Again, to be clear, we do not believe that these organizations have necessarily changed or improved their services. Rather, they have cleverly repackaged themselves so that they appear to be offering something similar to advisory firms. And in marketing to clients, it does not matter what you do, but what people think you do.
Client Supply Still Exceeds Demand
Although the flood of new entrants and the repackaging of brokerages has caused a dramatic increase in the capacity to capture clients, it does not appear that the supply-demand crossover point that will trigger the rationalization of the advisory business has been reached. Many advisory firms still spend next to nothing on acquiring clients. Many refuse to pay referral fees to outside organizations. Others still fire clients regularly. Outside of the market correction, these organizations have felt few, if any effects, from added capacity to the industry.
This is not surprising for two reasons. First, the sheer number of potential clients seeking advice is so large that despite the new entrants and repackaging, it still will take some time before supply equals demand.
In addition, the severe correction in the equity markets has created a near-term surge in the demand for advice. Many individuals who thought they could manage their money on their own have learned that doing so is a lot harder than it appears. Other investors who relied on brokers to pick stocks for them have lost large amounts of money. Both of these groups are now flocking to advisory firms.
At the same time however, the market correction has shrunk the overall pool of potential clients. Many individuals who only a couple of years ago were millionaires (and thus potential advisory clients) have suffered losses to their net worth as great as 70%. Hence, while in the near term some advisory firms have benefited from the market correction, its long-term effect will be to hasten the point at which supply equals demand.
Second, the effects of competition do not occur linearly in any business. Rather, they appear somewhat off in the distance, like a rumbling sound, and then, in a step-function fashion at the point of supply equaling demand, overwhelm an industry. This nonlinear effect of competition is why many industries (such as computer manufacturers in the early 1980s) have dozens of flourishing competitors one day and many bankruptcies the next. And for the advisory business, there are the distant rumbling sounds of the first symptoms of a more competitive environment.
A More Competitive
Environment In The Future
The most obvious reflection of a potentially more competitive environment is Schwab's transformation of its AdvisorSource program. In exchange for referrals of potential new clients, Schwab now demands 15% of the advisory revenue over the life of the relationship, regardless of the starting level of assets. While some accounting and law firms have long sought referral fees, Schwab's demand is notable in that it has had no difficulty finding advisory firms willing to pay these fees.