When The Balance Of Power Shifts Of Power Shifts

In early February at TD Waterhouse's annual conference in Orlando, former Securities and Exchange Commission Chairman William Donaldson told the more than 1,000 advisors in attendance that "your reputation is the most important product that you have. You have a tremendous opportunity. The only way you'll blow it is if you damage your credibility."


The ascent of independent financial advisors' position in the financial services industry's power structure has not been lost upon gray eminences like Donaldson. The vitality and energy that advisors have displayed in making themselves a force in retail investor services has enabled them to alter the balance of power in the individual investor market.

In the process, independent advisors have caught everyone from giant wirehouses to direct marketers of no-load mutual funds to publishers of do-it-yourself investing magazines off guard. But there are no guarantees that the success financial advisors have enjoyed winning new clients and taking market share away from larger institutions is destined to continue as long as advisors don't damage their clients' finances and their own reputations, as Donaldson implied. Indeed, economic history has tended to favor larger enterprises over smaller ones, although the advent of PC technology over the last 15 years has negated many of the inherent advantages big organizations enjoy. Rarely has this phenomenon been more apparent than in retail financial services.

Donaldson also hinted that the regulatory balance of power between advisors and their rivals, as symbolized by the implementation of the broker exemption rule for fee-based accounts on February 1, still hasn't played itself out. He told attendees that a new SEC study was under way and predicted it might end up as legislation. Whether or not potential legislation can resolve all the confusion, uncertainties and ambiguities in the current marketplace remains to be seen.

One doesn't have to look very far beyond the retail financial services arena to find instances of a changing balance of power in the global economy. Domestically, young companies like Google are challenging established giants like Microsoft and Verizon. Internationally, the Jack-in-the-beanstalk growth of China and India is visible before our very eyes. Companies from Asia, the Middle East and Latin America spent more than $42 billion purchasing European businesses in 2005.

Whenever something goes your way for an extended period of time-and things have mostly gone financial advisors' way for the last 15 years-I get scared. Nothing lasts forever.

Take this to another level and it gets scarier. Last spring I heard economist David Hale observe that no country in economic history managed to grow at 8% to 9% annually for 20 years until modern China has done so. At some point, they'll hit a bump in the road.
Frankly, that's likely to be a lot more worrisome for all of us than when the advisory business experiences a slowdown.

Evan Simonoff