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.

Most aging RIA founders failed to plan for an orderly succession. Many have been forced to sell their companies to ensure their employees and clients continue to be served. Others have been forced to seek merger partners or new capital because of changing business economics. While advisor pricing has remained steady, costs — especially related to compensation — continue to rise. Only about 700 RIAs have more than $1 billion of assets under management (a good proxy for critical mass in this business). Smaller firms find it increasingly difficult to compete for clients and staff, and have a limited ability to grow dynamically.

Today’s Challenges Advisors who wish to build enduring businesses today face a set of challenges: Talent – While the financial planning schools are producing great young advisors, the retirement of the old guard means an even larger demand. Unfortunately, most firm leaders’ passions and backgrounds are focused on developing client relationships and the caretaking of their wealth, not necessarily people management. Their inability to retain and develop young candidates results in high rates of attrition just when these young advisors reach their peak years. Advisory firms now struggle to fill a critical need for talent at a time of rising demand.

Capacity – Technology has contributed to greater productivity for most firms, but financial advice is still a people business. Each advisor can service only a limited number of clients. The best-managed firms use a team approach to create operating leverage and a better client experience, but most wait to hire until they are well over capacity and therefore lack the time to train and develop new advisors properly.

Growth – According to the 2018 Investment News Pricing & Profitability Study, the growth rate for the average advisory firm is back to double digits — but much of that stems from market growth, not organic growth. Most firms still depend on the founders or principals for business development as this skill has not been cultivated among young staff.

Identity – The broker-dealer world has been living with constraints on their method of doing business for many years, but now they are getting even with RIAs by pushing towards a harmonization of standards. Many customers cannot tell the difference between an advisor and a broker due to the nomenclature they use, and even the way they charge for services.

Next up will be a fiduciary standard for registered reps. The definition may be different for broker-dealers compared to the standard for RIAs, but both types of practitioners will be able to declare themselves advisors operating under a fiduciary standard. This means RIAs must distinguish their business model in comparison to other providers.

Capital – Up until now, RIAs have not been required to have capital — or even a balance sheet —because the business always has been a P&L-driven enterprise. However, with an increase in retainer fees, accounts payable, accounts receivable, equity infusions and lines of credit among other items, RIAs must consider how they will fund their balance sheet. In today’s digital world, the prevalence of fraud has become more prominent. This increases the risk firms face when money movements and wire transfers they authorize later turn out to be fraudulent. The advisor must cover this cost, especially if their insurance company does not accept their reasoning for the mistake.

No doubt, our industry faces potential snags: many founders dying and retiring without a succession plan, the absence of a systematic approach to recruiting new people and the lack of an effective lobbying voice to fight for our self-interest—alongside a high volume of passive shareholders taking large stakes in mature firms.

Nevertheless, this is a great time to be in the advisory business. We are enjoying an oversupply of clients and an undersupply of people to deliver advice. Furthermore, well-managed firms continue to deliver compelling economics. Just pay attention to your environment and keep your ear to the ground. Changing demographics and market forces can disrupt your business if you do not plan ahead.

Are you prepared?

Mark Tibergien is CEO of BNY Mellon’s Pershing Advisor Solutions. Tibergien is also the author most recently of “The Enduring Advisory Firm,” written with Kim Dellarocca of BNY Mellon and published by Wiley. He can be reached at mtibergien@pershing.com.