The Race to the Bottom Is Over. Here Comes the Big Squeeze

By 2034, the industry could face a shortage of 90,000 to 110,000 advisors — roughly 30% to 37% of current headcount — at current productivity levels, according to McKinsey. McKinsey also estimates that the number of advised relationships will grow at least 28% over the next decade, from 53 million today to at least 67 million by 2034. Meanwhile, Cerulli Associates projects that $84.4 trillion in wealth will transfer across generations through 2045, with $72.6 trillion going directly to heirs.

But the much-discussed advisor talent shortage isn’t a supply problem; plenty of capable, motivated people want to build careers in this industry. The gap is in development.

Experienced advisors aren’t building environments that foster next-gen talent, and that’s a missed opportunity.

The demand curve is steep and rising, while the curve heads in the opposite direction. The advisors best positioned to capitalize on the impending chasm are the ones preparing to exit. Many of them have 30 or 40 years of experience, strong books of business, and hard-won knowledge that took decades to accumulate. If that knowledge walks out the door with them, no amount of recruiting will make up for it.

Why Firms That Want to Win Can’t Wait

Most advisors hire reactively, waiting until they’re stretched thin and then searching for a unicorn employee who can contribute immediately. But as experienced advisors continue to exit, waiting is no longer a viable option.

Younger advisors need time to learn the work. They need to observe client conversations before they lead them and make mistakes in low-stakes situations before they’re trusted with complex ones. The kind of growth required to excel in our profession doesn’t happen within a six-month runway. It builds over years, and only when a senior advisor makes an intentional commitment to teach.

Hiring early is also a retention strategy. Research consistently shows that client attrition spikes sharply when a practice changes hands without built-in continuity. A client who has met your junior advisor, worked with them on smaller matters, and trusts them is less likely to walk away when leadership eventually transitions.

What to Look for in a Next-Gen Candidate

Resist the urge to hire a finished product. This goal is to find someone who can learn, not someone who already knows everything.

The traits that characterize advisory success in this role are less technical than you might expect: curiosity, communication skills, coachability, work ethic, and comfort discussing difficult or sensitive matters with clients.

Test for these things directly. Ask candidates to explain a financial concept to you as if you’re a first-time investor. Have them sit in on a client meeting and debrief afterward. Give them a real scenario, not a theoretical one, and see how they approach it. What you’re evaluating is more about judgment and the willingness to grow than knowledge parroted back from a course or textbook.

Invest in Development

Even advisors with the best mentoring and career development intentions can get sidetracked by the week-to-week demands of running a practice. But that leaves a junior advisor adrift, uncertain, and more likely to leave the profession entirely.

Build mentorship into a structured schedule with dedicated weekly touchpoints, gradual client exposure marked by clear milestones, and a defined progression of responsibility, so the junior advisor always knows what they’re working toward.

One advisor recently shared a set of leads he’d ignored for nearly a decade with a younger colleague on his team, who had the knowledge and confidence to start working them. Now the senior advisor is more engaged in his own business than he’s been in years, and referrals have started flowing again. The mentorship benefited the senior advisor, the junior colleague, the leads who are now being advised, and the firm itself.

The Business Impact of Cultivating the Next Generation

Nearly 38% of today’s advisors are expected to retire within the next decade. Advisors who invest in developing younger talent will be able to capture the demand from the impending exit wave while retaining existing clients.

Hiring a junior advisor isn’t a favor to the industry; it’s a strategic decision that expands your capacity, deepens your client relationships, and increases the long-term value of what you’ve built. Every experienced advisor who commits to developing one person creates a multiplier effect that the industry desperately needs.

Schwab’s Insurance Requirements and New SEC Regulations Drive Up Barriers to Independence

In 2019, commission-free trading was the shot heard ‘round the custodian world—arguably, the shot that launched the race to the bottom as the proverbial big guns, Schwab, TD Ameritrade and Fidelity, announced they would eliminate commissions on stocks, exchange-traded funds (ETFs) and options for retail investors and registered investment advisors (RIAs) on their platforms.

