Duran Duran

The big squeeze II: Rise of the mega-adviser

The big fish are rethinking and redefining what it means to provide financial guidance to a person's entire financial life. Are you going to take them on?

Sep 26, 2014 @ 1:04 pm

By Joe Duran

My last post created quite a stir and I felt it was important to clarify a couple of points before going to the next article in the series about “The Big Squeeze.”

In particular, two issues seemed to be the focus of attention. The first was about timing and whether the 25-year golden era for stand-alone independent advisers would come to an abrupt stop in 2015. In answer to that, I can only write that most generational shifts end with a transition, and one can only know when the shift occurred with hindsight.

For example, we didn't know in 1990 that the beginning of the golden era for independents had begun (with the rise of large custodians helping to make it possible.) It took until the mid-1990s to see that something very important was happening in our industry. I suspect we will only know that things are different in a few years, when new models start to dominate.

The second concern is about my obvious conflict. It's no secret that I have helped to build two national RIAs and that I am currently part of a national wealth management firm. That is no coincidence. I have spent the past two decades working with partners to build firms that go where I think the industry is headed. Our first one was an investment platform we built in the '90s and sold to GE Financial in 2001; it was built with a belief that many advisers would simply not want to run the operations of a scalable investment firm and that they would need help and would partner with a larger platform firm that had the scale. That turned out to be reasonably accurate. This time around I am assuming that the wealth management business will go through a similar transition.

I believe there will be several large national platforms for financial guidance and advice and I am staking my career on it. Despite this inherent conflict, my goal is the same it has always been: To understand what is happening in our industry and share what I think is the truth, regardless of whether it is comfortable or not, hopefully helping my fellow advisers to succeed in an ever-changing world. And with that let's talk about the next golden era ...


There's a lot of talk about robo-advisers as an impending challenge (I might have unwittingly contributed to the furor with one of my past articles). However, one of the biggest challenges to the local neighborhood RIA is almost certainly not going to come from the future, but from above; from the growing collection of mega-advisers quietly building size. Unlike the competition from the bank-owned brokerages, and the large direct-to-consumer firms, these superfirms are laser-focused on one thing: comprehensive wealth management. They are rethinking and redefining what it means to provide guidance covering a person's entire financial life.

As I reviewed the list of the largest RIAs recently posted by a national publication, I was struck by how fragmented and relatively small firms are in our industry. In the sea of wealth management there are lots of small fish and very few big ones. There are only a handful of wealth management firms with $100 million in annual revenue. That will change drastically in the next few years. We will no doubt witness the creation of lasting national wealth management brands in the new era.

In one telling sign, the fastest-growing advisers were not the firms with $50 million institutional clients. The fastest-growing (and likely highest revenue) firms were advisories with client averages anywhere from $250,000 to $5 million. Those are the firms growing upwards of 20% annually — the firms of the future that every adviser needs to be most aware of. The big fish are getting bigger very quickly.

The creation of mega-firms happened within the legal and accounting professions decades ago. While many mom-and-pop operations have survived, the whale's share of business in these two advice industries has gone to the mega-firms and the super-regionals. We are a very young industry but the transition in the financial advice industry will be no different than what occurred in those other advice-based industries. The wealth management business has been a cottage industry for the last 25 years, and is about to grow up. Here are some of the reasons these mega-advisers are being built and create such formidable competition to the status quo:

They have financial strength. Having $100 million in revenue means having the power to spend on things that an individual adviser cannot. They can invest in cutting-edge technology and inventing new client systems, underwrite marketing research and fund acquisitions, evolve the client experience and test different lead generation strategies. They can provide liquidity to their partners. That's almost impossible for a smaller boutique firm.

They have pricing power. Size means strength. Whether it's negotiating with vendors — technology, custodian, payroll et al. — or creating consistent national pricing standards, they can use their size as an advantage. Many advisers solve for this by working with a platform, but most of those platforms have different costs depending on size and everyone gets the same thing. When it comes to negotiating, bigger is almost always better.

