It’s common wisdom that once a wealth management shop reaches a certain size, things start to click. Phones start ringing, more referrals are generated, profits increase, and a genuine buzz about the firm begins. Although an observation like this seems a bit subjective, there is a scientific rationale behind it ?? 1/2 and it is referred to as network theory.

Scientists are finding that concepts as diverse as the interaction of molecules to the behavior of real-world economies can at least be partially explained by the complexities of interaction and the development of networks. A fascinating aspect of such research is the observation that extremely large and developed networks follow the same mathematical laws as simple ones, if they are given enough time to mature. Industries and even individual firms follow this same pattern; as a result, networking can partially explain what is happening in wealth management today, and may give a glimpse of possible scenarios in the future.

An example of a network is the dispersion of wealth. At first, describing such a distribution is akin to placing a large number of coin flippers in a room. Those lucky enough to flip heads slowly amass more assets, the distribution of which can be roughly analogous to a bell curve.

But as the experiment continues, things start changing. Winners amass other’s coins and begin figuring out ways to become better coin flippers. Lucky flippers begin to segregate themselves from the unlucky, and share information on how to increase their fortune. After the network becomes more mature, the distribution of wealth follows a power law.

A surprising number of networks, both artificial and real, obey power laws. Although such networks are not identical, they tend to follow the same basic principles. Examples include: 80% of all web searches involve 20% of websites; 70% of academic journal citations are based on 30% of scientists; and 75% of all peas are produced by only 25% of all peapods.

As it matures, the wealth management industry is destined to follow a power law as well. Over time, a larger proportion of industry assets will be in the hands of a few managers, and it will become increasingly difficult for industry upstarts to get to critical mass.

How can wealth firms up the odds that their shop is one of the survivors? In the end, it’s all about networking. Developing a web of relationships, doing joint ventures with CPAs and other professionals, and hiring socially adept employees are all vital components of the networking process.

Although some are born connected, while others have connectedness thrust upon them, savvy investment professionals looking to become successful in the industry should strive to network by any means possible.

cellspacing=”4″ width=”704″ bgcolor=”#ebf0ff”>

Index Jun-05

size=”-1″>QTD

size=”-1″>YTD

size=”-1″>Description

size=”-1″>S&P 500 Index*

-0.01%

0.92%

-1.70%

Large-cap

stocks

size=”-1″>DJIA*

-1.84%

-2.17%

-4.71%

Large-cap

stocks

Nasdaq

Comp.*

-0.54%

2.89%

-5.45%

Large-cap tech

stocks

Russell 1000

Growth

-0.37%

2.47%

-1.72%

Large-cap growth

stocks

Russell 1000

Value

1.09%

1.68%

1.76%

Large-cap value

stocks

Russell 2000

Growth

3.23%

3.48%

-3.58%

Small-cap growth

stocks

Russell 2000

Value

4.42%

5.08%

0.90%

Small-cap value

stocks

size=”-1″>EAFE

1.37%

0.62%

-0.85%

Europe, Australasia & Far East

Index

Lehman

Aggregate

0.55%

3.00%

2.51%

U.S. Government

Bonds

Lehman High

Yield

1.96%

2.77%

1.11%

High Yield Corporate

Bonds

Calyon Financial Barclay

Index**

1.97%

-0.15%

0.05%

Managed Futures

size=”-1″>3-month Treasury Bill

1.30%

All returns are estimates as of June 30, 2005. *Return numbers do not include dividends. ** Returns are estimates as of June 29, 2005