Bigger Isn‚t Always Better

I enjoyed reading your "Parting Shot" column in October‚s issue that challenged the notion that independent shops would have to merge to survive.

Prior to establishing an independent advisory firm in January of this year, I worked for one of the large and prestigious firms that you referred to, where I witnessed firsthand their inability to penetrate the high-net-worth marketplace with an online, phone-based advisory business.

Why? While they had plenty of in-house expertise on various issues of importance to affluent investors, they failed in their attempt to deliver such expertise through such an impersonal channel. While there are clear benefits to firms merging in an attempt to broaden their areas of expertise, the key to success is how it is ultimately delivered to the client. After having worked for several of the largest financial institutions in the country, I‚m betting that it‚s the independent advisory firm that can deliver sophisticated advice in a high-touch, highly customized fashion that wins in the end.

James E. Kearney, CFP, CTFA
Quadrant Capital Management LLC
New York, N.Y.

Practice Management Must Improve

I just read your "Parting Shot" in the October issue of Financial Advisor. I wanted to clarify my position on this issue, for whatever it‚s worth.

Thin margins and a low capital base are possible reasons why small firms may be compelled to merge, but those are not the only reasons. When we do our industry surveys for the FPA and our consulting on strategy and practice management with firms, we find some recurring themes:

• No time to manage and produce revenue

• No time to serve old clients while pursuing new clients

• Can‚t keep up with technology changes

• Can‚t effectively recruit, retain and reward staff

• Difficulty in differentiating in the marketplace

• Would like to build something with transferable value

• Cost pressures, fee squeezes and declining profitability

The problem is that these are chronic conditions that have existed for almost as long as I have been a resource to the industry (over 20 years). So I ask the question: "What are you going to do about it?"

What I have always said is that I believe there will continue to be a large contingent of "lifestyle" practices, individuals who have no desire to ever have, or be part of, a firm bigger than what they currently have. They will continue to make a living, but they will not be able to adequately address the problems identified above. As a small firm, it is harder for them to make an impression on their market, to ensure continuity to their clients who are getting older and care about this sort of thing, to keep good people who may want a career path, to have sufficient capital to invest in infrastructure and processes that will help them be better business people. But for many of them, none of this is important–they can handle a manageable number of clients, make a profound impact on their lives and, in many cases, lead a balanced life themselves. But, if they ever start complaining about the issues on this list, then it is time for them to re-examine whether remaining very small and very independent is a proper solution for them.

I have had no less than 10 conversations with advisors in the past two weeks who are experiencing one of the toughest tests of their business careers. The above problems are highlighted because these advisors have managed in only a growing market and economy, not one that is in a tailspin. So client service now becomes paramount in order to protect their flanks–this impacts productivity because of the defensive nature of managing relationships (no new assets, just increased time and cost to reassure them).

Consolidation of service businesses has always been tough. It‚s not like rolling up muffler shops. That said, I believe there is opportunity, not need, for firms to consolidate, especially on a regional or local basis. There are few, if any, markets in the U.S. in which there is a dominant financial advisory firm. As a business, the profession is fragmented, which creates vacuums in the market. That‚s why Merrill Lynch, Schwab, CPA firms, trust companies and others are coveting this opportunity so much.

So will firms be forced to merge? No. But will they be forced to manage their practices better? Yes, absolutely. The New World Order will not necessarily come from consolidation, but from the need for professional advisors to improve their skills as professional business managers. Nothing is more embarrassing than for a financial advisor to go broke or not be able to cover their monthly nut.

Mark C. Tibergien, principal
Moss Adams LLP
Seattle, Wash.