to find the right people to do the work they seek. It also means that compensation costs are rising in order to create the right inducements for people to join these organizations.
The talent shortage is also an opportunity for advisory firms that are able to position themselves as the employer of choice in their markets. They can establish a presence on college campuses where personal financial planning or related disciplines is a legitimate major. They can recruit from other firms by promising a career path, an opportunity to work with more challenging clients, and the appeal of greater financial rewards.
For advisors contemplating the future of their business in a sea of uncertainty, being positioned clearly among prospective employees and partners creates an opportunity unique in our business.
In a recent survey, most investors believe the financial services industry puts profits ahead of client interests.7
The reputation of financial services has diminished a lot over the decades. The financial crisis of 2008, the nefarious activities of players like Bernie Madoff and his compatriots, the mortgage crisis, the collapse of previously trusted financial institutions have all contributed to a negative image. Even those who have held themselves out as fiduciary advisors got caught in the mix, with several leading advisors being indicted and convicted for illegal behavior.
As much as Main Street advisors try to distance themselves from the stink of corruption, both the trade press and Main Street media highlight the misdeeds of people in the business constantly. Furthermore, members of Congress and regulators persistently cite the abuse of elders and the less informed as reasons to tighten the rules on bad behavior.
Of course, it doesn’t help that industry regulators have diluted the terminology, thus making it difficult for the average consumer to truly understand whom they are dealing with. For example, the term advisor was meant to be the province of those registered with the SEC but when broker/dealers purloined that nomenclature as a replacement for the term broker, no one objected. Yet broker/dealers operate under an exemption that says their registered reps can give advice as long as it is incidental to their business. Imagine holding yourself out as an advisor without having to register as one because it’s not considered core to what you do.
Other terms that tend to confuse is fee-only versus fee-based. Or suitability versus fiduciary standard. If you are the average client without reason to understand the jargon of this business, it may come as a surprise to you when you are recommended or sold something that doesn’t fit your goals, your risk profile, or your level of comprehension.
This is not to imply that one segment of the business is less trustworthy than another. It would be as if a chiropractor held himself out as an osteopathic doctor. Chiropractors and osteopaths are both medical professionals who treat patients with a focus on the musculoskeletal system. But the two disciplines require different levels of certification.
A chiropractor is a medical professional trained in chiropractic medicine, typically in a three to four year program. An osteopath, on the other hand, must be a licensed physician and is able to perform surgery and prescribe medicine.
The parallel to financial services is that clients do not know if they are being served by someone who gets paid based on the products they sell them, or paid for the advice they give regardless of which financial solution they use. Furthermore, when a bad act is committed, the press usually uses the word “advisor” in the headline, which reinforces the idea that the entire business is suspect.
In the end, advisors and brokers who are able to convey confidence and trust and who are transparent in how they conduct business will go a long way toward giving comfort to clients, prospects, and centers of influence. But the apprehension people have in dealing with financial services providers remains a headwind in the conduct of business.
Regardless of which business model financial professionals operate under, the cost of compliance continues to rise. For independent firms, this cost can represent 2 to 4 percent of all expenses. For the most part, it is a variable cost, meaning that it goes up and down based on the volume of business one is doing.
Much of what has to be done in the advisory profession is prophylactic and not to remedy bad deeds, but the cost of surveillance and enforcing rules of behavior is meaningful. To be effective, it requires at least one individual whose sole job is to monitor activities and take remedial actions when something is amiss. It’s like having a traffic cop on every corner.
Most advisors would say they are honest and ethical, so the cost of compliance seems especially burdensome. But the myriad rules in place to ensure both brokers and advisors are acting in the best interests of their clients require well-trained specialists to educate, inform, and direct partners and employees to stop, look, and listen before acting.
All of these forces of change contribute to the need for advisory firms to become bigger. “Bigger” is a relative term, of course, since for the most part, advisory firms are small businesses, even micro businesses.
But complexity and costs require firms to be managed professionally. Adding layers of process and management to a business means that revenues also have to increase to cover those costs. The need to generate more requires the addition of people and thus begins a never-ending cycle of growth.
Many firms have grown naturally by adding layers as needed, but others have found benefit in merging8 with like-minded firms to more efficiently consolidate certain costs, gain operating leverage, and establish a bigger market presence more quickly.
Firms like Hightower moved quickly to create a semi-national Registered Investment Advisory firm focused on recruiting people out of wirehouse brokerage firms. Focus Financial was an early roll-up firm that has acquired numerous large advisory practices around the country though it has not tried to merge them into a singular brand or common client experience. Middle-wear providers such as Dynasty serve as a bridge between advisors and their providers, providing outsourced solutions to those not yet big enough or disciplined enough to create their own management infrastructure for this purpose. Numerous advisory firms throughout the United States and in other countries have merged, as the founders of one looks to retire but seeks to provide continuity to their employees and clients.
While we do not predict the end of the solo-practitioner, it is clear that there will be a divergence in size and presence in different markets. It is not unfathomable to see some truly national advisory firms much like we see in the accounting profession with its Big 4 CPA firms. More likely, we will see the emergence of super regional advisory firms – what the accounting profession labels as “Group B” firms.
These super regional advisory firms will be managed professionally with a branch manager system not unlike the brokerage industry. While there will be some that are scattered across the frontier, more likely the best-performing super regional firms will have a geographic concentration that provides for tighter management, tighter branding, and operational leverage.
We expect there will also be smaller, local advisory firms that find value in banding together with other advisors to create some economies of scale and continuity of practice. Many of these will be formed by second- and third-generation advisors who do not have the same fear of working with others that many of the industry pioneers seemed to have.
What the Assumptions Mean for You
One thing is clear in any business: What got you here will not get you there. In our mind, this means that the assumptions about the advisory business over the past 100 years have changed dramatically.
Think of what has transpired
www.fa-mag.com/news/mergers-and-acquisitions-continue-on-pace-21238.html.
