It's probably not a coincidence that biological metaphors have started dominating the financial planning business. Consultants have begun describing the industry as an ecosystem-as if financial planners were part of a microbial community seeking ways to survive in an environment of fewer resources and limited water. Sometimes, biologists like to describe evolution in terms of "punctuated equilibrium," a process in which new species form from old ones that are separated and changed after catastrophic events.
And like it or not, the financial advice industry is going through its own evolutionary changes after the 2008 meltdown. Many firms have lost revenues over the past few years right at the same time they're about to come up against regulatory changes in the Dodd-Frank era. The choppy markets and economic indicators have robbed firms of the vital conditions for biological stasis: consistency, predictability, the comfort of the redundant.
How do you make growth plans when you have no idea what your AUM is going to be at the end of the next four quarters? How does that affect your plans to invest in a new CRM system? To hire a new client relationship specialist? How do you know you can keep together the teams you've created or stay alive without fishing into your own profits?
"The problem with volatility is that it makes revenue planning very challenging," says William Driscoll, who runs a one-person shop, Driscoll Financial, in Plymouth, Mass. "Probably 55% of my revenues, give or take, comes from asset management. If it goes up 20% one quarter and down 30% the next, those crazy swings make it hard to plan and hard to adapt. So it makes it hard to project and figure out what's appropriate to do."
It's not good for clients either, who are trying to figure out how to match goals for income against the current market volatility. "It's not a set-it-and-forget-it investment process anymore that will satisfy most investors," says Stephen Onofrio, a managing director with the SEI Advisor Network, which offers investment products and consulting to RIAs. "There's too much news that makes investors nervous."
Because growth through market appreciation doesn't seem to be a reliable option, growth through other means has become the new topic-in other words, in this changing ecosystem, the sharks are out and they smell blood in the water. Consolidation is a characteristic of any young, fragmented industry, and it seems like nothing is ripe for this sort of structural shift like the field of financial advice.
David DeVoe, the former managing director of strategic business development at Schwab Advisor Services, is so sure about the coming wave of mergers over the next decade that in a way he bet his career on it: In November, DeVoe left Schwab, where he headed up the M&A effort for RIAs, to set up his own shop, DeVoe & Company, a firm that will be more hands-on in its approach to advisor mergers than his old firm allowed him to be, where he will get to structure the deals and follow them through to completion.
"Within Schwab, our legal team didn't want us to get involved in valuation or structuring a deal or a whole number of investment banking activities," he says. "And now in my new firm I'm in a position to help advisors continue to the end of the deal."
To that end, depending on whether he's on the buy or sell side, he gets a monthly retainer, a success fee of 3% of the value of the deal and a flat fee for valuation. He also helps with succession planning and business strategy.
"Mergers and acquisitions are likely to increase in 2012," he says. "We've had a strong year, year to date, in 2011 and that's after a strong year in 2010. And I think we'll continue to see upward momentum not only through next year but over the long term. We'll see it over the course of the next seven to ten years."
Matthew Matrisian, senior vice president and director of practice management at Genworth Financial Wealth Management, says he doesn't see a boom in M&A activity at the moment, but he does think that people who were planning to transition out of the business before the 2008 market turmoil are starting to come off the sidelines and re-examine their options. "They're starting to come back and really start thinking about what does that succession plan look like," he says. "How do I go about extracting equity out of my firm? And some of that has been facilitated by a bounce-back a little bit in the market. We're seeing M&A activity slowly increase, and advisors are talking more about how they go about transitioning this ownership, whether it's an internal succession plan, an external sale to another advisor or peer or potentially merging firms or with another peer."
DeVoe says that, anecdotally, he sees banks showing interest in the RIA space again after contending with capital strains during the meltdown and cultural issues with the firms they bought before that. Onofrio says that private equity firms have also started to show interest.
"I think there's a lot of cash and capital on the sidelines in private equity money," he says. "They're going to look to see if they can really integrate what I think is a cottage industry ... Advisors are getting older and they want a liquidity event and they want to simplify. It's too hard for the advisors that we would call do-it-yourself advisors, who select their own investments, to be able to put portfolios together in an increasing compliance-heavy environment."
Girding For Growth
Peter J. Raimondi of Banyan Partners in Palm Beach Gardens, Fla., is certainly not waiting to see what happens. His firm has been on an acquisition tear; he purchased three firms in 2011, and he's got another transaction set to close on January 1 with a Southern California firm that specializes in global fixed income to complement his firm's proprietary asset management offering, which it outsources to other firms. The deal is set to bring Banyan (which now has offices in New York, Boston, Miami and Atlanta) west of the Mississippi for the first time, give it more of a national footprint and, most important, make it a major brand with $2 billion in assets under management.
"This is not a roll up," says Raimondi. "Banyan is a brand. A very unique brand of RIA, because our portfolio management is quite customized with a very robust option overlay program."
Raimondi says that while part of the impetus is to create that national profile, he also says it's no virtue to be small these days. "I think probably the most unfortunate thing about the small RIA business-say firms under $600 million-is that they generally need every person they have working for them, so it's hard to cut staff, which is going to be the largest expense. Most firms are running 50% or above in terms of payroll costs," he explains. "So if your revenue is falling dramatically, either because clients are falling out or the market is hitting you just before the billing cycle, you aren't going to cut staff. So RIAs tend to have owners take reductions in compensation, which is what one needs to do to keep staff at optimal levels. You don't want to hurt the operations of your business."
