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. . . from the Publisher of Brill's Mutual Funds Interactive^®

Times Change For Financial Advisors

by Marla Brill
Publisher, Brill’s Mutual Funds Interactive

Financial advisors taking a business as usual approach in the coming years will become as archaic as an 8.5 percent front-end mutual fund load, according to some industry leaders. At the same time, increased competition for the growing ranks of individuals seeking professional investment advice will bring lower fees and a bigger menu of services.

Those are the conclusions drawn in a controversial report titled "The Future of the Financial Advisory Business and the Delivery of Advice to the Semi-Affluent Investor." Released late last year, the study is already prompting some financial advisors to re-think business strategies, just as others question its vision of the financial services industry a decade from now.

Conducted by Dallas-based Undiscovered Managers Funds, the report envisions a world in which a group of 40 to 50 dominant competitors will capture the lion’s share of the industry’s future growth. Smaller firms, says Mark P. Hurley, president of the Undiscovered Managers Funds and co-author of the study, will have a much harder existence.

"Cutthroat competition will replace collegiality," says Hurley. "And financial advisory firms emerging as dominant competitors will be those which can quickly expand services that address every aspect of an individual’s situation." The transition to the "multi-user family office structure," in which individuals have access to one-stop shopping for all of their personal financial needs, will also pose a threat to stand-alone lawyers, accountants, trust officers, and insurance brokerages.

While financial professionals may see a rough road ahead, the picture for individuals seeking their advice looks brighter than it has in years. All this competition means that fees financial advisors charge are coming under enormous pressure. While many organizations initially charged fees of 1.5 percent to 2 percent of assets under management annually, the median fee level has fallen over time to 1.0 percent, on average. As the industry gets more crowded with competitors, fees will likely fall further.

Just where the tumble could end remains to be seen. "To compete and thrive, financial advisors are going to have to make a shift to lower fees," says Robert Clark, editor-in-chief of Dow Jones Investment Advisor, a trade publication for financial services professionals. "They will need to find ways to make money at 40 basis points."

Roy Diliberto, ChFC, CFP, RTD Financial Advisors, believes that re-tooling fee structures is a likely scenario. "Most advisors price their services as a percentage of assets under management," says Diliberto, who serves as President of the Financial Planning Association. "That doesn’t necessarily reflect what we do for our clients."

In some cases, he continues, a client with $5 million in assets under management who has a relatively simple financial picture will pay five times as much for services as a client with $1 million who has more complex planning needs.

"Why should a high maintenance client pay so much less than a low maintenance client," he asks rhetorically. "We need to consider ways to unbundle our services, and look at the overall relationship with the client."

While Diliberto feels that new ways of pricing services may be in order, he suggests that the independent practitioner occupies a unique niche that even giant competitors with deep marketing pockets can’t fill. "There will always be people who enjoy working with an independent practitioner," he says. "I believe that large independent firms will be a dominant force in the financial planning marketplace."

Others agree that the independent practitioner will continue to hold a unique appeal. "Clients come to me for different reasons than they go to a big institution," says Patti Houlihan, President of Houlihan Financial Resources Group and Chairman of the CFP Board of Standards. "They perceive the way I handle things as more desirable than the service they get from a wire house." At the same time, she acknowledges, the pricing pressure brought by increasing competition "is something we’re going to have to pay attention to."

Some challenge that scenario. "I believe the future of financial planning is the independent financial advisor, not the large financial institution," says Clark. "Replacing independent, entrepreneurial advisors with corporate employees makes no sense. Employees can’t generate the same amount of business as a partner at a financial planning firm."

Clark sees fewer small one- or two- person financial planning firms, and an increasing number of larger firms with five or more practitioners. "That’s a similar professional path we’ve seen with lawyers and accountants," he says. "A larger firm provides some economies of scale and a diversity of expertise."

Regardless of whose vision one subscribes to, it’s clear the stakes are high-- the potential $8 trillion marketplace for semi-affluent individuals, which Hurley defines as those with a net worth of between $1 million and $10 million. The ranks of these individuals have swelled in recent years from a healthy economy and strong stock market, and is predicted to grow to 5.6 million households by 2005.

Hurley’s seemingly dire predictions about smaller financial planners come at a time when assets under management by financial planning companies and other financial services firms are at an all-time high. With more money under management than they ever envisioned just five years ago, financial advisors may see little need to change comfortable business strategies that have worked for so long.

Yet they may have to. Individuals have more tools at their disposal for evaluating stocks and mutual funds than ever before. New competitors are spending billions of dollars to capture the semi-affluent investors.

While Hurley’s report predicts dramatic changes in the industry, he believes that some have misinterpreted his conclusions. "I’m not suggesting that small financial advisory firms won’t exist a decade from now," says Hurley. "But professionals need to acknowledge that the world is changing."

To adapt, he says, many of the current small firms will raise capital or enter into strategic alliances with other companies in order to fund the growth of their businesses. Owners that do not run the risk of

working harder, making less, and struggling to keep their firms alive, Hurley predicts. The exception to this will be niche competitors who provide complex and sophisticated services that meet the needs of a very small portion of the overall market for financial advice.

To capture their slice of the consumer pie, independent financial advisors should be thinking about how to best position themselves for the future, says Hurley. "The single biggest thing I want people to come away with after they read the report is that the future presents an incredible, mind-boggling opportunity for those willing to adapt to it," he says. "You know, the Chinese word for crisis puts together the symbols for danger and opportunity. That’s pretty much what we have in the financial services industry right now."