Developing a career path in the RIA industry

The following is an edited transcript of the NextGen Channel Spotlight on registered investment advisers, moderated by InvestmentNews editor Frederick P. Gabriel Jr. and Deena Katz, an associate professor in the Personal Financial Planning Division at Texas Tech University, and president and chief executive of Evensky & Katz. Panelists were Rudy Bethea, chief business development officer at NestWise, an LPL Financial Holdings Inc. subsidiary; Kim Dellarocca, director and head of practice management at Pershing; and Mike Riley, a senior manager at TD Ameritrade Institutional. Ms. Katz: Rudy, please tell us a bit about NestWise — why the firm was recently started and why you feel there are opportunities for many of our listeners to develop a career path in the advice industry. Mr. Bethea: I want to start out with some numbers. In terms of whom NestWise was started to serve, we really focus in on providing affordable advice for the middle class. We estimate that there are about 32 million households in our target market — clients with as little as $5,000 to as much as $250,000 in investible assets. And based upon a survey of that target demographic, 70% said they wish they had someone they could trust to help them make financial and investment decisions. But when you looked at that group, only about 25% of them are currently working with a planner. So our opportunity is to deliver actionable, personal financial advice to these customers at an affordable price. Given the size of our client incomes and investible assets, how they spend and save are really critical to their financial success. They really need to prioritize. They can't make too many wrong decisions or spend money on less critical areas. Big mistakes for these folks can be really disastrous, yet ironically, most firms focus on high net worth and the mass affluent, while the middle class is pretty much left to do it themselves. And after years of missteps, market ups and downs and do-it-yourself mistakes, I think folks are really ready for some sound advice in this target demographic.

RIGHT MODEL

So with that understanding of the target and then the need, the next question is: What's the right model for delivering that advice? And at NestWise, our belief is that the key to making financial progress is aligning one's choices on what to spend, save, invest and what to give back with what really matters to you. And so we believe that the foundation of financial advice really needs to be based on what you want to achieve, have and enjoy. Our program is built on a base of financial planning. We support our advisers and our financial planning tools with a consumer engagement program and a saving strategy that we deliver at a much lower cost. Our advisers take the time to get to know their customers and understand what their goals are and what their preferences are. Clients want to know that their advisers care about what matters to them and [place] their interests [above their own]. Mr. Gabriel: Mike, will you describe TD Ameritrade's NextGen strategy and what will drive growth in the RIA channel and within your own firm over the next several years? Mr. Riley: At TD Ameritrade Institutional, we provide comprehensive brokerage and custody services to fee-based advisers, registered investment advisers and third-party administrators. We have a web interface where they can manage their client portfolios and teams of folks that do all the back-office support features. The RIA channel is one of the fastest-growing segments of wealth management. Advisers that we work with are either registered with the [Securities and Exchange Commission] or are state-registered, depending on their assets under management. And as Rudy mentioned, they really do proudly adhere to the fiduciary standard, and that really boils down to always putting their client's interests first. They truly believe in the fee-based model. We are the second-largest custodian with client RIAs, with over 4,500 advisers. As of August, TD Ameritrade had about $461 billion in total client assets, and roughly 40% of those assets were in the advisory side of the business. Roughly 25% of our accounts are associated with Gen X and Gen Y. Let me give you a number to think about: $18 trillion.

TRANSFER OF WEALTH

A Deloitte Consulting report cited that over the next 35 years, $18 trillion is going to transfer from the baby boom generation to Gen X and Gen Y. This presents both a huge opportunity for independent RIAs and an area of concern. In addition, studies have shown that only 17% of children will retain their parents' adviser. As the aging population of advisers has shown, advisory practices need to figure out a strategy to not only retain their existing client assets but also determine growth strategies to attract the younger generation of investors. To that end, let me paint you a picture of what we're seeing in the field from visiting with hundreds of clients every year. RIAs that want to grow and connect with the younger generation of investors are hiring younger advisers. It's all about connections. Investors in their 30s are going to have a much better time connecting with advisers in their 30s, as opposed to advisers in their late 50s.

