Then I read how planners should maximize technology to minimize their time doing repetitive or boring tasks, thereby saving on labor (read: hire less folks). Finally, I read how senior planners need to focus their time on their best and highest use, delegating everything else to others at a lower pay rate with presumably fewer skills than the experienced planners (read: hire more folks).
Has anybody in the business connected the dots to see where the industry is really going profitably? I'm not certain, but I'll explore the idea in these next two columns. It might help many of us figure out the answer to a tough question: If I want a job (or I want to hire someone) in the financial planning industry, what should I do?
Nearly a decade ago, Mark Hurley, then principal of Undiscovered Managers, predicted our industry would undergo a classic economic maturation through consolidation of volume and profits into a few large firms: the classic Pareto principle in which 80% of revenues are generated by 20% of the firms. Like it or not, Hurley, now president and CEO of Fiduciary Network, was right, and his most recent research, Creating, Measuring and Unlocking Enterprise Value in a Wealth Manager, published last June, has reinforced the earlier prediction.
Here are some rough numbers I've compiled from Hurley as well as Mark Tibergien of Pershing Advisor Solutions, Bernie Clark of Schwab Institutional and Tom Bradley of TD Ameritrade Institutional. Last year, there were 60,000 financial planners nationwide; the majority work for themselves.
There were 17,000 independent RIAs, but only 1,200 to 1,400 firms with annual revenues topping $1 million. There were 200 to 400 firms with revenues of more than $4 million, which translates into more than $500 million in assets under management. There were about 100 firms wth more than $1 billion in managed assets, and maybe a dozen with assets topping $5 billion (excluding the wirehouses).
Let's put these numbers in perspective. In my experience, managing a business with $100 million in assets takes three to five people, including one or two relationship managers. Managing $1 billion to $3 billion takes 20 to 40 people, including seven to 15 experienced relationship managers. Organizational growth is not linear, so when the size of the industry doubles, it doesn't mean there will be twice as many jobs.
Well, what about overall growth? Please grab your calculator and do the numbers yourself. All the solo planners will probably hire only a handful of kids out of college/grad school.
Firms that have more than 10 employees might hire one junior planner a year, with some of them coming from brokerage firms, trust companies or banks. I'd guess there are less than 200 openings a year for new graduates at firms with complex client needs, meaning there's a slim chance new hires can get into planning right away. Why is that?
REALITY IS A BOEING 737
I'm writing some of this at 37,000 feet in a Boeing 737. Boeing and Airbus are the two commercial manufacturers left in the world producing very large planes. (Russia and China have nationalized facilities, but none of their models are competitively efficient or used worldwide.)
This is a classic example of industry maturation, with only two firms on the planet able to profitably build such a complex machine at a competitive price. In most Boeing cockpits sit two seasoned professionals with a combined 30 to 50 years of flight experience, managing a bunch of computers running complex systems.
A few decades ago, this size aircraft didn't exist. Back then, there were a half-dozen different manufacturers with different ideas of what was important in the cockpit. The largest airliners required three to five people up front because there were no computers or satellites, and aircraft systems required much more human intervention. Today, most general aviation four-seat aircraft have better technology than the largest airliners of yesteryear, allowing pilots to travel more safely and efficiently.
What does this have to do with the planning industry, you ask? Our industry is undergoing technology and labor efficiency changes like those that happened in aviation, which means a study of those trends can lead to insights about where we are going.