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Advisors slow to train successors

The dismal demographics of the financial advisory industry have been well documented, but aging advisors continue to drag their feet when it comes to succession planning and preparing for their own retirement.

Data produced by research firm Cerulli Associates suggest a bleak outlook for the industry. Aging advisors are expected to retire in droves over the next two decades, and relatively few young people are entering the industry to take their place. Financial advisors without a succession plan for their practices put not only their own retirement at risk but also the well-being of their clients.

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"We see it firsthand," said Tom Nally, president of TD Ameritrade Institutional, which serves as a custodian for independent registered investment advisors. "Something happens to an advisor, and the clients are left out in the cold."

Consider the numbers. The total number of financial advisors across distribution channels in the U.S. fell to 307,623 in 2012—down 4.4 percent since 2010 and 9.4 percent since 2004, when Cerulli began collecting data on the industry.

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The average age of advisors in the country is now 50.9 years, and 43 percent of advisors in the industry are over the age of 55 years, while just 11 percent are under the age of 35. Based on the expected number of retiring advisors, the entrance of new advisors to the industry and the growth in demand for financial advice, consulting firm Moss Adams has estimated that the industry could face a shortfall of more than 200,000 advisors by 2022.

While the industry as a whole faces a looming talent shortage, RIAs—particularly solo practitioners—are the most vulnerable. Most of them lack the resources to recruit and train young people and studies show that just 30 percent of them have any explicit succession plan in place.

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"This is a crisis for the independent advisor movement," said Mark Tibergien, CEO of Pershing Advisor Solutions. "So many of these firms are small businesses, and they have no continuity plans. They risk just disappearing."

Tibergien thinks it unlikely that advisors who have operated on their own for most of their lives are now going to become great people managers at the end of their careers. "The natural direction for them is to merge with another firm."

He expects the RIA industry, which has been gaining market share in the industry by leaps and bounds for the last decade, will eventually look more like the accounting industry. "There's going to be a few large firms, lots of midsize firms and a lot fewer solo practitioners."

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Those advisors expecting a buyout without having some kind of continuity plan and help from younger associates to eventually handle the business could be sorely disappointed.

"This is more about effective strategic planning," said Nally. "When someone makes an organization less dependent on themselves, it makes the business more valuable.

"Advisors have to understand that no one on a white horse is going to come and write them a check for 2.7 times revenue," he added.

Firms with multiple advisors have a leg up on solo practitioners in the hunt for successors. Commonwealth Financial Network, for example, helps its 1,500 independent financial advisors with matchmaking services, hammering out details of succession plans and drafting buy/sell agreements as well as helping with the transitions.

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Joni Youngwirth, managing principal for practice management at Commonwealth, said she has seen an increase in the number of explicit succession plans that have been adopted by advisors in the network, but the firm still has a lot of work to do.

"Young people see the industry as greedy, unethical and, in some cases, illegal." -Mark Tibergien, CEO of Pershing Advisor Solutions

"Financial advisors as a whole have been slow to embrace this issue," she said. "We may be slightly ahead of the industry, but we don't have this solved."

The other half of the equation is attracting enough young people to the industry—a tough job, given Bernie Madoff and the slew of scandals that emerged from the financial crisis. "Young people see the industry as greedy, unethical and, in some cases, illegal," said Tibergien. "The evildoers in the industry have created a perception that's reinforced by movies like 'The Wolf of Wall Street.'"

Unless the industry as a whole can change that perception, there may not be enough successors to go around.

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