Several leading thought leaders in the financial services profession have offered their responses to The Future of the Profession white paper, published by Bob Veres and Inside Information. "It's really gratifying that so many thoughtful people have offered such extensive feedback, and how many others are talking about the predictions offered in the white paper," says Veres. "In fact, in many ways the insights that others have offered have taken the white paper into new and interesting territory. The growing apocrypha is making the white paper that much richer and more substantive."
For instance, the white paper predicts that a number of one-principal advisory firms will merge to form two-to-four-principal firms, spurred by a variety of drivers that are separately discussed and evaluated. But Mark Tibergien, of Pershing Advisor Solutions, took the analysis one step further, and proposed that this trend-which he agrees with-will lead to the creation of two different kinds of larger, consolidated firm.
Tibergien predicts that as they scale up to the size where they can hire a professional manager, these firms will start to encounter many of the same challenges that the principals thought they had left behind in the independent broker-dealer world and/or the brokerage/wirehouse world. Where advisors come together to create semi-independent silos-keeping control of their client service and their client revenues, but sharing a back office and, in many cases, office space-they will find that the back office becomes the center of gravity of the company. The detachable silos will become clients of the firm, rather than the end client-exactly like independent broker-dealers today.
The other model, the ensemble, where clients are considered to be clients of the firm, will grow by hiring and training younger advisors, not unlike the recruiting and training activities at brokerage firms. And, like brokerage firms, the teams of advisors will have to be supervised by senior advisors, who will have to ensure that their activities are profitable to the firm. In both cases, as advisors enter the brave new world of larger entities, they could profit from studying the business models that their firms will increasingly resemble.
In his observations, Tibergien draws a distinction between an advisory firm's front office (which handles client-facing activities), back office (the clearing and custodial functions) and the middle office (all the activities in between front and middle office, including downloading, reconciliation, data entry, and perhaps compliance and marketing). A key distinction of the future, and a way to distinguish the different future business models, is whether the firm is building/owning the middle office or renting it.
Philip Palaveev, of Fusion Advisor Network in Elmsford, N.Y., offered his comments on The Future of the Profession white paper's discussion of one of the most important drivers of this consolidation. In his comments, Palaveev says that advisors who want to create transferable value might be looking at the wrong model and valuation metrics.
Specifically, Palaveev says that today's advisors should push aside the idea that their firms should have value to a hypothetical outside buyer. To see why, he offers the example of a similar profession. "In the accounting world," he says, "the value of an accounting firm is created by your partners. The value of your equity is the promise of the partners to buy you out when you retire." This, of course, raises very different transition issues, some of which could be uncomfortable to advisors who don't expect to fully retire as they transfer ownership or equity.
Palaveev agrees with the white paper's assertion the advisory world is undergoing a phase transition from practices to well-managed businesses, but he wonders if advisors have thought through the implications of creating larger firms with strong local brands, hiring advisors to handle the client service while the marketing department leverages the brand and brings in clients. Will we run into situations where the firm decides (like the branch manager at a brokerage firm) that this or that advisor is "wasting company time" on life planning services, or overservicing clients in other ways?
Michael Kitces, publisher of The Kitces Report, takes the white paper's predictions into a new dimension, when he ponders some potential generational conflict as practices are handed over from founders to younger advisors. The next generation of advisors, he says, has been university trained in planning, and tends to be idealistic about the value of the planning service. Meanwhile, many 50-something advisors today have gravitated to a business model that primarily manages assets. As equity is transferred, the younger advisor may want to spend money to beef up the planning capabilities and add services not provided by the founding generation.
Plus, the younger successor advisors will want to work with clients their own age, which could mean creating a middle-market department or service platform--again, potentially eating into the profits of the transferred firm even while the founding advisor is receiving a share of the profits as part of the transaction.
Finally, Kitces thinks that there may be a generational divide in views about how client assets should be managed. "There's an entire generation of planners completely inculcated with the belief that buy and hold works, and stocks for the long run works," says Kitces, "and a new generation of planners who have been in the business for a not-trivial amount of time, whose only experience is that buy and hold fails. How," Kitces continues, "can those young planners justify to their clients the way the firm is investing their assets? How can they talk their clients off a ledge when deep down they believe that buy and hold doesn't work?"
Spenser Segal, president of Minneapolis-based ActiFi (and creator of the RoadMap service) offered detailed comments on the practice management section of the white paper. He doesn't disagree with the conclusions, but he adds a key dimension: HOW will advisory firms navigate the period of increasingly rapid rate of change that the profession has recently entered. His answer is surprising: motivation to make a change trumps great advice, coaching or even great strategic direction. His analysis of this issue is extremely provocative.
Kitces and Palaveev also address the white paper's assertion that the wirehouse business model is dead or dying in an increasingly fiduciary world, and Tibergien talks about what may be the once-in-a-lifetime opportunity for independent broker-dealers to expand their reach and service larger numbers of independent RIAs. Tibergien explains why he doesn't expect to see a major national brand emerge in the financial planning space. And Segal talks about systematizing the process of change in ways that can be directed, measured and evaluated-taking control of our journey through an increasingly turbulent future.
All of these comments, plus The Future of the Profession white paper itself, are posted on the Inside Information web site: http://www.bobveres.com. Advisors and industry thought leaders are invited to download the white paper for free--and, of course, offer their own comments.
Marie Swift is president and CEO of Impact Communications, a marketing communications firm that works exclusively with industry thought leaders, independent advisors and allied institutions. Follow @marieswift on www.Twitter.com. Read her Best Practices in the Financial Services Industry blog at www.marieswift.com.