Mark Hurley seems to be addicted to predicting the future. He published a number of white papers around the turn of the century that predicted a dystopian professional landscape composed of a small handful of giant RIAs and a few smaller firms scurrying under their feet, looking for table scraps. Recently, he wrote a whitepaper that predicted what I would interpret as a cybersecurity apocalypse where suddenly the bad guys successfully targeted advisors and stole from their clients. (Hurley is running a new firm that advisors can subscribe to that would offer cyber protection to their clients.)
Now there’s a new white paper that predicts ‘The next phase of the evolution of the wealth management industry,’ called ‘Welcome to the Jungle.’ A number of thought leaders are cited at the beginning, but I find myself wondering if they would agree with the paper’s analysis and conclusions.
Conclusions? The first prediction is that the ‘wealth management’ world (I prefer the terms ‘financial planning’ or ‘financial advisor’) is going to do something similar to what Hurley predicted a couple of decades ago: the aggregators and PE-backed firms will, themselves, aggregate into $500 billion AUM firms or larger, as the PE investors sell their aggregated RIA acquisition portfolios to organizations with even deeper pockets: sovereign wealth funds. Alongside them, we are told, there will be specialist firms that will serve client niches or (the paper says, more likely) multiple sub-niches with more than $100 billion AUM. And then there will be thousands of small generalist advisory firms whose margins will be squeezed, whose owners will not be running actual viable businesses.
The paper explains that advisory firms became more valuable simply due to the extraordinary bull market raising their AUM. The PE firms, flush with capital, moved in to buy into the rising tide, and valuations were inflated ‘to levels previously unimaginable,’ as ‘buyers contorted themselves to justify higher prices.’
We are told, most astonishingly, considering all the changes after Covid, the industry has experienced little innovation; ‘wealth managers largely do today what they did 30 years ago,’ and ‘the operating models of most wealth managers have also not materially improved.’ (I look back at the list of eminent contributors, and wonder if none of them have noticed the advent of professional management, growth of specialized back office personnel, career tracks and workflows, a dizzying number of additions in the fintech space, remote client meetings and specialized clientele, and the evolution of sustainable firms that once were practices or, more likely, IARs of broker-dealers with no market value.)
Anyway, the paper says that wealth management firm offerings are so homogenized today that prospective clients can’t distinguish between them, and the reader will be surprised to learn that most firms have done no marketing for a very long time. They might also be surprised to discover that, as the white paper tells us, advisors are spending less time with clients, and playing a much smaller role in their lives.
This profession-wide complacency is due for a rude awakening. “Going forward,” the paper concludes, “wealth management will look much more like a jungle than a club.”
What happens if there is a major, sustained market correction? Advisory firms will have to start marketing again, and there will be renewed focus on organic growth. Advisory firms will start providing services to people in the blue ocean of clients in their 40s and 50s, but there will be more competition for those previously-ignored clients. Larger firms will leverage their scale to offer discount pricing in order to compete favorably with smaller firms, and everybody will have to expand their range of services offered to clients. Talent will be more expensive and harder to find.
What about that aggregation of aggregators trend? The paper assures us that the only buyers in that somewhat dystopian environment (jungle) will be the deepest pocketed sovereign wealth funds that will want to create large wealth management enterprises. Higher interest rates, lower market returns and a dog-eat-dog marketing environment will make it less attractive to buy even larger wealth management firms that are not among the giants.
Toward the end, we are provided with the ‘ten traits common to the most successful future firms:’ They will be run by decisive owners who are not ‘asleep at the wheel,’ who have long investment horizons. (Think: they invest back in the firm.) These far-sighted leaders will capture as many new clients as possible as quickly as possible. (One assumes that being a bit choosy and having minimums will no longer be the norm.)
The decisive owners will restructure their compensation packages to incentivize their firms’ best marketers and pay them based on the clients they personally service. They will create more attractive cultures in order to win recruiting battles, and (separate trait) do what is necessary to keep their talent. (Will that come as a surprise to any advisory firm reader? Will that be different from what they’re doing now in this hyper-competitive market for talent?)