Robert Palmer, the president of Plante Moran Financial Advisors in Southfield, Mich., with $9 billion in assets, says that he's anticipating a pickup in new client growth in 2012 and is getting ready to absorb it. The firm currently has 140 employees, and the plan over the next year is to go to over 150, since asset levels have risen some 50% off the 2008 trough, he says.
"I'd say we've been lean on hiring over the past couple of years," he says, "So we're hiring a significant number of people for the next fiscal year. If you go back to 2008 and 2009, our revenues were pretty flat; profitability got tight. We had to control costs, so that came from technology spending, came from compensation, came from hiring. So now that that growth has been back ... that has now put us in a position where we need to do a lot of hiring so we can continue to serve our clients."
Another firm trying hard to not only build scale but plant its name in consumer consciousness is United Capital Financial Advisers in Newport Beach, Calif., a firm that grew 145% in assets in 2010 on the backs of acquisitions. The company doesn't just sell its name to new firms but a particular holistic financial advice package, replete with counseling and a card system that clients use to determine goals and fears about money. Every firm in the company universe adopts this approach, Jenny Craig-style.
Joseph Duran, the firm's CEO, says that the company now wants to burnish its brand nationally with a radio campaign and a Web site. The firm plans to use that higher national profile to foster more organic growth at the 40 odd shops it has bought. The firm was handling $4.88 billion directly as of September 30, 2011.
Of the major initiatives the firm has next year, says Duran, "the first [is] we're looking to diversify our growth beyond just acquisitions, so we will definitely do probably a couple of billion dollars worth of acquisitions, so tens of millions of dollars worth of revenues acquired next year, which has been our pattern. Next, we're looking to grow the local offices we have to create a national organic growth strategy for those local offices, so that's going to be a major spend for us next year. There are very few national RIAs, so we're looking this coming year to really establish ourselves as one of the leading national RIAs."
To that end, he says, the firm is also going to spend $3 million to $5 million on marketing to raise the visibility of the firm and bring clients into its local offices. The goal is to grow 30% through both acquisition and local office growth. This also augurs a technology upgrade, he says, another $3 million to make Salesforce the middleware, straight-through processing CRM system for all its offices. The goal is to bring in $1 billion in non-acquired assets and $2 billion in acquired assets.
Smaller firms are trying to get their houses in order, too, to deal with client demand.
Keith Singer, who runs Keith Singer Wealth Management in Boca Raton, Fla., with $90 million in assets, has started to gain a decent following of people with a strategy built around annuities and guaranteed income products, a strategy he developed as he found regular asset allocation faltering in the last decade. So many people have started to call him about this strategy, he says, he might add to his four-person shop, bringing in someone to help with client relationships.
"I'm concerned about capacity issues," he says. "I do a radio show and I have a pretty decent following. A lot of people call me and I've had to turn people away I didn't feel would be a good fit because I only have so much time. ... The challenge is kind of being in touch with all my clients in an efficient way, spending a lot of time reaching out to clients and communicating with them and making sure that their needs are met."
Driscoll, too, says that he's been thinking of adding a person to help where technology can't keep up with demand. But he says that where 2008 and 2009 were among his best years, 2010 was one of his worst-in a personal setback, an illness felled him, but he also found that the cratered asset values from the financial crisis finally caught up with his revenues-a lag effect that made 2010 hard for a lot of advisors. Given the dilemma, his focus can't be on boosting AUM, he says.
"A lot of my model isn't limited or focused on just acquiring assets," Driscoll says, "so I might work with a client on a fee basis or an insurance basis or on asset management, all for the same client, and that's an optimal client. I want them to look at me as their financial resource. Part of financial planning is covering risks, so making sure they have a mortgage to cover the house, [they know] how to protect the kids or to cover the estate. Those kinds of things are integral and important to the way I operate. So I'm not an insurance guy who calls himself a financial planner. I'm not an investment guy who calls himself a financial planner. I'm a financial planner who does all of those things."
Matthew Chope, a CFP licensee with the Raymond James-affiliated Center for Financial Planning in Southfield, Mich., says that the recession forced his firm to make some $150,000 in budget cuts, including a suspension of a 401(k) match and the creation of a "furlough Friday." Since then, he says, he's thinking of making new investments for growth, including a new portfolio management system and a new CRM (different from the one he built in house). He's thinking of hiring a staffer down the road. But he's not girding for a double-dip recession or a new disaster.
"I've been pretty optimistic for the last year," says Chope. "I did not call a recession this year even though all my indicators that I've followed for most of my career were saying 30%-40% possibility of recession. It only would have been the second time in 40 years that these economic indicators lined up to say there would be this high probability of a recession without it really happening. But I just didn't see it. None of the numbers were making sense. There was fear, a lot of chaos in Europe. There were a number of things going on and the media was yelling at us. But there was nothing substantial to it, to the slowdown."
Onofrio, with SEI, says that advisors this year are going to need a growth plan no matter what. "Everybody grows at their own pace; some are more aggressive and some are more moderate, but the desire to grow has to be the Number 1 priority, and then setting up for growth. Any advisor that is going to grow this year, right now they should be writing down written goals, a written plan," he says. "Just write the goal down, make it realistic and then a marketing plan, a high level plan, very simple. We do a two-page marketing planning guide for advisors and then it lists all the activities that they're going to do to support their growth objective."