Back in 2014, a clairvoyant advisor reaching for their periscope to discern what the profession would look like today would no doubt have grasped certain trends. Billion-dollar RIA firms, many the size of large wirehouse branch offices, were already starting to populate most major regional markets.
A handful of private equity firms already had invested in both individual firms and aggregators. A few giant acquirers, like Focus Financial Partners, were even talking to firms within their networks about going public. Edelman Financial Services—now Edelman Financial Engines after its merger with a tech-driven 401(k) platform in 2018—had outgrown its parent company, publicly held Houston-brokerage Sanders Morris Mundy, and gone private, in large part because its shares were nearly trading by appointment.
Focus itself would go public in 2018 and then go private in 2023. Though few other aggregators have yet to embark on this public-private merry-go-round, financial engineering is alive and well in the advisory space.
Fast-forward to today and there are now more than 20 firms with assets under management exceeding $20 billion; the majority of them are backed by private equity. Consolidation in the last year slowed a bit after its feverish pace during the pandemic, but the consensus is that it will continue at its brisk speed for the foreseeable future.
Not that today’s giants are guaranteed continued success. In a white paper called “Welcome to the Jungle” released last December, Digital Privacy & Protection CEO Mark Hurley, himself a former consolidator, wrote that some of the biggest firms now have a built-in problem: Many of their client rosters are skewed toward older baby boomers clients, and by 2035, this cohort will be well into their asset unwinding phase. That offers a poor indication of where the biggest firms will be, and suggests that the biggest determinant of any firm’s future success will be the number of new clients it can capture over the next 10 to 15 years.
Or, as former Fidelity Institutional executive David Canter likes to say: in 10 years, “we’ll all be 10 years older.”
Market performance has covered up most of the advisory industry’s flaws, including its lack of talent development, which probably tops the list. “One of the sins camouflaged by consolidation is many of these firms who sold failed to plan for true succession, so off-loaded their continuity problem to buyers,” says Mark Tibergien, a financial services executive and director of Pathstone, a $100 billion RIA. “One can only hope that firms who are now at critical mass through roll-ups will start focusing on next-gen advisors, staff and clients.”
The generational shift underway now will be largely complete a decade from now. “The upcoming wave of new clients will consist of younger individuals, most of whom will be capital accumulators,” Hurley contends.
Truth be told, future clients in their 30s and 40s are already depositing trillions of assets at big custodians like Schwab and Fidelity, and they want a different set of services than clients over 50. The problem is determining what young investors, whose preferences are still being formed, really want or what their expectation of an advisor is.
Specialist Firms Likely To Surge
Small generalist firms remain the largest single group of advisories, despite the wave of consolidation during the pandemic. In the coming years, firms focusing on younger clients, often charging subscription fees, are likely to find it to their advantage if they specialize in solving the “problems of a narrow group of clients,” Hurley writes.
By building such a set of skills, these specialist firms will have far more efficient operating models than generalists, he says. Moreover, they won’t have to rely nearly as much on rainmakers.
Consider a firm in the Dallas-Fort Worth or Minneapolis-St. Paul market that establishes itself as the go-to expert for handling the financial issues of restaurateurs or dentists or car dealers. The client acquisition costs of this firm are likely to be far less than those of generalist firms forced to “push” prospects into becoming clients. Ultimately, the impact on profitability is likely to be dramatic.
“As we see in other professions, the level of segmentation will become even more sophisticated—not just based on assets, but on life cycle, source of wealth, catalyst for hiring advisors, philosophy around money and possibly even things like religious affiliation,” Tibergien argues.
Will the squeeze on the profit margins of generalists be as severe as Hurley anticipates? That remains to be seen.
Many think the biggest obstacle to firms’ success will be the difficulty in finding and developing new talent. A firm that struggles with this might remain profitable, but it will also remain small, since its growth potential is likely to be limited.
“The talent shortage has been a problem for years and has truly become acute in the last decade,” Tibergien says. “As a profession, we have not done a good job of making this a compelling career to pursue, though by all measures it should be.”
