The financial advisor industry is facing a population crisis of sorts.
According to a report by financial services research firm Cerulli Associates (The Cerulli Report—U.S. Advisor Metrics 2024), the headcount of financial advisors in the financial services industry has largely stagnated over the past 10 years. The report showed that at the end of 2023, the total number of financial advisors had increased by only 0.2% over the course of the previous decade.
Perhaps more alarming was the outlook for the coming decade, during which 109,093 advisors indicated that they plan to retire, which comprises 37.5% of the industry’s headcount and 41.5% of total assets. Taking this into conjunction with the fact that the advisor rookie failure rate is around 72% within the first five years, the financial advisor industry is on track to lose advisors faster than it can replace them.
Additionally, 26% of the advisors who plan to retire in the next ten years said that they do not have a clear business succession plan. The report noted some of the likely reasons for this:
“These advisors face a variety of challenges associated with developing a business succession plan that is necessary for them to retire, including finding a qualified buyer for their practice (86%), structuring deal terms (63%), and valuing their practice accurately (53%), among other challenges.”
These findings emphasize the need for recruiting, cultivating, and retaining new talent, as well as the need for succession planning for outgoing advisors.
Regarding the former, increased training and mentorship opportunities for young advisors can help develop their skillsets and create a more sustainable pool of talent. Providing more client-facing and production responsibilities to young advisors as part of a clearly communicated career timeline can also help them to feel more satisfied at their firms and better equipped to continue on in the industry.
Litigation surrounding succession planning, partnership, and “sunset” agreements for returning advisors has increased significantly. Issues surrounding junior advisors leaving with client relationships and assets, client attrition clauses that affect the valuation, service agreements for the retiring advisor, and breaches of payment or restrictive covenant terms in these transactions have all become a regular occurrence. This litigation is time consuming, expensive, and unnecessary.
Advisors who are looking to their own retirement futures should prioritize creating a valid, enforceable succession plan. This should include implementing practice protections for current client relationships, junior advisor and employee attrition, and competitive scenarios after the advisor’s retirement.
Trusted counsel can assist with drafting and financially structuring these types of deals to meet advisors’ future goals. Consideration of appropriate jurisdictions, dispute resolution process, and consideration of damages in the creation of these succession plans is critical. It is also wise for advisors to have a plan if the need arises to litigate a breach of succession planning agreements and the restrictive covenants that provide protection and compensation to the parties to the deal.
If you have any further questions regarding advisor transition and succession planning, please contact James Heavey.
James E. Heavey