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How Crises Create Waves of Change in Financial Services

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What You Need to Know

  • Crisis is the mother of change, especially in the financial industry.
  • The Great Recession and now the pandemic have shown wirehouse advisors the path to independence.
  • Back in 2016, asset flows to the independent channel exceeded flows to wirehouses and banks for the first time.

The most impactful lesson I’ve learned in my long career is: If necessity is the mother of invention, then crisis is the mother of change.

The past 13 years have witnessed two periods of tidal transformation precipitated by crises. The first occurred in 2008, fueled by the financial crisis that led to the Great Recession. The second happened last year, caused by the COVID-19 pandemic that continues to disrupt markets and lives around the world.

First Wave: Financial Crisis

In 2008, as part of the founding management team at Hightower, I was responsible for business development. Launching a business at that time focused on recruiting corner-office financial advisors out of wirehouses and into independence. That might sound crazy, but the timing proved to be perfect.

Firms were imploding as advisors scrambled to manage deteriorating market conditions, crumbling brand reputations and massive client fears. However, amid seemingly endless days and nights of stress and worry, many of the industry’s best advisors discovered clients were staying with them despite, not because of, their firm affiliation.

They had truly emerged as trusted advisors and began recognizing an opportunity to explore the world of independent wealth management. Most advisors who took that leap tend to be far better off.

Transitioning to independence allowed them to become true fiduciaries and focus on the best interests of clients, while building their own legacy and enterprise value. It also provided better access to technology, products and support, on top of much-appreciated freedom from bureaucracy and ineffective firm management.

No Exaggeration

About 10 years ago, when I was working as a consultant, a senior executive at a major wirehouse called me into his office and said, “Ed, I think this tsunami to independence is exaggerated. I just don’t see it!”

I agreed, saying that the media tends to cover trends from an extremist angle, but added that “every tsunami starts with just a few ripples at the shore. Firms that ignore those ripples do so at their own peril.”

Sure enough, advisor and client movement to independence only grew over the ensuing years, reaching an impressive milestone in 2016, when asset flows to the independent channel exceeded flows to wirehouses and banks for the first time.

Second Wave: Coronavirus Crisis

When the second wave of change stormed ashore last March, COVID-19 forced advisors nationwide to fundamentally alter how and where they worked. Nobody knew how long the situation would last when restrictions were imposed that required most advisors and their staff members to work from home.

Many big banks and wirehouses offered some capability for employees to work remotely for a short period of time, but those firms weren’t truly prepared for an extended duration, and it showed.

Meanwhile, wirehouse advisors who began working from home got a taste of independence, and many  of them liked it. The concept started to seem more tangible to them, and the possibility more realistic.

While remote work may not be ideal for everybody, it did allow advisors to unplug from the bureaucracy of a branch office and find greater freedom to explore other options.

As with the first wave of change 12 years earlier, many advisors at big firms began to wonder why they were paying 60% of every dollar to the wirehouse and what were they really getting for that cost.

Additionally, clients started to embrace technology such as videoconferencing to a greater degree than ever before. This led many advisors to conclude that they didn’t really need a firm’s real estate anymore and preferred having significant flexibility in work location.

Appealing Options

Technology is the key, and many big firms have been late to the party in this respect. The advent of new independent models, offering advisors the ability to design their ideal form of independence, makes a potential transition even more appealing.

For example, David Canter, executive vice president and head of the registered investment advisor segment at Fidelity Institutional, recently told me that he believes the avenue to full independence will see significant movement over the next 18 to 24 months.

Advisors considering independence can join as an affiliate partner, tuck into an existing firm, or join a custodian directly.

While it’s early, in thinking about the next wave, I suspect that it will involve those who were reluctant to embrace an evolving industry. Sadly, they may soon realize that they’ve missed the boat and start scrambling to climb aboard.


Ed Friedman is director of business development and growth at Summit Financial.

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