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By 
January 31, 2019 at 11:00 AM
Do you remember which companies dominated the business when you started?
The names Smith Barney, Dean Witter and E. F. Hutton often come to mind. Remember their tag lines? “We earn money the old fashioned way…” “We measure success one investor at a time.” “When E. F. Hutton talks, people listen.”
Are they still around? What happened to them?
Each of these firms disappeared from the scene for different reasons, among them unmanageable growth plans, poor controls, scandals and mergers. While cracks in strategy and leadership contributed to their phase-out, some universal lessons endure. Change is inevitable in this business. To survive, you must adapt — while also staying true to your vision, your clients and the culture and brand that attracted people to you in the first place.
Unfortunately, the current boom time for the business — especially independent registered investment advisor firms — has instilled a false sense of infallibility in many advisors. This complacency can prevent us from hearing the footsteps behind us or spotting potential perils in our changing environment. As a result, we neglect the actions we need to take to adapt.
Consider the last 50 years of disruption:
Until the mid-1970s, stockbrokers charged a fixed commission on all transactions. For example, a 10,000-share lot could cost $3,500. There was no discounting for larger orders and no negotiating. Compare those numbers to current prices and imagine the economic impact on the full-priced firms.
The change to negotiated rates ushered in two new business models in the 1980s. These models — independent contractor broker-dealers and RIAs — altered the face of retail advice. In the former, registered reps established their own independent businesses and contracted with the broker-dealers for compliance supervision, education, product access and technology in return for a payout double what they would receive at a captive, employee-based brokerage firm. In the latter, individual advisors registered as RIAs to act as fiduciaries instead of product salespeople, and collect 100% of what they charged. In both cases, financial professionals took responsibility for all business expenses and had to create their own firm name instead of relying on an established corporate brand.
In the late 1980s and 1990s, discount brokers such as Charles Schwab further disrupted the institutional brokerage model, which historically served RIAs in return for the research they provided. Schwab saw the opportunity to deliver lower-priced trades and custody of assets to professional buyers who were subject to a different standard of conduct than the registered reps who worked within their retail business. It took a while, but Schwab became a phenomenal asset-gathering machine soon emulated by other discount brokerage platforms. Meanwhile, institutional brokerage firms shrank or changed to adapt to different markets.
Entering into the 2000s, the retail financial services business changed again when the Glass-Steagall Act was repealed and replaced with Graham-Leach-Bliley Act. This new law allowed banks to compete with insurance companies and broker-dealers for the sale of financial products. The GLBA also limited the Securities and Exchange Commission’s oversight into bank holding companies. These giant retail brands, branch networks and concurrent product innovation created a powerful competitive edge for many of these companies.
Great Recession Consequences Almost a decade later, the Great Recession hit. Countless customers went bankrupt, and retail banks took the blame for selling products to consumers who did not understand the risk or could not control their impulses. This resulted in new legislation to curtail the abusive behavior, adding to the regulatory complexity. Many firms changed how they delivered financial recommendations and proprietary products.
The Great Recession ushered in a new era of growth for the RIA business model, with thousands of new RIAs formed since that time. Two industry trends also emerged: age demographics and business economics.
