBA, is a contributing editor to InsuranceNewsNet, specializing in life insurance, annuities and income planning. Linda can be reached at email@example.com.
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