The successful firms will build powerful brands, embrace cybersecurity, expand their client services and value propositions, they’ll become more discriminating in their M&A activities and (last trait) they will bring in management that will be able to execute all these things. (The article says that these new leaders will need to have the diplomatic skills on par with those trying to resolve the war and factionalism in Syria and Iraq. Is there a war going on in Iraq that I haven’t read about?)
Which brings us back to the forecast that the profession will be dominated by mega advisory firms with $1 trillion AUM, there will be ‘visionary owners’ who will manage to get to $500 billion of AUM, we’ll see those specialist wealth managers who work with a narrow group of targeted clients, and scattered among these giants will be thousands of small generalists. These smaller firms, we are told, will have little to no enterprise value, and will fly their firms ‘into the ground.’ Hurley said exactly the same thing about smaller advisory firms back in the early part of the century—you know, those firms that have been selling for 15 times EBITDA lately.
So what do I think about all this? (Thank you for asking.) I’ve forecasted the future of the profession a few times, myself, over the years, and I would have no qualms whatsoever about comparing, in hindsight, the accuracy of my predictions with Hurley’s. I’ve learned, sometimes by instinct, that it’s tempting to take a few trends you see in front of you and blow them out into grandiose forecasts with a time frame that is much shorter than what we have ever seen historically.
But I have some directional objections as well. My own predictions are almost literally the opposite of what you’ve read here. I’ve written about how the founders of smaller firms, who have sold to the large aggregations, ultimately regretted the experience, and were surprised by the bureaucratic restrictions, the operational inefficiencies and the dramatic diminution of personal client service. Are these, therefore, the firms of the future?
Hurley is right to say there is more competition for talent these days, and we can expect it to intensify. But hearing about these experiences makes me wonder if those aggregated firms that are going to aggregate further will be the ultimate winners in that competition for the best, most thoughtful advisor talent. I think we’ve seen the opposite historically; the best people leave wirehouses to go out on their own, or they leave the BD world to start their own RIAs, and they are generally the thought leaders and most valuable advisors to their clients. The best people want freedom, and to escape bureaucratic restrictions.
Size doesn’t scale very well in a profession; the processes become bureaucratic, the advice becomes necessarily standardized, and as the most creative people leave for independence and freedom to practice their own way, a kind of mediocrity takes over. The largest advisory firms today look, to me, kind of like the wirehouses look: the advisors work for the firm rather than the client and they are told what advice to provide and what portfolio advice to give.
Hurley says that the giant firms will build strong brands. But in the process of creating a brand that appeals to ‘the market’ (meaning everybody) they necessarily become the equivalent of general practitioners, largely catering to the wealthiest cohort of potential clients where there is already an over-saturation of competition.
I’ve predicted that the firms that live in the shadows of the rollups and aggregators will migrate toward what Hurley calls ‘niches,’ what I would call ‘specialties’—that is, working with specialized clients whose challenges they understand at a very deep level. Their advice will become tremendously more valuable to their select client group than the retirement planning projections and portfolio management services that the profession has traditionally provided.
If that prediction comes true and there is a diaspora of small and mid-sized firms servicing a number of specialties, the advice will be the entire value, with increasingly value-based pricing.
Which means? It means that the whole structure of Hurley’s white paper, built on a foundation of what will happen to AUM if the markets don’t cooperate, will be irrelevant to the people who I think represent the future of the profession. ‘The jungle’ he envisions, where a market downturn causes the firms to turn on each other because they’re all competing for the same clients, might actually happen at the largest aggregations, where AUM is still the revenue model and the client base is anybody with rising minimums to hand over for management. But the jungle looks very different to firms that have little or no competition in their specialized clientele. Let the dinosaurs eat each other.
A firm that offers planning to doctors coming out of residency, and helps them negotiate their contracts with hospitals and finds the resources to staff and stock their offices, and understands their unique insurance needs, will find it increasingly easy to pick off clients from a firm with a strong brand that stands for fiduciary, fee-only and cookie-cutter planning.
This white paper is an echo of Hurley’s original forecasts. With the benefit of hindsight, we can see that they were wildly off-target back then. I am going to offer a forecast of my own: 10, 20 years down the road, we are going to look back and say the same thing about this paper as well.