In the three decades that I’ve been a financial adviser, our industry has evolved in many ways, and that evolution appears to be accelerating.
In 1990, fresh out of college, there were two ways for me to become a financial adviser. One was with a wirehouse, where I would be trained on the grind that is cold-calling. I could keep my job if I opened enough accounts. The other avenue was with an insurance company, where I was taught that permanent life insurance was the answer to every financial problem or need.
Both structures had myriad problems.
First, the career window for a new college grad was not just a sales job, but really a prospecting one. The main objective was to simply find people who were willing to buy what you were selling. But there was no apprenticeship where one could learn the trade. Rather, unless you could prospect and sell, there was no other real path to become an adviser.
Second, the organizational structures were riddled with conflicts of interests. Although the client might have believed he or she was receiving advice that was in their best interest, the internal conflicts made that almost impossible to deliver.
When my business partner and I formed the registered investment adviser Hanson McClain in 1993, there were relatively few independent financial advisers in this country. Stockbrokers tended to look down on the small independents as being unsophisticated and incapable of serving larger clients.
The independent broker-dealer model emerged, and financial advisers began leaving those wirehouses (or insurance firms) and setting up their own offices with the help and support of the IBDs. Then, as the fee-based model gained traction, advisers began to leave their IBD relationships, became independent, and directed client assets to custodians and investments that best fit their clients’ needs.
Later, we saw the arrival of large, national RIAs that operate under a fiduciary model, put their clients’ interests first, and don’t view their financial advisers as simply a channel through which to sell their proprietary financial products.
The current evolution of the advisory industry is consolidation. We’ve all witnessed the explosion of M&A in the advice business, and this is driven, in large part, by advisers wanting better outcomes for their clients, their staff, and themselves.
Let’s be honest, most independent advisers didn’t become independent so they could operate a small business, which is replete with headaches and responsibility. In general, they became independent because there were no appealing alternatives.
As advisers tire of wearing the numerous hats that it takes to run a small business, many have merged with larger RIAs so they can slow down, take some financial chips off the table, and focus entirely on serving their clients. Further, the adviser demographic is, let’s face it, one of the oldest workforces out there. Many have realized that they need succession plans, and the larger RIAs provide an appealing option.
Today, there are a couple of dozen RIAs that are growing like mad by finding other like-minded firms and bolting them together. Their objective is to have a national platform that can provide superior service and experiences to both clients and advisers, alike.
As the evolution continues, we’ll see the pace of M&A accelerate to the point where, in the next decade, there will be a handful of RIAs that rival the wirehouses.
[More: 3 drivers of record M&A activity]
Andrew is half-human, half-gamer. He’s also a science fiction author writing for BleeBot.