3 reasons the time is now for big breakaways

The number of large teams breaking away and starting their own independent advisory firms has been rising. Scott Highmark of Mosaic Family Wealth likes to compare this trend to the growth of the craft beer industry. Craft beers, like breakaways, have been around for years but recently, there’s been a notable increase in their appeal. Why?

Mr. Highmark, who recently broke away with a team of experienced investment managers to create St. Louis-based Mosaic, says it’s because the marketplace is now primed for these models. I couldn’t agree more.

Tastes are changing. Back in the day, industry giants reigned unchallenged — they didn’t have to think much about innovating or refining their products. In contrast, today’s entrepreneurs build from a deep base of knowledge and experience to customize their offerings. New technology and resources enable them to reach bigger markets and sophisticated customers seeking diverse, personalized experiences.

Mr. Highmark is on to something with this analogy, and he’s on to something with Mosaic. I’d say that both the beer industry and the independent advice space are ripe for new models due to transformative changes in three areas: knowledge, value and experience.

BUILDING ON LESSONS LEARNED

From brewing to marketing, craft brewers have learned from the artisans who came before them. Meanwhile, beer drinkers have become far more discerning. They’re on the lookout for new flavors and interesting, creative approaches to their beverages — stout vs. ale; hops vs. malt; smooth vs. bite. As a result, craft beer production is up 9.6%, while overall beer production is down 1.4%, according to a 2014 industry analysis by market tracking firm Technomic. And here’s the kicker: the Wall Street Journal reported last year that Americans now buy more craft beer than Budweiser.

Current trends also suggest that we’ll continue to see momentum in the number of advisory teams breaking away. According to Cerulli’s “Intermediary Distribution 2015” report, the independent model’s market share is up 6% from 2007 to 2015, and we’re seeing an increasing number of large — and, in particular, very large — breakaways.

Prior to striking out on their own, most of these large teams were already structured like enterprises, with defined roles and multi-level client support systems in place. This positions them for better success when they go independent. Earlier breakaways led the way to robust, sophisticated and agile providers in the RIA space. As a result, big teams are finding exceptional quality in research, technology, client services and back office support.

Newly-independent advisers can take a thoughtful approach to setting up their firms, from choosing the right vendors, custodians and suppliers to determining how to organize their teams and talent. They also know that they won’t have to wait years to access new products. Since they’re in charge of their firm’s technology choices, they can select next-generation tools that position them for ongoing growth.

(Related insight: Breakaway broker movement shows no signs of stopping)

UPENDING THE STACK VALUE

In 2010, craft breweries accounted for just 5% of the beer sold in America, according to the Brewers Association. Market share grew over the next five years and by 2014, one of every 10 beers sold in the U.S. was artisanal. Nonetheless, less than 2% of the breweries in the country account for 89% of the beer brewed and the other 98% of the breweries made only 1/10th of the beer sold. But these small breweries account for 1/5th of the money spent on beer.
That, my friends, is a case study of a value stack getting upended.

The financial advice value chain is also in the process of being upended. Historically, investing was the foundation of the adviser-client relationship. Now, the situation is flipping because of technology and investor preferences. Large breakaways are recognizing the need to build a solid foundation around financial and wealth planning — the services that are much less likely to be commoditized going forward.

Combine this with the generational wealth transfer, and you get an extraordinary value creation opportunity for advisers. The big teams that are choosing to go independent are seeking to act on this opportunity. They’re also looking to capture the value they’ve created as successful teams within large institutions.

The value generated by independence can be especially evident when advisers compete for significant new client accounts. Increasingly, traditional teams are facing large breakaways with forward-thinking advisers and leading-edge technology. Many clients, especially younger ones, are now choosing independent firms.

CURATING THE EXPERIENCE

American craft breweries produce more than 100 distinct styles of beer that make use of traditional brewing methods, and emphasize flavor and quality over mass production and marketing. But more than that, craft beer has come to reflect an alternative approach to brewing that’s based on creativity, adaptability and customer service. The field is largely made up of passionate innovators who are driven to curate unique experiences for their customers.

(More on breakaways: Breaking away increasingly means joining an RIA, not starting one: Report)

That sounds a lot like the large breakaways that are creating high-touch service models with customized solutions and open-architecture platforms. These are entrepreneurs who took a leap of faith to create a business out of their skills and passion. They know that as the industry evolves, size alone won’t be sufficient for success: firms need to become curators of the client experience. And to do this, advisers need the freedom to provide services and products that help best meet their clients’ needs.

Having a clearly defined focus is essential, and it should be articulated to clients in a consistent, meaningful story. As part of this strategy, large breakaways are setting up practices that highlight their commitment to helping clients manage the “moments of truth” in their lives. They also understand that these services will be the core of successful financial advisory businesses in the future. This will require an intimate understanding of their clients, along with an unwavering dedication to guiding them through market conditions to their goals. And that’s a future I’ll be very happy to welcome with a uniquely brewed and well-flavored craft beer!

Bob Oros is executive vice president and head of the RIA segment for Fidelity Clearing & Custody at Fidelity Investments.