JUNIOR ADVISERS

I hear all the time that RIAs cannot find suitable candidates. Firms tell me that they are actively looking to hire junior advisers, but folks they interview with either don't have the skill sets needed and/or are not a good cultural fit. This is where all of you on the line today have a tremendous opportunity. Many of you are attending personal-financial-planning programs at universities and are well on your way to seeking a [certified financial planner] designation. That addresses the skill set requirements. So let me touch briefly on the cultural fit, which many advisers tell me is equally — if not more — important. Keep in mind that RIAs oftentimes have anywhere from five to 25 employees. These are really small businesses, and it's critical that new employees fit into that culture. My advice to all of you on the line is to do your homework. Do your due diligence with the firm you're interviewing with, and get a feel for their culture. You can learn a lot from their websites and their social-media presence. Try to connect with the firm on this level. Ms. Katz: Now I would like to go to Kim Dellarocca, who will talk about some broader trends that have developed in the advice industry that will influence new advisers. Ms. Dellarocca: Your reputation and the reputation of the people you work with will be everything in this industry, as you all may well know. Given that most of you are looking for jobs or interested in this field, I thought it would be good to put ourselves in your shoes and to say why is this a job that you should be interested in. The economy is tough, and finding jobs is difficult right now, but there is one job that is really in demand and has a lot of tail winds in its favor.

DIFFERENT MODELS

Right now in this country, there are 329,000 advisers in lots of different service models. The headline here is that over the next decade, our industry falls short of reaching market demand by 237,000 new advisers who are really needed. So that's a 32% projected growth rate. There's not many other industries that you can point to that show this kind of growth rate and this kind of demand. When you look at professions like medicine and technology, they're being disrupted. There's a lot of outsourcing going on. There's a lot of technology innovations that are making their jobs more efficient and, therefore, less job creation. But here's an industry that you can count on that is creating new jobs. The financial adviser profession is different than some of the investment banks or the more opaque world of hedge funds or some of the organizations that you may have seen make headlines. [You may even have] been discouraged by the actions that some of them have taken. But this is a field that we believe remains secure. There are a lot of reasons why 237,000 new advisers are needed over the next decade. One of them is a lack of succession planning. The average age of the traditional financial adviser is somewhere in the mid 50s to 60s, and [they have no] succession plan in place, so these clients are going to transition. Mike talked about the $18 trillion transitioning to the next generation. Those clients, those assets, need to go somewhere. You are all in a perfect position to catch those relationships and assets.

NEW ASSETS

In addition, new assets are being created every year. In fact, our latest study, “The Advisor of the Future,” points to $850 billion in new assets will be created each year over the next 10 years. And that's fueled by a lot of things, such as a growing population, the accumulation of retirement funds, new generations — folks like yourselves, and the X and Y generations — more entrepreneurs. In this country, capital is still at a premium, but people are still investing in entrepreneurs and great ideas, and you can see that when you just look at the Forbes list over the past few years. So there are a lot of things in your favor. We have a shortage of advisers, we have a growing population, we have market gyrations and shifting demographics, and then overall, we see an increase in personal responsibility for people's wealth and savings. We saw that with retirement, and we're seeing it now with health care. Less than 5% of all the financial advisers are under 30. In nearly any profession, whether it's doctors, lawyers, accountants, any of our trusted advisers, there has to be that sort of undercurrent that they get us and understand us. And you have a natural connection with this next generation of wealthy families and wealth transfer just by the factor of being a member of their generation and really understanding the demographics and psychographics and just generational trends that have shaped them that allow you to speak their language and be a relevant trusted adviser. We think this is a job of real significance — for a lot of reasons — one being that, unlike some other jobs that you might do, you actually get to see the fruit of your work every single day. You get to sit across from a couple who may be retiring and getting to achieve the life of their dreams. You may be sitting across from a younger couple trying to figure out how they're going to pay off loans and start a family. You may be helping an entrepreneur begin a business. The life-changing conversations you'll have are really important and meaningful, and I think not only give the lives of your clients significance but give you significance in being able to be a conduit to helping people to achieve their dreams and do these kinds of things. What we find is that not only do you become a trusted adviser to clients, but we hear our clients being brought into things that are not even money-related at all, such as resolving family disputes and helping to create family charters of how they think about wealth and how it will be spent in future generations, and what it means to leave a legacy. So [you could] play a role much larger than just a financial adviser. Compensation will be an important part of how you evaluate your career. Hopefully, it won't be everything. For you to be thinking about being a financial adviser this way is sort of the way that many of us in my generation grew up thinking about a surgeon or a doctor. The types of salaries and potential for owning your own business or practice — not unlike owning a doctor's practice — are very high and very significant. If you decide that you want to own a firm, a salary of $600,000 or more would be totally within reason, depending on the part of the country you're in and depending how big your practice is. And again, this is akin to sort of the surgeon salaries of different generations. So I think that there's a lot to do in evaluating your career. Compensation may be a piece, and hopefully, the meaning that you bring to your lives and the lives of your clients and your colleagues will be another.

