Evolving business firms have four alternatives available to them to overcome these obstacles to profitability: (i) slow the rate of cost inflation by improving operating efficiency, a goal that requires constant review and improvement of internal processes; (ii) redesign compensation systems to increase the amount of variable and equity components and more closely tie salaries to the performance of the firm; (iii) offer more specialized, higher-value-added advice targeted to specific sub-segments of individuals who will pay a premium for customized advice; and (iv) acquire other wealth managers.

The obvious management challenge for the owners of evolving business wealth managers is to determine which of these four alternatives make the most sense for their firms and when to pursue them. We expect that most will pursue a combination of all four alternatives at different points in time over the next five years.

In contrast, firms in the “tweener” category will be the most changed by the forces sweeping through the industry. While the forces place the future operating margins of all firms in peril, the potential strategies available to evolving business firms are largely impractical for tweener firms. The latter already operate at robust margins so they have far less room to improve their efficiency and cut costs. They also lack the depth and breadth of professional staff essential to specializing and/or integrating an acquisition.

Instead, the owners of tweeners will find that the strategy of the past two decades of maximizing near-term profitability at the expense of reinvestment—which for many of their owners has been extraordinarily successful in building personal wealth—soon will be unsustainable. Their only practical alternatives will be to: (i) take the messy and expensive steps necessary to convert into an evolving business, (ii) sell the firm or (iii) slowly devolve into a “BoB.”

Unfortunately, the last group of wealth managers—the 18,000 or so “Books of Business”—have few options available to them. They will be largely at the mercy of the broader forces sweeping through the industry. Their owners will work much harder and get paid much less.

Future Shape Of The Industry

Given these forces and their likely impact on the economics of individual firms, some might expect that we would forecast a wave of consolidation within the industry. However, we think that is an unlikely outcome.

The vast preponderance of the 18,000 participants that today fall in the “Books of Business” category will remain in business. However, owning a BoB will be far less pleasant than in prior decades. As noted earlier, owners will make less and they will receive very little consideration when they sell their firms.

At the other end of the continuum, a relatively small number of evolving business firms currently will capitalize on (as opposed to endure) the forces confronting the industry. Over the next five to 10 years, these firms will become much bigger enterprises, far larger than their founders might have ever imagined when they first launched more than two decades ago.

In reality, this shift is already happening as several firms in the evolving business category today generate more than $50 million of annual revenue and dozens more generate in excess of $20 million. Some of these firms (as well as others that today are much smaller), through a combination of acquisitions and organic client growth, will wind up having as much as $75 million to $150 million of annual revenue 10 years from now.