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November 10, 2020 at 10:54 AM
Photo: Gualtiero Boffi/Shutterstock
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.