They have institutional bench strength. We are in the knowledge and judgment business and no matter how great any one adviser is, no one individual is likely to have all the answers to the complexities any person might encounter in their financial life. Like the large law firms that have the breadth of talent to cope with any legal issue that arises, clients prefer to have great advice on a range of questions from a team of experts. Having bench strength also means the clients can count on the transfer of knowledge and are less dependent (and must take less risk) on one single person for their entire financial life.

They have strategic muscle. Most advisers cannot commit time to strategic thinking and evaluating what changes and investments need to be made within a practice to keep it competitive and thriving. Many live in a world in which their time is constantly sucked up by the complexity of running a practice, serving clients' needs and managing staff. Big firms have specialization, and that means dedicated time and resources to think about the way they need to evolve and innovate. They have research and knowledge that most independent firms do not have access to.


So how should a standalone independent adviser be thinking about the competition from these large wealth management firms? It all depends on your perspective and your time horizon. Consider:

Ignore them. If you want to operate a comfortable lifestyle business with a select group of clients, you will probably be fine. Think of your business like the local accountant who works for himself and has a set of personal clients. You have built a great career for yourself and you like the boss. What's not to like? There's always room for a different size fish in this large ocean, but swimming alone can be riskier proposition for you and your clients. You can't ignore the change that will happen in clients' expectations, but being small allows you to make quick changes. There is one caveat, it is still vitally important that your team figure out what happens to support and guide your clients if you aren't there to help. Having a punt plan (a strategy for a “what if?” scenario) is really important.

Compete against them. If you have a longer time horizon, or more ambitious goals, there will be plenty of opportunities. We are entering the very early stages of this era. However, you will need to dedicate serious time, as much as a third of your life, and a significant portion of your free cash flow to understanding and being competitive in this changing landscape. It won't be enough to be a run-of-the-mill wealth management firm delivering what everyone else does, using off-the-shelf software if you want to grow meaningfully. Size and differentiation in brand and services matter more when stronger competitors change the landscape. How would a video store owner, coffee shop or book store evolve in a world of Netflix, Starbucks and Amazon? There are opportunities but no one can ignore the changes in their market.

We have no mega-competitors in our industry yet, but you probably have one in your region that is growing to become one. Take a look at these larger firms and ask yourself what you can do to be more interesting to prospective clients, what can you emulate and improve that can elevate your firm? What kind of people do you need to bring on to your team to help you? Carve a distinct niche for yourself and invest in it. You will need to have a clear growth path, reasonable expectations about how to execute and the team and recourses to help it happen. You will need to think about your own (and your team's) skills and refine and evolve them with your changing firm. Someone will be the new super-regional, why not you?

Partner with them. The landscape will have some failures, but many of the large firms will simply get bigger and more formidable. Today there are around a dozen wealth management firms with approximately $10 billion in assets under management catering to the millionaire next door. There will likely be a handful of $25 billion and bigger wealth management firms, and several $10 billion in AUM firms in the next five years.

The winners will win big. The early adopters who partner with the right firm will be the ones who will participate the most in the rewards that come from being a first mover and creating a market. However, being part of a larger team is not for everyone, some folks would rather go it alone and create their own path. But make no mistake, a strong team with resources will usually accomplish more than any one player.

There's no time like now to take a look at what the big fish are doing and try to figure out how you fit in a sea with ever-growing competition. I will have follow-up posts on “The Big Squeeze,” after a brief respite, discussing the growing threats from the bank/broker channel and the large direct-to-consumer brands. You either make the change or are swept up in it.

May you shape your own destiny.

Joe Duran is chief executive of United Capital and the bestselling author of “The Money Code: Improve Your Entire Financial Life Right Now.” Follow him @DuranMoney.


How do you see yourself in context of the evolving financial advice business?

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