On the heels of this move to grab market share among RIAs, Schwab announced its acquisition of TD Ameritrade, an integration set to be completed in 2023 that will deliver $6 trillion in client assets, 28 million brokerage accounts and more than 5 million daily average trades under the combined custodial umbrella.

The latest move in the custodial chess game came from Charles Schwab, which recently announced a change requiring firms who custody with them to purchase an aggregate minimum of $1 million of the following risk insurance coverage:

Errors and Omissions (E&O)
Social Engineering
Theft by Hacker
Theft by Employee

The Impact of Insurance Requirements on RIAs

It’s always been recommended that RIAs purchase, at the very least, E&O insurance coverage, which covers settlement, judgements and defense costs associated with the following claims:

Claims by clients for investment losses and other damages resulting from claims like negligence
Breach of fiduciary duty in providing (or failing to provide) professional services
Errors and omissions
Breaches of the advisory agreement
Failure to supervise brokers

It has not, however, been a requirement until now. Failure to comply with Schwab’s policy could prevent prospects from being able to custody assets with the firm, and existing Schwab clients that don’t meet the insurance coverage requirements could be looking at a termination of their service agreement. Firms new to Schwab have 90 days to comply.

At its core, Schwab’s insurance coverage requirement is a good thing. In a statement to RIABiz, Brian Hamburger, CEO of MarketCounsel, put it this way: “Schwab is overtly stating what we all know: that well-run businesses are properly insured to protect the enterprise and those who engage with it.”

For advisors, their clients, and Schwab itself, the mandate offers several positive implications:

The RIA industry is growing rapidly—and with more growth comes more complexity and more risk, especially on the operational side of the business.
By requiring comprehensive insurance coverage, Schwab is proactively trying to protect advisors and themselves, as well as end investors, from unnecessary risk exposure
Several states are requiring that RIAs purchase errors and omissions insurance, a trend that is likely to continue. Firms that custody with Schwab will already be prepared as this becomes a more common requirement.
Rising fraud rates and cybercrime attacks leave uninsured advisors exposed to damages that could cost them their business. Schwab’s mandated social engineering and theft by hacker insurance provides much-needed protection from these very real threats.

But it’s not all insurance and roses for some RIAs—particularly smaller firms that are just starting out. Schwab’s coverage rule indicates that all firms, regardless of size, must maintain an aggregate minimum of $1 million in coverage. This requirement significantly raises the cost of doing business—roughly as much as a new car—which is a real challenge for smaller RIAs.

As of now, neither Fidelity nor TD Ameritrade require E&O insurance coverage, although advisors that currently custody with TD Ameritrade will need to meet Schwab’s insurance requirements as the consolidation of the two firms gets closer. Fidelity has indicated they strongly encourage clients to obtain insurance coverage—a more lenient stance that could very well firm up in the coming months.

The Ever-Evolving Cost of Compliance for RIAs

In addition to new insurance requirements, the SEC also recently announced a new rule prohibiting RIAs from outsourcing certain services and functions without conducting due diligence and monitoring of the service providers.

These oversight regulations don’t directly specify which services are beholden to enhanced due diligence and ongoing monitoring; “covered functions” as they’re called in the SEC’s proposal could mean that almost anything an RIA outsources needs to satisfy pre-determined due diligence elements and will be subject to periodic monitoring of the service provider’s performance.

Most RIAs don’t have a Chief Compliance Officer in house to handle the additional compliance burden of significantly increased due diligence over outsourced providers, nor the budget for the expenses such due diligence and frequent monitoring require.

And outsourced services oversight regulations are just the latest in a long line of increasing compliance requirements for financial professionals, which include implementing cybersecurity risk management policies and procedures, new marketing and advertising rules and regulation best interest, or RegBI.

The Future Landscape for Independent Financial Professionals

Regardless of custodian, RIAs who are considering independence should not put insurance coverage or cooperation with SEC regulations on the back burner, as fines and penalties for non-compliance carry significant reputational and profitability risks.

Ultimately, the goal of both the insurance requirement and of the SEC’s mandates is protection for advisors, their firms and their clients. Advisors seeking independence should align themselves with a firm that can help them navigate the financial and operational complexities of regulations such as these.

To learn more about the resources and support independent advisors can expect from Silver Oak, click here.