Inside the FA Succession Crisis
It’s an impending drama worthy of an HBO series.
The financial advisory industry faces an existential crisis. Over the next decade, more than one-third of US financial advisors—representing $10 trillion of the industry’s assets under management—plan to retire. But nearly 40% of those advisors say they have no succession plan in place, according to financial services research firm Cerulli Associates.
Will some financial advisory firms gain market share while others shrink? Will new firms rise up to lead the industry? And what of the clients left scrambling to find new advisors?
With trillions of dollars at stake, the irony is all too apparent, as many of the people charged with planning their clients’ financial futures haven’t planned for their own retirements.
“The lack of succession planning, a reluctance to acknowledge the need and not prioritizing the mentoring of successors is a crisis for advisory firms,” says Theresa Gralinski, Head of the Advisor Advancement Institute at New York Life Investments.
“Succession plans are increasingly being factored into the valuations of advisory firms,” she says. “If you do not have a succession plan, the valuation of your business is dramatically lower. Wealth management firms and solo acquiring advisors are aware that they will have to develop successors and do the hard, time-consuming work of cultivating relationships with transitioning clients to retain the assets.”
Gralinski is alarmed by how many firms are afflicted with what the Institute’s research partner, the Columbia Business School, calls the “ostrich syndrome.”
Clients are changing how FA firms operate
Today’s advisors are struggling to find successors, says Gralinski, and that’s “a very real problem without obvious or easy answers. When we are speaking with advisors, we often notice they are looking for carbon copies of themselves.”
That mentality fails to recognize the ways in which the financial planning industry has changed in recent years. For decades, trusted advisors were the stars of their advisory firms. Those advisors served as the face of their firms, often bringing in affluent clients through referrals from other longtime clients. For years, firms could rely on one or two trusted advisors to bring in most of the business.
But a recent study from Rita McGrath and William Klepper, Academic Directors in Executive Education at Columbia Business School, finds that there’s been a transformation of business development within financial advisory firms.
While loyalty and referrals are still an important source of growth for firms, there’s been a shift in how clients approach the advisor relationship, and in what they’re looking for in an advisor. Technology is fueling that change, and today’s clients, who skew younger, are leveraging technology to become well informed on the latest investing trends, while looking for a highly cultivated, personalized experience. They benefit from having access to nearly as much information as their advisors.
The study shows that this new generation of clients is more comfortable using an array of providers that specialize in different aspects of planning. As a result, there is a shift from the traditional emphasis on the trusted advisor—and from their firm’s reliance on their referrals—to an increased focus on a different kind of advisor: the “activator.”
“Activators are advisors who don’t keep their clients only to themselves,” says Gralinski. “Activators see themselves as part of a broader team that supports one another. Activators understand that bringing in business for the entire team, not just for their individual books of business, ultimately leads to greater sustainable growth.’”
Developing the next generation of FAs to become activators
The study’s authors argue that the traditional trusted advisor role, while still relevant, is no longer the primary contributor to an advisory team’s revenue growth; it’s begun to be overshadowed by the new activator role. A recent Harvard Business Review report shows that focusing solely on cultivating deep relationships as a business development strategy—a key characteristic of the trusted advisor—can actually depress revenue growth.
Three specific behaviors set activators apart: They are committed to consistent business development; are adept at connecting with others in varied circles; and understand the power of creating and offering new content and thought leadership.
“The good news is that, with consistent coaching in these areas, all advisors can strengthen their business activation skills,” says Gralinski. “Mentoring and building activator activities into performance metrics will help to develop the next generation of successors.”
Firms that recognize this evolution, and create succession plans that include training talent to become activators, will be at a distinct advantage going forward.
“Those firms are going to be in a position to absorb the business and the respective money that will also be set in motion when the clients of the ‘ostriches’ realize they have not been provided with a continuity of care that others offer,” says Gralinski.
In other words, this is the year for financial advisory firms to be proactive and start looking for and developing the next generation of financial advisors.
For more information and insights on succession planning and developing your team, visit the Advisor Advancement Institute.
New York Life Investments is a full-service global asset manager. To learn more about solutions across asset classes, visit newyorklifeinvestments.com.
The Advisor Advancement Institute is a program within New York Life Investments. "New York Life Investments" is both a service mark, and the common trade name, of certain investment advisors affiliated with New York Life Insurance Company.
