Wall Street Eats Its Young
- Joshua M Brown
- August 10th, 2012
A recurring theme on this blog is the necessary shrinking of the financial services sector in general and the aging decrepitude of the traditional brokerage business firmament. But each year there are less and less financial advisers and brokers at major Wall Street firms and the independent rep model is coming unglued as small firms struggle to stay in business.
And in terms of total industry headcount, how about these stats courtesy of Reuters:
Across banks, brokerages, insurers and other investment firms, the ranks of U.S. financial advisers fell by about 7,000, or 2.3 percent, to 316,000 last year. This downward trend is expected to continue, with those numbers shrinking by 19,000 people over the next five years, or 1.2 percent a year, according to research firm Cerulli Associates' latest brokerage industry market share report...
The ranks of self-employed broker-dealers fell 14 percent last year to about 80,000, reflecting the difficulty of operating an investment business when clients made fewer trades and the stock market ended flat for 2011.
And those financial advisors who are surviving this Ice Age tend to be older and grayer - more so every year. The average FA in America is now 49 years old. And that number will likely trend higher in the near future, not lower.
Why is this happening? It's quite simple, actually: Wall Street Eats Its Young.
I've spent the last week and a half following up with resumes we've been sent since posting an opening for a junior advisor. The good news is, the kids are alright. The younger generation joining the profession is going to be just fine - they're smart, ambitious and almost every single one of them cited "doing the right thing for the customers" as a primary goal when I asked them what they were looking for out of a career in wealth management.
The bad news is that never before have the large firms and their priorities been so arrayed against this incoming class of professionals. Once-proud training programs at the wirehouses have degenerated into a glorified Hunger Games-like contest where the failure rate is somewhere between 80 and 90%. With all due respect, any endeavor that 90% of people fail at is categorically not a training program, it's a massacre. A colossal waste of time for a young guy or gal who is trying to learn a profession.
But the firm wins and the dinosaur "vice presidents" who've been roaming its hallways since before the internet have a permanent upper hand. When a 25-year-old enters the program, it's probably best if his dad is rich and has rich friends. If not, he is sat down in front of an antiquated dialing system where half the phone numbers are dead and the ones that are alive connect him to prospective clients who are dead. 500 phone calls in a day and less than 20 conversations is the norm, not the exception. This training period goes on indefinitely for many, they are running a race with no pre-determined finish line.
In the meantime, the broker must hit several different types of goals - new money raised (or "net new"), gross commissions charged in brokerage/insurance products or a certain amount of client assets successfully tucked into the fee-based platform. It is a triathlon and the target amounts set for trainees are impossible to the point that if they are hit, the elders are almost suspicious.
Now why, you may ask, would firms want to set impossible goals for trainees in their wealth management program and watch so many wash out each year? Because the assets and new accounts these kids do manage to bring in are swept up to the older advisors, it's all part of the "loyalty program." If you think the rich get richer in general, you should see the upside-down pyramid that the brokerage business has become. There are the established haves and each year a new crop of fresh-faced have-nots to be taken advantage of. The older advisors get away with this because they are consistently profitable to the home office and management keeps getting shuffled around anyway, no one wants to rock the boat. Also, to be quite frank, what client or prospective client wants to entrust their retirement to someone in their 20's anyway? Graying temples are an asset in a business where hard-earned market wisdom is the primary selling point of the product (advice!).
Now there have been some notable new initiatives at the brokerages to restart their training programs and move into the 21st Century. They probably don't want to resemble a Dickensian workhouse forever. Merrill Lynch is doing some interesting things with their Edge program, for example. The trouble is, each time the economy hits a rough patch, the first thing scrapped is the training program. These firms used to be legendary for the amount of talent that had passed through their programs, now they are a line item that gets chopped at the first sign of profit decline. Will the next time be different?
And for the young man or woman who does manage - against all odds - to become an actual advisor and be added to a team, the job that awaits them involves blocking-and-tackling for a senior advisor who has one foot on the golf course. There is the waiting game for more responsibility to be handed down as well as the familiarization process with the multi-level marketing scheme that the industry has become. There is a lifetime ban from social media and a regulatory regime under which creativity is frowned upon and innovation equals risk in the eyes of the complacent corner office managers. And if one is extremely fortunate and can make all the cuts as annual gross commission minimums go ever higher and the herd of non-senior advisors is culled each season, one can certainly make a great living and ultimately reach a position of security and stability.
But at what cost? What happens to the heart and soul of the energetic young kid who goes through that process? What compromises are made along the way and what awful truths about human nature and the priorities of the firm are accidentally revealed?
The tradition of mentorship at Wall Street brokerage firms has been displaced by a vampiric rite of passage where the juniors who don't make it pay for the cost of the one or two who do. In the meantime, the big books get bigger and the future for these firms gets dimmer.
Can anything or anyone break this predatory cycle or is secular decline an inevitability?
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The Reformed Broker is a blog about financial markets and the economy. Joshua Brown is a New York City-based investment advisor for high net worth individuals, charitable foundations, retirement plans and corporations... More.