The decade from 2012 to 2021 was an extraordinary time for wealth managers. A raging U.S. equity bull market was accompanied by historically low inflation. Typical diversified portfolios generated average annual inflation-adjusted returns that were nearly three times those of the previous decade.

As clients’ assets soared, so did the fees they paid. Given that owning a wealth manager is analogous to making operationally leveraged investments in the financial markets, advisory firms’ profitability tripled or even quadrupled, even if they added no net new clients.

Record low interest rates accompanied the bull market. Debt became plentiful and cheap. PE firms awash in uninvested capital saw the wealth management industry as an opportunity to put that capital to work, along with large amounts of leverage. More than 100 buyers emerged, and an industry-wide M&A feeding frenzy followed.

Nearly 1,600 transactions were consummated as competition drove prices to stratospheric levels. An industry accustomed to pricing metrics of eight to 12 times cash flow saw transactions completed at as much as 20 or even 30 times.

But whether acquirers paid too much did not matter. Asset appreciation papered over any mistakes. Buyers bet heavily on a rising tide and won big.

Meanwhile, many wealth managers went to sleep. They largely ceased marketing efforts and depended on either the prospects handed to them by custodians or erstwhile referrals from existing clients. Seventy percent of the industry’s growth came from asset appreciation.

Industry participants placed little emphasis on improving efficiency or recruiting new professionals. Although their fees climbed, many wealth managers provided less value to clients. By one estimate, nearly half are now de facto investment-only firms. But why worry about such things when one’s EBITDA is compounding at 15% to 20% annually from just turning the lights on?

Unfortunately, the party ended in March 2022 when the Federal Reserve began to aggressively combat inflation. Markets corrected and have yet to fully recover.

Today the industry remains fragmented and discombobulated. There are nearly 15,000 RIAs, and they have a median of $412 million in AUM. Their management and clients are now much older. A chronic shortage of qualified professionals will soon worsen as nearly 37% of the industry retires over the next decade. And cybercriminals meanwhile pose an existential threat to advisors and their clients’ wealth.

The easy money from M&A is now gone, and aggregators are paying for some of their earlier sins. Debt is much more expensive and far less available. Some are scrambling to recapitalize their balance sheets. More problematic is that many are not single businesses but rather confederations of small firms that have not recruited new clients for many years. It will be a mammoth task to transform them into integrated, growing companies.

Immense Opportunity Ahead
However, there’s good news—an immense opportunity is at hand.

Notwithstanding the hype about “boomers,” more than seven million more Americans are age 45 to 60 than 60 to 75 years old. Hundreds of thousands of them will need financial advisors over the next 10 to 15 years. More importantly, the current cost of acquiring new clients is a fraction of the value that their fees create for the wealth managers who serve them.

However, most of the industry is utterly unprepared to capitalize on this opportunity. Recruiting new clients is brutally hard, and most advisors rely on outdated operating models that discourage their best marketers and keep businesses from achieving scale. They have anemic brands and comfortable employees. Indeed, the industry’s largest firms allow its smallest ones to compete on equal terms with them for new clients.

Nevertheless, a group of extraordinarily successful participants will emerge from the industry’s current chaos. They will capture the vast preponderance of new clients and the tens of billions of dollars of enterprise value these clients create.

Ten traits will be common to these organizations:

1. They’ll have decisive owners with very long investment horizons.
The single greatest competitive advantage of any wealth management firm is having decisive owners with very long investment horizons, those who think in terms of decades rather than years. Successful firms will make substantial investments that won’t pay off for a very long time. They will also decide on and implement strategies today that will determine their outcomes in 10 to 15 years.

2. They’ll do whatever is necessary to capture as many new clients as quickly as possible.
The low acquisition cost for clients will not continue indefinitely. At some point in the not-too-distant future marketing costs will climb and wealth managers will also have to do much more for clients.

In the interim, advisors can build enterprise value. We estimate that adding a 45-year-old client with $2 million in assets who saves an additional $100,000 per year will produce fees of about $600,000 (in net present value terms) and have an acquisition cost of only $20,000 or less. But these economics won’t last.

The most successful firms understand they are in a limited time land grab. They also recognize that those firms that innovate and change the terms of competition will benefit most from this opportunity. Consequently, astute firms will do whatever is necessary to capture as many new clients as quickly as possible.

At the same time, they will not depend on outside parties, such as custodians, to generate prospects. Instead, they will create their own referral networks through other influential people.

3. They’ll re-engineer their operating models to better use their talent.
Advisors who want to capitalize on the organic growth opportunity will re-engineer their operating models. Instead of compensating their best marketers for the size of their books and discouraging them from getting new clients once they are full, the most successful firms will allow their talent to specialize: The most talented marketers will focus their time on recruiting new clients. “Closers” will spend their time persuading new clients to sign up. And everyone else will service clients.

Advisors shifting to this model will accelerate their organic growth rates four- to fivefold while taking advantage of their existing excess client servicing capacity, which virtually every wealth manager has.

But implementing these changes will be extremely challenging: Key employees currently control client relationships, and this is the source of their bargaining power with their employers. By unilaterally shifting to a specialization-by-function operating structure, which would institutionalize relationships, firm owners could strip the power from these key employees, perhaps triggering their departures (with clients) and risk blowing up a firm.

The challenge is to find new people who buy into the new system. If you can’t get people who embrace this new system, the business can’t be scaled.

To avoid the risk of key people leaving, the most successful firm owners will instead adopt a two-track approach. First, they will create a compensation system that lets marketers share in the value created by each new client they recruit. The most talented ones will be able to build immense personal wealth over time.

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