How aging advisers could hurt the 401(k) industry

Few millennials are becoming financial advisers, even as demand for the profession is rising -- and that is expected to lead to a critical shortage.

For retirement plan advisers, getting out of the game while they are young can be critical, as the value of their practice can diminish as they age. But many are reluctant to sell their practices while they are younger and the businesses are still growing.

Meanwhile, recruiting models have broken down, and the industry’s appeal to millennials isn’t great. The main recruiters and trainers -- wirehouses and insurance brokerages -- have slowed their efforts, facing a lack of resources, changing dynamics or losing out to more attractive professions.

The average U.S. financial adviser is 52 years old, with 37% expected to retire over the next 10 years, according to the Wise Rhino Group. Less than 10% of advisers are under 35, with a third between 55 and 64. Who will replace them?

Traditionally, young recruits at wirehouses and insurance firms were given cold call lists and paid primarily on what they sold. The attrition rate is high, and it is hard to attract younger workers looking for meaningful careers. The 2008-09 financial meltdown certainly did not help the financial services industry's appeal.

Independent RIAs engage in limited recruiting and training, even though more 401(k) assets and plans are moving to that sector.

Yet demand for financial wellness and workplace advice is growing -- and those demands are unlikely to be satisfied by managed accounts or pure technology. Employers, workers and their families need trained fiduciary advisers, enabled by technology and smart data, to help manage finances, retirement and benefits.

There might be an answer to this, but we need to act fast.

“Buyers may pay a premium for leadership talent in the 30- to 50-year range,” Dick Darian, CEO of defined-contribution-focused M&A adviser firm Wise Rhino Group, wrote in an email. “The next range from 50 to 60 is where most of the sellers fall -- there is no premium or discount for sellers in this range. For sellers above 60, buyers begin to discount the firm value, as their perception of remaining runway, interest, energy, etc. to drive growth drops.”

Not considering the age of the owners in relation to the value of their firm is a major blind spot, Darian said.

That could also be driving the boom in RPA sales, and it could help attract younger talent as well.

First, owners of RPA firms who are not ready to sell may be more motivated than ever to bring in younger advisers by offering the opportunity to get equity and even one day take over the firm. It’s an alternative to selling and it provides options.

Second, DC aggregators buying up RPA practices are motivated in part by the opportunity to cross-sell wealth management and benefits. As was the case with wirehouses and insurance broker-dealers in the past, aggregators have the resources and will to recruit and train. The convergence of retirement, wealth and benefits at the workplace is valuable.

Even wirehouses like Merrill are compensating younger advisers through salary and bonuses linked to cross-selling banking, retirement and financial planning to their record-keeping, banking and advisory clients. It may also be the bet MassMutual is making, using proceeds from the sale of its record-keeping division to double down on its army of 10,000 agents. Those workers are well equipped to sell insurance products and wealth management along with retirement planning, though MassMutual was unable to effectively cross-sell to its record-keeping clients.

If the biggest demand by DC plan sponsors is for financial wellness and advice, while the traditional cold-calling, eat-what-you-kill compensation model is no longer attractive to younger professionals, why not train these younger advisers to be financial coaches or mentors at the workplace? There’s a ready source of retirement plan prospects, and they enjoy a degree of trust. Not only will plan sponsors be willing to pay, a fact that most of the industry still misses, these financial coaches and mentors would provide wealth management opportunities.

And helping people manage their finances and prepare for retirement, especially those without access to traditional financial advice, is a noble profession.

Captrust claims that for every eight one-on-one meetings with DC participants, its staffers uncover one opportunity with at least $1 million in assets. Plus, the firm is paid $20 to $50 per employee to provide participant advice. No wonder Captrust's valuation is well over $1 billion, based on its recent round of fundraising with GTCR.

Though a simple solution, as with most big problems, it is not always easy to execute. But the confluence of an aging financial adviser demographic, the need for succession planning and the demand for financial wellness and advice may be powerful enough, if we have the right stewardship.

[More: In-plan retirement income slow to arrive]

Fred Barstein is founder and CEO of The Retirement Advisor University and The Plan Sponsor University. He is also a contributing editor for InvestmentNews’​ RPA Convergence newsletter.