To be sure, we are not suggesting in any way that it will no longer be attractive to work in wealth management. The demand for independent financial advice is immense and will continue to grow over time, and we believe that few (if any) firms will go out of business. However, we also believe that the days of easy profits are over.

Only those firms that adapt their strategy and business model to the next decade’s realities will prosper. The owners of those that cannot adapt will have to work harder for less money, and their businesses will ultimately have little enterprise value.

1. Fewer new millionaire households with more firms competing for them.

The supply of millionaire households (the core prospective clients of wealth managers) declined sharply with the 2008-2009 financial correction and, to date, has barely recovered to pre-correction levels. To be sure, at some point it is likely that economic growth will accelerate and more new wealth will be created. However, even when the supply of prospects expands, firms will find heightened competition for new clients because the number of large firms with sophisticated marketing and business development functions has increased dramatically over even the prior decade. Whereas 10 years ago a firm with $300 million was considered large, today firms managing at least $1 billion are relatively commonplace.

2. Aging client bases with higher capital consumption.

The average age of clients serviced by many wealth managers is now much older than only a decade ago. Because most new clients are in their 50s or early 60s when they hire a wealth manager, those who were recruited over the last decade are likely today in their mid- to late 60s and those from the previous decade are in their 70s.

An aging client base creates a drag on wealth manager revenues in two distinct ways. First, whether due to retirement, charitable giving or other age-related reasons, older clients often increase their gross rate of capital consumption. Second, because older clients have a reduced appetite for investment risk, a larger portion of their portfolios are allocated to lower-risk assets that generate lower nominal rates of return. The combination of higher average gross capital consumption and lower investment returns results in greater net capital consumption by clients, reducing the wealth managers’ assets under management and the corresponding fees paid by the clients.

3. Possible prolonged period of low return on lower-risk assets.

The Federal Reserve recently announced that it will continue quantitative easing until unemployment is below 6.5% or inflation exceeds 2.5%. Until then, the Fed intends to keep the yields on fixed income securities at or near their current record lows.

This new policy is very problematic for any business—such as most wealth managers—that receives fees based on a percentage of assets under management. Nearly all wealth management clients allocate a substantial portion of their portfolios to lower-risk asset classes as part of a rational diversification strategy. Because the nominal returns generated by these types of investments—shorter-term fixed-income securities, hedged investments, etc.—typically track to U.S. Treasury securities with a modest premium, wealth managers should expect returns well lower than historical averages. The impact to wealth manager revenues is direct: Slower appreciation in this part of clients’ portfolios will result in slower revenue growth.