Redefining Holistic Advice
What about the nature of the advice these firms are giving? Michael Nathanson, chairman and CEO of the Colony Group, one of the largest firms in Focus Financial’s network, expects consumers of financial advice to “demand much more from their advisors, and advisors will successfully respond to these demands. Targeted, goals-based asset management services will be complemented not only by core financial planning services but also by tax-compliance, bill-pay, credit-monitoring, family-governance, legal, trustee, and even private-banking services,” he says.
Ultimately, advisors’ offerings will extend to “non-financial life-enrichment and lifestyle services, such as travel and health-concierge services, as well as other services such as career-coaching, next-generation financial education, security, and cybersecurity services,” Nathanson predicts. Advisors who think these services are beyond their expertise will likely partner with those more expert “so that clients seamlessly access what they need from a single point of contact.”
Nathanson also believes that just as there is a field of precision medicine, there will emerge a field of “precision advice,” which will be a key value offering for both large, diversified firms and boutique advisory shops that can serve specific types of clients. Precision medicine offers more effective outcomes, he says, because “it targets the specific needs, profiles, and even genetic makeup of patients. This type of tailored approach further supports the need for preventative care, which reduces risk and contributes to long-term health benefits.”
Precision financial advice will be similarly impactful: It will target even the smallest distinctions among clients, who will be encouraged to seek it out early and often to reduce their risk and optimize their long-term outcomes. Nathanson is describing what he terms “extreme specialization, customization, and depth of advice, well beyond the current general interpretation of those terms.”
Advisors serving business owners “will need to have expertise and experience catered to specific business types, ownership and capital structures, industry segments, employee bases, business sizes and locations, and even leadership and management styles. Their advice will be integrated not only into the financial plans of their individual clients but also into the business plans of their companies.”
Services that once were provided to only the wealthiest, most elite clients are likely to be deomocratized. "We expect to see concierge-like services to come down market from UHNW to HNW—concierge services will be the future advisory model regardless of net worth," says Alli Warner, chief marketing officer at Beacon Point.
She also thinks the transition in gender dominance will take place than most advisors anticipate. "Women [will be] controlling the majority of wealth—the industry has been talking about it for a several years now, but we’re really starting to see a shift in the demographic of the end client," She predicts.
Advisors are just beginning to engage is serious consumer marketing as a handful of firms like Creative Planning and Corient run national advertising campaigns, whereas in the past some had merely targeted local advertising in regional business journals and other marketing vehicles.
In the future, they can also expect to see themselves “heavily scrutinized and publicly rated by consumers and consumer advocates,” Nathanson says.
Technology’s Impact
Everyone agrees that there aren’t nearly enough advisors to satisfy the demand for financial advice—and that increasingly sophisticated technology should enable advisors to serve more clients in more distant locations. But how many more clients?
“Until artificial intelligence is truly intelligent, including emotionally, humans will still need humans for financial advice. But that advice will increasingly be delivered in a technology wrapper, making it even more impactful and efficient for clients,” Nathanson says.
Some think the impact of technology—a decade ago with robo-advisors, today with AI—could be exaggerated.
“Just like investment management has become a commodity, with the advent of great technology, financial planning is also becoming commoditized,” says Carolyn McClanahan, founder of Life Planning Partners. “More people will try to do it themselves. However, just like with investment management, many of the people who try to do it themselves won’t necessarily do a good job.”
She notes that while it’s “fairly easy” to accumulate assets, the decumulation phase is more challenging. “Pulling the trigger on spending money, understanding how to be tax-efficient in retirement, and realizing that you’ll need help at some point as you age will be what continues to drive people to advisors,” she believes.
There could be a backlash against the overreliance on technology. People are already being driven crazy by voice mail hell, and AI is already causing problems as much as offering help. The main job of financial advisors could be to act as client advocates to help “fight the machines.”
Others take a more nuanced view of AI’s impact. It “will certainly be transformational in terms of processing data, making advisory firms and those that support them more efficient, and delivering more insightful information to clients and advisors,” Tibergien says. “However, the data from which the industry has to work is probably pretty messy and inconsistent, so a lot of work has to be done on the base of information, as well as the technology, first.”