by Daniel Allen, JD., CFP
The investment management industry is facing one of its greatest challenges in years.
Demographics are shifting while technology advances, simultaneously increasing demand for financial services and shrinking the ranks of qualified financial professionals. According to Ernst & Young, the average age of a financial advisor is now 50 years old, and it continues to rise every year.
In fact, only 22 percent of financial advisors are younger than 40, with only 5 percent younger than 30. As a result, the industry could face a shortage of up to 200,000 advisors by 2022.
CNBC reports that over the next several decades, Americans will transfer an estimated $30 trillion in assets to the next generations. So why is the financial advisory business facing a shortage of young, qualified professionals? In my opinion, we have an identity issue.
Wealth management is how we help individuals, families, and business owners make smart decisions with their money. However, I believe our industry does a poor job of explaining what we actually do on a daily basis. When most individuals hear the terms “financial advisor” or “wealth manager,” they envision someone at a computer all day analyzing companies, poring through spreadsheets, or designing investment portfolios.
While we do spend a considerable amount of time on these tasks, that is not the whole story. In addition to asset management, we are engaged in what’s happening in our community and in the world. Also, good advisors must be good students who enjoy learning and solving problems. Most importantly, advisors must be great listeners, understand people and their pressure points, and be passionate about finding solutions to better their clients’ lives.
Another barrier to entry for young professionals is the time, sacrifice, and money it takes to become a specialist in the financial advisory business. Advisors must be trained in general financial planning principles, education planning, risk management, investment planning, tax planning, and estate planning. Therefore, most firms seek young professionals with various specialties and designations, including CFA (Chartered Financial Analyst), CFP (Certified Financial Planner), JD (law degree), and CPA (Certified Public Accountant).
The training that advisors receive from these programs is invaluable, but it is time-intensive, involves challenging material, and is sometimes prohibitively expensive. In my pursuit of my law degree, I spent three years in school and thousands of dollars, along with three months of 12-hour study days to prepare for the licensing exam. Earning a CFP also requires years of studying and a minimum of three years of work experience. To obtain a CFA designation, advisors commit at least three years to meeting the educational requirements.
While it may sound daunt-ing, these specialties and designations are achievable. They provide advisors the necessary tools to bring valuable solutions to their clients. In our society’s pursuit of instant gratification, many young professionals may be unwilling to make these types of sacrifices. However, the hard work is worth it in the long run.
One of an advisor’s primary roles is to cut through the “noise” and analyze a particular set of facts to help our clients make informed decisions. These recommendations may involve investments in stocks, bonds, or real estate. They may also involve the sale of a business and how to protect those proceeds and effectively pass them to the next generation. In order to properly guide our clients, we must have an intimate understanding of their short and long-term goals and have open lines of communication.
Robo-advisors and generic planning software do have some value, but those tools lack the customization, expertise, and case-specific solutions that are necessary in our complicated financial world. For example, will the robot understand the most tax-efficient ways to structure the sale of your small business? Does the software understand that Tennessee has some of the best asset protection laws in the United States to protect you against lawsuits, creditors, and ex-spouses?
While robo-advisors offer convenience and present more choices, investors should consider the value of working with a trusted advisor. A human connection with a professional is beneficial to creating a long-term plan and making complex financial decisions.
Although our industry is changing and our financial professionals are aging, it’s not too late. We can still build sustainable, valuable firms that attract and retain young talent. We just need to show these 20- and 30-somethings that being an advisor is rewarding, exciting, and lets them make a real impact.
Daniel Allen, 30, is a wealth advisor at Red Door Wealth Management in Memphis. He can be reached at firstname.lastname@example.org.
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