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Pick up any industry article, white paper or analyst briefing circulating in the independent wealth management space these days, and it seems a foregone conclusion that the future of advice will be big.

That is big as in large, dominant regional and national firms owning all of the clients, all of the advisors and all of the assets. Thus, if you want to be a player in 2020 and beyond, you need to get big and get big fast.

In fact, it seems that those “get big or die” analysts basically have the word “scale” tattooed on their foreheads as the only answer to any industry trend, development or strategic question.

This shouldn’t be a surprise. Particularly as the costs of investment products, services and delivery are being driven down — literally to zero — by the behemoth digital players in their own personal technology sprint to get massive scale, so they can stay in business in an era of zero interest rates and zero commissions.

At the same time, with much of existing advisor tech being disjointed, costs of client acquisition increasing and compliance becoming more complex, the word “scale” is becoming ubiquitous as a requirement for independent advisory firms to be able to allocate more of their fixed costs over a larger client base to remain profitable.

Yes, scale is good, and independent advisory firms that have grown to billion-dollar plus status should be admired, respected and congratulated for this incredible achievement. Their growth continues to power the success of the wealth management space.

More importantly though, for the broader wealth management ecosystem supporting advisors, size is critical to being profitable in a world where basis points are being squeezed out of just about every part of the investment management supply chain.

But is scale really an absolute requirement for all advisors? Is the future of smaller advisory firms so bleak and grim that they will be swiftly relegated to the dust bin of history? I think not, and here’s why.

Mice That Roared

Depending on which survey or report you reference, there are about $80 trillion to $90 trillion of investable assets in the United States, give or take a few trillion. The largest financial services firm of them all, Fidelity, gathered just a hair over $8 trillion after 75 years in business.

This means the biggest, most successful financial services company ever in the history of the industry has only been able to achieve a 9% market share.

Plus, the state of competition in wealth management is dramatically increasing, and it will be tough for those industry leaders to truly achieve dominant market shares.

And it is extremely unlikely that our regulated industry will evolve into a scenario similar to the real “scale kings” — the tech titans, such as Amazon, Facebook, Google and Apple, that have market share in some verticals eclipsing 90%.

That’s simply not going to happen in wealth management — case in point, the largest wirehouses and independent broker-dealers through the years have never been able to get past 17,000–20,000 advisors, despite their perennial strategic goals to merge, acquire and recruit more and more advisors.

Due to turnover (about 15% per year historically), these mega-firms need to add an additional 2,000 to 2,500 advisors a year just to stay even, a pace that means onboarding more than 200 new advisors a month. This breaks down to 50 advisors a week or 10 per day — a phenomenal achievement, again, just to break even.

History has shown that the span of control and risk levels become too large for any one organization to manage, meaning that we will always have a handful of top-heavy firms, a meaningful number of regional players and thousands and thousands of smaller firms.

Our industry forever will be fragmented and most likely will evolve into market structures that are similar to the legal and accounting professions. These centuries-old industries have gone through countless iterations over the years and have remained very fragmented.

For example, over 70% of lawyers work in a practice of 10 or fewer attorneys, with 48% working as solo entities, according to HG.org. The accounting profession has evolved the same way, with over 99% of CPA firms having 20 or fewer people; the majority of those have fewer than five, according to Accounting Today.

These two professions have a lot in common with fiduciary advisors. Of the roughly 39,000 total RIA firms in the industry, 60% of them manage under $50 million in AUM, with only 5% at over $1 billion.

After 40 or so years of being an identified segment of independent firms, why will wealth management be any different from the legal and accounting professions?

After all, they have the same issues of increasing digital competitors, increasing client acquisition costs and corresponding technology advancements as they also pursue their own scale goals, yet still remain fragmented after two centuries of existence.

Cost Structure Advantage

Another challenge for the big firms is their own high cost structures and overhead, meaning that the majority of the big boys (both independent and wirehouse) have million-dollar minimums.

The problem with those minimums is that there just aren’t that many million-dollar households out there. Thus, big advisors’ ultimate growth will slow as more large firms go after the wealthy, and competition for this segment intensifies.

In fact, 93% of the investor market in the United States has less than $1 million in investable assets, according to Kiplinger. This opens doors to a large marketplace that is being underserved by the industry and can be a vast green field for small advisors to service with little to no human competition. Also, their much lower overhead and smaller cost structures allow them to profitably service a $500,000 account, while the big firms simply can’t.

Further, smaller firms are more adept in adopting new technologies to keep them on the forefront, while large enterprises sometimes take years to evaluate, buy and deploy new systems that immediately become outdated the minute they go live.

Despite the purchase of small-advisor friendly TD Ameritrade, there are many advancements in technology and new service model choices, making the opportunities for smaller advisors never better.

New and existing turn-key asset management platforms and custodial options, such as those made by TradingFront, Shareholders Service Group, XY Planning Network, Altruist, Lifeworks Advisors and others, are moving aggressively into the vacuum being created by Charles Schwab’s acquisition of TD Ameritrade to provide innovative, low cost solutions specifically crafted for the small independent RIA.

Lastly, one of the outcomes of the pandemic has been the universal acceptance of video communication tools such as Zoom by both clients and advisors. As a result, small advisors can now efficiently, effectively and at a low cost, acquire and service clients nationwide. They are no longer limited by geography and can become specialists in varying niches to continue to grow and remain viable.

Therefore, the next time you read or hear the word “scale” as a mandate, know that there are two sides to that coin; and the future is most certainly bright for small advisors as we power through 2020 and beyond.

Timothy D. Welsh, CFP, is president, CEO and founder of Nexus Strategy, LLC, a leading consulting firm to the wealth management industry and can be reached at [email protected] or on Twitter @NexusStrategy.