OTHER ROLES

One other point that I wanted to make is that being a financial adviser isn't the only profession within the financial advisory business. Equally important are roles in service, operations, human resources. What used to be small practices are really growing into big businesses, and they'll need all the typical functions that a regular business runs. So if you don't have the propensity for investment knowledge or it just isn't your thing, but you happen to be really organized or really great at process, don't rule out this profession, because there's lots of ways that you can participate in it. Mr. Gabriel: What are some of the most important skill sets for NextGen advisers? What kinds of intangibles should they bring to the table, and what are you looking for from these potential job candidates when they come to you? Mr. Bethea: As much as smarts and the ability to learn are important, the will is really critical. When we look for advisers, we really want people who have a passion for helping people. We believe the segment that we serve has been ignored for a while. And it's not just our mission statement, but we really weave the objective of helping people into every aspect of the design of our program, from the 15-minute daily challenges to the face-to-face engagement classes on through to the types of products we offer. Every aspect of our program reinforces the fact that our advisers are really coaches and that they are there for their clients. So you really have to have a passion for what it is that we're doing. You really have to believe that you're making a difference in people's lives. So if you have the will, we can help you acquire the skills. A good candidate really has to have the emotional intelligence to empathize with clients, which requires excellent interpersonal and communication skills. And again, above all, it should go without saying that a good independent adviser candidate must have unquestionable integrity. Mr. Riley: When they're bringing someone into their organization, they obviously want folks that are professional and personable, but really what it comes down to is, they want people that are authentic. They want clients that are signed up with their practice to know who they are and really be able to relate to them. Advisers are trying to stay out of being commoditized, so they look to be transparent and allow their clients to truly get to know who they are as an organization. If you think about this, this really engenders trust. So as you are contemplating a career as a NextGen adviser, I think it really boils down to passion for what you're doing and having the heart of a servant. So if you truly love what you're doing, you're able to connect with people and truly be passionate [about] what you do. Ms. Dellarocca: When we surveyed investors to find out what they wanted from a financial adviser, 63% of them said the most important trait was “someone who can guide my life.” So that really kind of gets to the heart of a lot of what these folks are talking about ... While investments and numbers and math and everything that you may have thought about that it takes to succeed and do well in this field is important ... you definitely have to be able to understand that and understand the markets, and make smart decisions for your clients. That's the first thing that you're asked to do.

BEHAVIORAL ECONOMICS

It would behoove you, especially if you still have time to take course credits or those types of things, to also embrace some classes in psychology and understanding how people work, even understanding how people make decisions so that they'll take your advice, a little of the behavior-economics-type things, being a great listener. And always [be] a student, always understanding and keeping in mind what your clients want, being a student of this industry, being humble to what you don't know. And having the ability to think like an owner. So whether you take a job as an entry-level salesperson or an intern, or you're in a senior-level position, if every day you could act like an owner, act as if you have that much invested in it, I think you'll see ... the cream will rise to the top, as well as your career. So be someone who can make a difference, be helpful. When you think like a business owner, you begin to see that it's more than just providing good financial advice, it's also knowing how to market your services and how to communicate your services, and how to help a business owner structure a transition. There's a lot of other aspects of this role — especially if you have ownership on your mind — that you'll need to know. And whether you're in an ownership role or not, always acting like that is certainly something that most advisory owners really value in an associate.