in wealth management — case in point,the largest wirehouses and independent broker-dealers through the yearshave never been able to get past 17,000–20,000 advisors, despite their perennial strategic goals to merge, acquire andrecruit more and more advisors.
Due to turnover (about 15% per yearhistorically), these mega-firms need toadd an additional 2,000 to 2,500 advisors a year just to stay even, a pacethat means onboarding more than 200
new advisors a month. Thisbreaks down to 50 advisors aweek or 10 per day — a phenomenal achievement, again,just to break even.
History has shown that thespan of control and risk levels become too large for anyone organization to manage,meaning that we will alwayshave a handful of top-heavyfirms, a meaningful number of regional players andthousands and thousands ofsmaller firms.
Our industry forever will be fragmented and most likely will evolveinto market structures that are similar to the legal and accounting professions. These centuries-old industrieshave gone through countless iterationsover the years and have remained veryfragmented. For example, over 70% oflawyers work in a practice of 10 orfewer attorneys, with 48% working assolo entities, according to HG.org. Theaccounting profession has evolved thesame way, with over 99% of CPA firmshaving 20 or fewer people; the majorityof those have fewer than five, accordingto Accounting Today.
These two professions have a lot incommon with fiduciary advisors. Of theroughly 39,000 total RIA firms in theindustry, 60% of them manage under$50 million in AUM, with only 5% atover $1 billion.
After 40 or so years of being an
COST STRUCTURE ADVANTAGE
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
Another challenge for the big firms istheir own high cost structures and overhead, meaning that the majority of thebig boys (both independent and wire-house) have million-dollar minimums.The problem with those minimums isthat there just aren’t that many million-dollar households out there. Thus, bigadvisors’ ultimate growth will slow asmore large firms go after the wealthy, andcompetition for this segment intensifies.
In fact, 93% of the investor market inthe United States has less than $1 million in investable assets, according toKiplinger. This opens doors to a largemarketplace that is being underserved bythe industry and can be a vast green fieldfor small advisors to service with little tono human competition. Also, their muchlower overhead and smaller cost structures allow them to profitably service a$500,000 account, while the big firmssimply can’t.
Further, smaller firms are moreadept in adopting new technologiesto keep them on the forefront, whilelarge enterprises sometimes take yearsto evaluate, buy and deploy new systems that immediately become outdated the minute they go live. Despite thepurchase of small-advisor friendly TDAmeritrade, there are many advancements in technology and new servicemodel choices, making the opportunities for smaller advisors never better.
New and existing turnkey asset management platforms and custodial options,
such as those made byTradingFront, ShareholdersService Group, XY PlanningNetwork, Altruist, LifeworksAdvisors and others, aremoving aggressively into thevacuum being created byCharles Schwab’s acquisitionof TD Ameritrade to provideinnovative, low cost solutionsspecifically crafted for thesmall independent RIA.
Lastly, one of the outcomes of thepandemic has been the universal acceptance of video communication toolssuch as Zoom by both clients and advisors. As a result, small advisors can nowefficiently, effectively and at a low cost,acquire and service clients nationwide.They are no longer limited by geography and can become specialists invarying niches to continue to grow andremain viable.
Therefore, the next time you reador hear the word “scale” as a mandate,know that there are two sides to thatcoin; and the future is most certainlybright for small advisors as we powerthrough 2020 and beyond.
Timothy D. Welsh, CFP, is president, CEOand founder of Nexus Strategy, LLC, a leadingconsulting firm to the wealth managementindustry and can be reached at email@example.com or on Twitter @NexusStrategy.
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.