Small Advisors' Time To Thrive

Eighteen years ago when I became editor of Financial Planning, everyone I spoke to warned me of how difficult it was to earn a living as a financial advisor.

Back in 1990, observers of the financial services business compared the financial planning world to the real estate brokerage business. It was something of a cottage industry, a good place for folks between jobs and, at the risk of sounding ageist and sexist in the same breath, a nice hobby for housewives and the semi-retired who still wanted to keep busy, didn't want to work full time and had some other means of support.

A handful of folks managed to earn a very good living. But most of them were either people with serious money management skills who offered financial plans on the side, or super-salesmen and women who frequently gravitated toward high-commission products. Conventional wisdom viewed fee-only financial planning as an impossible way to earn a living for most folks-essentially a pipe dream for foolish idealists.

I can remember a broker-dealer who was a big supporter of commission-based products telling me he frequently ran TRW credit checks on his reps for fear that if they were selling too many high-commission products they might be crossing the line and if they weren't selling enough they might be dealing in unregistered securities and "selling away."

Thankfully, today's world is very different. The vast majority of commissions have come down to reasonable levels and fee-only financial planning has emerged as a viable way to earn a very good living and build a business.

In late 1999, the head of a start-up mutual fund company, a man named Mark Hurley, penned a white paper arguing the financial advisory business would start to experience increasing consolidation, with a few dominant firms in each major market, and that smaller firms would face intensified competition and would find it more and more difficult to grow their businesses. Contrary to popular mythology, he didn't argue that small firms would face extinction. Many advisors wondered who was this guy and how did he think his fledgling company was ever going to compete with Fidelity, Vanguard, American Funds, Pimco and other giants, but that's another story.

Hurley was both right and wrong in his analysis of this business. Major firms have indeed emerged in regional markets. Though none has yet to achieve a market share approaching that of a Safeway or Walgreens in their respective industries, many independent advisory shops now boast more assets than a good-sized wirehouse branch office.

But small and midsize advisory firms have continued to thrive as they did in the late 1990s. Their problem isn't earning a decent living or attracting new clients; their challenge is finding an exit strategy that doesn't entail selling the business for a song.

Even that is starting to change. United Capital's Joe Duran has emerged as a legitimate buyer of smaller businesses and his holding company is interested in helping grow these firms. While Hurley's Fiduciary Network is focusing on acquiring stakes in firms with $500 million to $2 billion in assets, word has it that some of the firms within the network may be using their recently repriced equity as a currency to purchase small firms. Expect intra-industry consolidation, in these formats and many others, to accelerate.

Yet, as Eric Rasmussen reports on page 98, many smaller advisors find themselves sitting pretty. The roof has not caved in. Among those I've talked to, few need a major liquidity event to enjoy a comfortable retirement. What they do need, like many of their small business-owner clients, is some kind of succession strategy. Fortunately, the options are expanding.

Evan Simonoff, Editor-in-chief