As a result, advisory firms were inundated with potential clients. For most of the 1990s-and to some degree still today-the supply of potential clients significantly exceeded the industry's ability to capture them.
This supply-demand imbalance created an inefficient and not yet rationalized industry. Advisory firms spent little or no part of their revenues on marketing. Cost accounting, contribution analysis and competitive analyses were largely nonexistent in the industry. Some advisory business owners even spent more of their time researching arcane financial theories or participating in industry groups and seminars than in managing their businesses.
What Were Our Predictions?
Our paper argued, however, that two forces-competition and technology-would rationalize the industry over the next seven to ten years.
1. Competition-We forecasted that a "flood of new entrants" would enter the business. In addition, many larger competitors would, in effect, reinvent their service offerings to at least look like those of financial advisory businesses. Combined, these two factors would significantly increase the capacity to service clients.
As a result, demand for clients would equal supply at some point, sparking a series of changes in the industry. As in any other competitive environment, industry participants would face severe margin compression. Costs would rise for several reasons. First, advisory firms would be expected to do more for their clients for the same or lower fees. Second, marketing costs would skyrocket as more firms competed for fewer available clients. Finally, advisory firms would face increased competition and thus higher costs for their personnel.
2. Technology-We forecasted that technology, on the other hand, would serve primarily as a catalyst for many of the changes brought on by competition. Rather than replace the role of the advisor (as many "Internet gurus" had predicted), we argued that technology would increasingly become an integral part of advisory businesses. It would serve as a key tool in making advisory businesses more efficient, leveraging the time of professionals. Advisory firms that embraced technology would be far more capable of withstanding the inevitable margin compression that would accompany a more competitive environment.
New Shape Of The Profession
The combined effect of competition and technology would reshape the structure of the advisory business by 2009. A group of 40 to 50 competitors would capitalize on these changes to grow their businesses substantially and would eventually become household names in their markets. These organizations would have in excess of $15 billion under management, and some might have more than $50 billion.
To be clear, we did not necessarily believe that these future dominant competitors would be made up of large brokerages, banks and insurance companies. Rather, it was equally likely that they would emerge from the ranks of the existing participants in the advisory profession.