In “The Cerulli Edge Advisor Edition,” Cerulli Associates examined adviser demographics, training and retention strategies. The firm projects that adviser contraction will continue through 2016, with headcount falling by 18,600. With a shrinking pool of talent, retention of quality advisers will be at a premium and the costs of securing outside talent will inflate.

Broker/dealers, such as the wirehouses and insurance companies, are traditional entry points for new advisers, Cerulli said. In recent years, wirehouses have altered their strategy, aligning their resources with the largest producers, with emphasis on profitability over scale. Executives are content to stay headcount neutral, or even reduce their footprint.

Adjusting the scale of wirehouses made sense to realign the value proposition and culture of the firms. However, the narrowed focus to the existing top producers minimizes resources and neglects the importance of training and development of new talent. At the other end of the spectrum, insurance broker/dealers continue hiring efforts, but adviser quality significantly trails the industry. As such, these new advisers are largely undesirable for recruitment.

In a flat or shrinking market, recruitment is at best a zero-sum game for broker/dealers, as firms trade the same experienced advisers. As one executive noted, “Retention is the best growth strategy.” To break the cycle of attrition, broker/dealers must take a multifaceted approach to increase the tenure and productivity of their advisers.

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Compensation Is Not Everything

Adviser compensation must be an element to any plan, but should not be the sole determinant of satisfaction, even within a wirehouse culture, which is notorious for fostering short-term thinking, the report said. To compete on payout alone will be a losing game, as advisers now have the option of 100% payout by operating their own business as a registered investment adviser (RIA). With compensation as one lever among many to secure adviser loyalty, broker/dealers will be better positioned to reduce their onus on recruitment, improve profitability, and increase adviser satisfaction.

Few channels are delivering above-average organic growth. The independent channel reaps significant benefit from adviser movement, but suffers as advisers exit the industry and retire. With no centralized method to bring advisers into independent practices, transitions are the lifeblood of the channel.

RIA and dually registered firms have exhibited the highest organic growth rates without the assistance of centralized training classes. Client acquisition and organic hiring effects have helped improve average adviser productivity. However, it should be noted that as many firms in these channels are in the earlier stages of their development, their growth rate is likely to abate and these firms are less likely to face retirement of their advisers as compared with the industry average. Conversely, wirehouses are losing significant assets from adviser movement, but fall short in replacing talent through productivity improvement and hiring.

Cerulli’s Advisor Edition is a quarterly research publication for advisers using the firm’s research for a thematic discussion of industry topics, including a range of market statistics drawn from interviews and surveys with advisers and industry executives. More information, including how to purchase a copy, is here.