In the early 2000s, the biggest stir in the advisory profession was being caused by reports written by Mark Hurley, then of Undiscovered Managers. Hurley predicted massive consolidation in the financial planning profession, where a very small handful of firms would gobble up their competitors and use their scale, national brand and proprietary technology to drive smaller firms to extinction. Any firm that didn’t get to $1 billion under management in a hurry would be unprofitable or irrelevant.
The Hurley white papers went further than that. They also posited that the great majority of advisory firms had no enterprise value – roughly translated to mean that no buyer in its right mind would pay anything for them. One of the most incendiary observations was that advisors who had gone independent to build transferable value were running a job, not a business.
I had a different opinion and wasn’t shy about taking issue with pretty much everything Hurley claimed. I was asked to debate Hurley on the stage at the Connecticut FPA chapter and later at the NAPFA West Regional Conference. My points, in writing and at the debates were simple:
- We already had national brands that were ostensibly offering investment advice and financial planning – large organizations with massive scale, brand names and proprietary technology. We called them wirehouses. They were losing market share, albeit incrementally, with each passing year, while smaller advisory firms were gaining.
- The financial planning universe was relatively young, and still developing toward a mature service profession. Other service professions that have been through developmental stages that ours can look forward to didn’t take anything close to the evolutionary path that Hurley was predicting. The accounting and legal professions did, indeed, have three to five large national firms with scale and (in the case of the CPA firms, anyway) almost universal brand recognition. But those professions had settled into a steady-state, self-replicating four-tier model, with those aforementioned national firms, a somewhat larger number of significantly sized regional firms, a larger number of locally dominant firms in major cities, and in each case, about 70% of the total profession was made up of smaller solo firms or partnerships with three to 10 principals.
In those professions, we did see consolidation, where some of the smaller partnerships merged with others to move up the tiers. But at the same time, many people dropped off the partnership track of those large national and regional firms to start their own local practices, constantly replenishing the numbers at the bottom.
- The assertion that these smaller firms didn’t have enterprise value was undermined by the fact that, during the ongoing consolidation that Hurley had been pointing to as evidence that he was right, those large firms were paying good money for the practices they were buying. They were paying so much, in fact, that industry pundits thought that we had entered a seller’s market and advisory firms were being grossly overvalued.
I bring up this ancient history because I’m once again hearing from advisors who are worried about the profession's evolution and their smaller firm’s ability to survive in it. They look around and see firms like Focus, Creative Planning and others buying up smaller planning businesses around the country. They see the selling advisors gaining scale in the form of a centralized back office that takes care of the labor-intensive investment work, leaving those selling advisors with more time to focus on their clients. They see those selling advisors rebranding their offices with a big name that potential customers might recognize.
Focus, Creative Planning and others buying up smaller planning businesses around the country. They see the selling advisors gaining scale in the form of a centralized back office that takes care of the labor-intensive investment work, leaving those selling advisors with more time to focus on their clients. They see those selling advisors rebranding their offices with a big name that potential customers might recognize.
They feel small and helpless against this trend, just like Hurley made advisors feel.
Those firms are asking me how they can possibly compete. Wouldn’t it be better to sell now and remain viable, rather than try to outcompete the Goliaths and lose all their clients to that rebranded office down the street?
These are good questions, and it’s healthy for advisors to be a little bit paranoid. If I was inclined to raise my profile and get a lot of media attention, I would loudly confirm those fears and make Hurley-like projections based on the consolidations we all see.
But I can’t. I don’t see anything in this phase of our professional evolution that threatens the smaller advisory firm.
Let me lay out my case.
- (You may have heard this before.) We already have large national financial services brands that every consumer recognizes – they’re still called wirehouses – and they continue to leak market share for some very good reasons. Their sheer size means that they have to mandate that every broker and rep has to provide essentially the same kind of service to their customers, with guardrails around what they are allowed to recommend. These firms have to control their liability over an unwieldy set of offices.
The newly acquired firm down the street, with the new brand, is offering a much more standardized service “product” than the smaller firm where clients receive advice directly from the people whose names are on the door.
I used to recommend that advisors tell a prospect to go to the nearest Merrill Lynch office and ask to speak with “Mr. Lynch” or “Mr. Merrill.” The same dynamic is at play here.
- Related to this, the large and growing internal compliance departments at the acquiring firms have to set policies geared to the lowest common denominator. Many brokers, and a growing number of advisors at larger firms, are being told that they can’t run their own blogs or social media outreach initiatives. That is not because the firm doesn’t trust them, but because others at the firm would want the same freedom.
