The owners of most wealth management businesses sense that the industry is at a crossroads.

On one hand, they are savoring their great success resulting from two decades of hard work. The profession, which finds its roots in the 1980s and grew into a cottage industry by the early 1990s, is now a $5 trillion behemoth. Individual firms with aggregate client assets in excess of $1 billion are commonplace—an outcome few of the industry’s pioneers would have predicted three decades ago. Fewer still would have foreseen how profitable their firms would become. Many founders of wealth management businesses are now multi-millionaires.

On the other hand, most owners recognize that the business is becoming significantly more challenging. New clients are harder to find, operating costs—and employee compensation in particular—are increasing, and regulators are becoming more hostile. Additionally, looming over all of these changes is a much greater, immutable force: old age. The founders of the advisory business, with an average age of 59, are reaching an age at which personal needs and objectives shift in preparation for retirement.

Three business models are emerging.

The business is far from homogeneous and extremely fragmented, but from 30,000 feet, wealth management firms can be largely grouped into one of three general business models:

Evolving Businesses—approximately 200 firms that have taken the messy and difficult steps necessary to evolve into businesses that are both sustainable in the long run (i.e., after the departure of the founders) and have meaningful enterprise value;

Books of Business (“BoBs”)—almost 18,000 wealth managers with low annual revenue, few (if any) capable successor professionals and no obvious strategic plan, firms that are better described as “jobs” rather than “businesses”; and

Tweeners—1,000 to 1,200 firms with greater scale and profitability than BoBs, but, unlike evolving businesses, have been unable and/or unwilling to take the necessary steps to evolve beyond a founder-centric model and effectively are very large proprietorships.

Five forces will drive the next phase of the industry’s evolution.

The profession is about to embark on the next phase of its evolution. Five forces will combine to create an operating environment that is vastly more challenging and competitive than in prior decades.