Whether you’re a solo practitioner or a partner in an ensemble practice (or work for one), I suspect that business is good for you these days. That said, some in our field believe you’re going to be out of business within five years.
This is likely true even if you’ve enjoyed a great deal of success during the past 10 or 20 years. The fact is that you can’t safely assume that the business model that got you to this point will sustain you—and help you grow—into the future.
Before I explain why, let me say that I’m not a coach or business consultant, although I’ve done a lot of both for advisors over the years.
Unlike some others in our industry, I haven’t made a business of it. So I’m not going to be so bold as to tell you what to do. Instead, I’ll merely share with you what I’ve learned from operating my own firm. When my wife, Jean, and I launched our practice in 1986, we started with zero clients, zero assets and zero staff. Today, we’re one of the nation’s largest independent advisory firms; as of September 30, we had $14 billion in AUM, 26,000 clients and more than 100 advisors in 38 offices.
Our experience has convinced me of one hard truth: What got us to here won’t get us to where we want to go.
The same will be true for you: Whatever you’ve done to build your practice will not be sufficient to maintain it—and it certainly will not get you to the next level.
To understand this, think about how you got to where you are. Most advisors started out as clerks: You sold whatever it was that a prospect was willing to buy. As a result, your early book of business contained an eclectic mix of clients—some wanted to buy stocks, others bonds. Some traded options and still others annuities. You gave them whatever they wanted.
Then you became a salesman—and I don’t mean that in a negative way. True salesmen sell products that people really do need (while con men enrich themselves by selling products that are harmful). When you persuade people to buy what they need (even if they don’t know they need it), you’re truly serving their best interests.
But serving a client well is quite different from serving lots of clients well. The amount of money we earn is limited—in part by the amount our clients have invested with us and the number of clients we serve. Although we can increase our compensation by shifting to products that pay us more, ethical advisors won’t do that. We can also decide to serve clients with more money to invest, but let’s face it: While every advisor wants to do that, there are only so many high-net-worth clients to go around. So for most of us, the only way to significantly increase our incomes is to increase the number of clients we serve.
But recruiting more clients while retaining the current ones requires a different approach. After all, serving 10 clients is very different from serving 100 or 1,000. This is why I stated earlier that what got you to where you are today won’t get you to the next level.
Also, you face challenges that didn’t exist before, including rapid advances in technology, more experienced and better educated clients, increased competition and tighter regulatory oversight. Let’s explore each of these.
The Speed Of Technology
Moore’s law tells us that computer power is doubling every 24 months. Many in the tech sector say the doubling is now occurring every 18 months. By the late 2020s, therefore, many scientists say singularity will be achieved: Software intelligence will be indistinguishable from biological intelligence.
How will this affect the financial services industry?
Think about it: If millions of entrepreneurs are able to access capital directly from crowdfunding sites, will we still need investment banks? If virtual currencies allow for anonymous and cheap financial transactions globally, what happens to credit card companies and banks? Plus, we all know the threat of the robo-advisors, so I don’t need to elaborate on that here.
Current life expectancies for 65-year-olds are 88.8 and 86.6 years for women and men, respectively. But futurists say the first person to reach 150 years of age has already been born, and some project that people alive today will live 300 years or even longer. The best part: Medical technologies will actually “cure” aging—meaning you could reach 150 but feel as though you’re just 45!
Clearly, these issues represent massive disruption to retirement and estate planning as we know them. The Social Security system certainly wasn’t designed to support retirees for 100 years, nor was the U.S. pension system or annuity business. Even college planning will need to change once higher education becomes free. (Georgia Tech is already offering a master’s degree in information sciences for just $7,000 to online students. )
Experienced, Educated Clients
When I started in the 1980s, clients knew little about mutual funds. Today, investors are far more experienced, having gone through everything from the crash of 1987 through the dot-com bubble of 2001 to the credit crisis of 2008. Consequently, our industry faces unprecedented demand for transparency about risks and fees.
Increasing Competition
Advanced medical technology won’t put doctors out of work. Likewise, online investing won’t put financial advisors out of work. But we are still going to have to change the way we do business.
We’ll contact clients in different ways, using mobile technology more than ever. We’ll be doing “planning-on-the-fly”—with clients watching us build analyses on their tablet or smartphone in real time. The days of demanding that clients drive to an office for a two-hour meeting and then getting back to them in two weeks are fast disappearing.
And of course, online advisory services might cause us all to change the way we charge for our services.
Ultimately, we will see a metamorphosis between online advisors and traditional brick-and-mortar advisory firms—and clients will be better off for it. How all this transpires remains to be seen, but it’s safe to say that huge changes are coming, and faster than most advisors realize.
Regulatory Oversight
The SEC was deeply embarrassed by its failure to detect Bernie Madoff’s crimes, and the agency is determined not to let that happen again. Finra and state regulators have also increased their efforts. This is good for investors and the financial markets—and therefore, also good for us—but it means that we have new, unprecedented compliance requirements. That means more work and more cost for advisors—and more risk (financially, legally, reputationally) if we fail to comply.
The Three Choices Advisors Face
As a result of all this, advisors need to realize that the business we know so well is fast disappearing. My fear is that most advisors do not fully appreciate what’s coming or the speed with which the future will arrive. Consequently, many are unprepared.
Within 10 years, practices that consist of 100 clients and $100 million in AUM will no longer exist—for the simple reason that operators of such firms will find the cost and complexity of doing business so great that they will be unwilling to pay for, or unable to deliver, the required services. Clients will increasingly demand services that are available elsewhere, and small-shop advisors will struggle to satisfy such needs.
Over the next 10 years, therefore, advisors will have three choices:
1. To focus intently on growing their books, meaning they must generate more clients and more AUM to produce the revenue they will need to compete;
2. To join a billion-dollar firm (or find several partners to create one);
3. To quit (or, to put it more euphemistically, to retire) This will be the most common course of action, since surveys say that more than half of all advisors are over age 55.
Why did I omit selling your practice as an option? Because most advisors don’t have a practice that’s worth buying. Mark Hurley says that 97% of advisors will never be able to sell their practices because they lack a sustainable business model. The 2014 Quantuvis study found that only 10% of advisors have a marketing plan. No wonder Chip Roame of Tiburon Strategic Advisors says half of all advisors will be gone in five years.
A few of us will enjoy massive increases in clients and AUM, and life will be fun and exciting. But the rest, I’m afraid, face more work, more stress, lower pay—and early retirement.
That’s why I recommend that advisors strongly consider option 2. There are many thriving firms for you to consider. Most multi-billion-dollar firms have the infrastructure, technology and branding in place that let advisors thrive, and the vast majority are adding advisors as quickly as they can, through recruiting, assimilation, acquisition and merger.
Take a serious look at where you are, and where you want to go. If what got you here won’t get you there, consider altering your course. The future is fast approaching, and the sooner you reset your path the better off you and your clients will be.
Ric Edelman is chairman and CEO of Edelman Financial Services LLC, a registered investment advisor. He is an investment advisor representative who offers advisory services through EFS and a registered principal of (offering securities through) Sanders Morris Harris Inc., an affiliated broker-dealer and member of Finra/SIPC. He can be reached at [email protected].