My recent white paper written with consultant Matthew Jackson concludes that, in this age of increasing social media transparency, prospects are going to want to see more candid commentary and have more visibility into the personal side of their advisor. The larger organizations are not going to be able to follow this trend nearly as effectively as the smaller, more nimble firms.
- The advantage of proprietary technology is a myth. Ask any broker about the bright, shiny features they were offered eight or 10 years ago, and how they degraded over time, and could not be upgraded effectively to the new standards of the marketplace because they were bolted onto legacy systems. The larger advisory firms have their own tech stack that is standardized across many offices. They will not be nimble when new tech providers emerge with better solutions to management efficiency and client service.
- Speaking of management efficiency, advisors who sold their firms to a larger entity now have more scale, and therefore more time with clients. They have a new back office which runs firm-wide model portfolios that every office recommends to clients, which the selling advisors no longer have to update. The selling advisors don’t have to run the portfolio reporting software or manage the staff that interfaces with the custodian. They’re free!
But the smaller office could enjoy exactly the same advantages of scale as soon as tomorrow without losing their independence, meanwhile having much more flexibility and control over the portfolios they recommend. That new back office is called a turnkey asset-management platform (TAMP), and they’ve been around for a long time. At least one of them (First Ascent) charges a flat fee per portfolio, which is certainly less than firms are paying in internal costs to create their customized client portfolios. Another (SEI) has negotiated asset management fees down to levels that the larger advisory firm acquirers couldn’t manage, because it has a lot more scale than they do. Dimensional offers model portfolio advice for free.
- Finally, those larger firms are (or have been) funded, in large part, by private equity. Don’t get me started on how private equity has cannibalized other businesses to line its own pockets at the expense of employees, customers and society at large. Anybody who accepts private equity investment is adding a very greedy, impatient mouth to feed into what had been a comfortable arrangement where clients and advisors worked to mutual benefit.
There are several implications here. Those larger firms are going to have to ”maximize” their client relationships in order to create the profit margins necessary to satisfy their (am I really going to use this word?) rapacious new investors. Brokers will tell you that their branch managers hector them constantly not to ”over-service” ‘small’ customers, and I have talked with a few acquired advisors, now working under the umbrella of these acquiring entities, who are feeling similar pressures. The private equity-funded business is not being run for the benefit of the client with the advisor making a fair profit. The once-fiduciary relationship becomes exploitive.
Another implication is the nature of the deals that the advisors are signing with private equity-funded firms. If the large firm is buying only a portion of the smaller one, the contract will typically give the acquiring firm first dibs on the revenues generated by their offices. In a hypothetical example, if the smaller firm is operating at a 25% profit margin, it’s not too painful to give the first 15% to the larger firm. But what happens if we ever encounter a severe market downturn, and suddenly the firm is being run at break-even – but the larger firm is still taking its 15% cut off the top?
I am somewhat vindicated by the prices that the acquiring firms are paying for their acquisitions. Those days when people thought the acquisition prices were crazy are a bit quaint in light of what’s being paid today. Nobody knows if that trend will continue, but the idea that smaller firms don’t have value – or that they won’t in the future – is nonsense.
I’m writing a four-part series on the upcoming changes in the profession in my Inside Information newsletter, and my readers know the accelerating trends that they need to adapt to: changing client demographics, a different value proposition (from AUM to advice), a different service offer (offering deeper advice to a narrower focus of clients), a different revenue model, different marketing approaches in this age of social media, new and transformative planning/asset management technology, and the fact that the wide adoption of Zoom technology by advisors and clients during the pandemic means that clients and advisors can work together from anywhere to anywhere, which means that every firm in the profession is now competing with every other one.
These are profound shifts in the business landscape, and they will demand shifts in how advisory firms do business. The future doesn’t belong to the largest competitors (think of dinosaurs or brokerage firms), but to the most agile and adaptable, to the firms that provide the most customized, personal service that adds value to their clients. Smaller advisory firms would benefit from becoming more efficient, and from devoting more face time to clients. But the current wave of consolidation does not in any way threaten their existence. The Hurley report’s predictions that smaller advisory firms will go the way of the Dodo are no more valid today than they were 20 years ago.
Bob Veres' Inside Information service is the best practice management, marketing, client service resource for financial services professionals. Check out his blog at: www.bobveres.com.
In the early 2000s, the biggest stir in the advisory profession was being caused by reports written by Mark Hurley, then of Undiscovered Managers. Hurley predicted massive consolidation in the financial planning profession, where a very small handful of firms would gobble up their competitors and use their scale, national brand and proprietary technology to drive smaller firms to extinction. Any firm that didn’t get to $1 billion under management in a hurry would be unprofitable or irrelevant.
