This repricing of one of the advisory community's largest client referral systems is a signal that increasing competition-and the accompanying higher costs of client acquisition-is on its way. And in four to seven years, we believe that 15% of revenue is going to look fairly inexpensive.
Our research uncovered two small, relatively isolated markets (one in the Southwest and the other in the Northeast) in which, for a variety of reasons, there emerged intense competition for referrals from accounting firms. In both cases, the cost of referrals ultimately went from free to 50% of revenues.
Other, less obvious symptoms of competition also are starting to emerge. Several advisory firms report that they, for the first time, are in competitive presentations. Instead of simply evaluating a potential client and deciding whether to accept them, these organizations must now make a case as to why they should be selected by the potential client.
Still, other organizations have begun to take steps to reposition themselves to capitalize on what they believe will be a more competitive environment. Several advisory firms have entered into strategic partnerships with either law firms or accounting organizations. Other advisory businesses have considered acquisitions or mergers to provide more scale.
A good example is the Chicago-based firm of Balasa Dinverno Foltz & Hoffman LLC. It is the result of the merger of two mid-sized advisory businesses. A key reason that these firms decided to merge was their owners' belief that a larger business would be better positioned to grow in a much more competitive environment in the future.
Technology Spawns
Contrary to many Internet futurists' predictions three years ago, the last three years have also shown that technology will not replace the role of the financial advisor, but enhance it. And technology does not provide any sustainable advantage to its users.
In the words of one specialist, "Technology is like an arms race. You have to have it to survive. But it is ubiquitous and smart firms will be able to get it cheaply."
MyCFO.com is the best example of technology's limitations. This organization has made immense investments in systems and equipment so that it can better communicate with clients and provide more comprehensive advice. However, as this company's backers have learned, it is far easier to start with an organization with many clients and acquire technology than it is to build sophisticated software systems and then try to get clients.
Outsourcing Nonrevenue Functions