As financial advisor workforce ages, what will it mean for retirement plans?
Demographic shift might have ripple effects beyond the advisors’ own companies.
Go to any financial advisor conference and you’re bound to see plenty of wrinkles and gray hair. According to a 2019 J.D. Power study, the average age of financial advisors are 55 years old; 20% of financial advisors are 65 and older. Only about 10% of advisors are under 35, says Cerulli Associates, and efforts to recruit younger advisors haven’t produced their intended results.
The industry’s aging has long been a source of consternation, with observers worrying that the lack of a robust pipeline will create an advice shortage for people dealing with increasingly complex financial needs.
But that demographic shift might also have ripple effects outside the advisors’ own offices. With 93% of defined contribution plans now working with an advisor, will the aging of the advisor workforce be detrimental for American retirement savings too?
“This is a real issue, and I don’t know why every plan isn’t talking about it,” says Rebecca Hourihan, founder and chief marketing office of 401(k) Marketing.
Need for advice is real
Over the years, more and more plan sponsors have looked to advisors to help them design and monitor their plans. In 2019, Fidelity’s 10th annual Plan Sponsor Attitudes Study found that 93% of plan sponsors work with an advisor, a record.
With 401(k) lawsuits mounting, plan sponsors have been eager to mitigate some of the fiduciary risk they have by working advisors to assume some of the fiduciary responsibility.
Fidelity’s survey also found that sponsors are feeling pressure from employees to help them work on their other financial challenges. They’re responding by implementing financial wellness programs as well.
According to Morgan Stanley and Financial Wellness Network, 75% of employees believe financial wellness is a significant benefit and 60% of employees say they would be more inclined to stay with a business if they were offered a financial wellness program.
“There are only 5,000 advisors that truly specialize in the retirement space,” adds Hourihan. “We are nowhere close to saturation.”
The impact of advisor retirements
Advisors work on retirement plans on two tracks. On the one hand, advisors help plan sponsors design and monitor their plans. On the other hand are advisors who may also work with plan participants, providing them with education and sometimes one-on-one, personalized advice.
Large, multi-billion dollar plans typically work with large consultants such as Aon or Callan. These institutional firms have layers of management and will probably be able to bring in advisor talent, say observers such as Jim Scheinberg, managing partner, founder and chief investment officer with North Pier Fiduciary Management, which helps plan sponsors find consultants to work on their plans.
“The larger organizations clearly have a plan to replace their senior advisor with younger folks that they’re bringing up through their systems,” Scheinberg says.
At the other end of the spectrum are small advisory firms that can be described as solo-preneurs. Many of these firms lack a succession plan and it’s unclear what will happen when the lead advisor retires.
“That’s the one, where business owners are probably scratching their heads and thinking, ‘What am I going to do?’” says Hourihan.
In the middle are larger firms who have been targets of the M&A registered investment advisor frenzy over the last year. These too may be able to ride out the aging trend.
“[As smaller firms get bought up by RIA aggregators], they become more institutional,” says Shawn O’Brien, senior analyst with Cerulli Associates.
A role for technology
To fill the advice void for participants of smaller plans working with smaller advisors, plan sponsors might need to turn to technology solutions using things like robo-advisors, managed accounts and target date funds that automate some investment decisions.
“Picking a prudent fund lineup is a lot easier than it used to be,” says Eric Droblyen, president and CEO of Employee Fiduciary, a 401(k) plan provider for small businesses. “There’s a huge amount of value you can get from technology.”
Smaller advisors can scale their practices with technology and provide only a small amount of personalized advice.
“People have such a variety of questions, and sometimes those questions are really personal and they may be more interested in getting them answered through technology,” says Hourihan. “But automation can only get people to a point when they need human advice.”
Plan sponsors can deploy advisors strategically, to a situation where human advice is most needed and where it makes the most impact, says O’Brien. “I’m thinking of those high balance participants nearing retirement, they are going to want to talk to an advisor because their decisions are so consequential,” O’Brien says.
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