What to make of Mark Hurley's latest prophesy that most RIA firms will go out with a whimper

Provocative but mostly correct.

Think about it. The industry today is structured in large part to assure that brokers and advisors do NOT render advice. This makes for good industry defense in arbitration proceedings, absolving brokers and advisors from any accountability for their investment recommendations. Structurally the broker just makes their clients aware of their investment alternatives, it is up to the consumer to determine investment merit regardless of how limited their investment knowledge and experience may be. This works neither for the broker or the consumer. Thus necessary large scale institutionalized support for advisory services needed to support advice does not exist and it is beyond the reach of terribly under resourced advisors to create on their own. The need for innovation is profound, at least 15 major innovations central to advisory services have not been embraced by the brokerage industry, and by necessity the end result will look nothing like conventional brokerage business model.

If the brokerage industry continues to look at innovation as being disruptive rather than essential and will not properly resource advisors, and if individual practitioners by definition can’t create scale, then indeed only a very small number of very large RIAs have the capital resources and intellectual capital to create large scale institutionalized support for the full range of advisory services (transactions, planning, consulting and fiduciary counsel) to include fiduciary counsel.

Through advanced technology now in use in the institutional markets there is a level of counsel which goes far beyond the humane capacity to reason which fosters the management of an incredible degree of portfolio detail for an unlimited number of custom portfolios in real time. This level of counsel preempts advice products so prevalent today which can not be held to a fiduciary standard of care.

Given the innovation comming down the road that requires scale, Hurley is very likely correct, but:
> It requires RIAs to work together in a common delivery format which to date has never been sucessfully executed.
> None of the RIA roll ups insists on a common approach which can result in scale or even a focused R&D methodology for advisory services which would commonly benefit all.

Thus, the most likely scenario is something new that starts with sufficient scale ($15 to $30 billion) to be self sustaining. There are only a few firms that fit this description. It could just be ten RIAs at $1.5 billion each. If they focus and marshall the proper resources, a faster, better,cheaper advisory services business model will reorder the financial services industry around an extremely high level of continuous. comprehensive investment and administrative counsel. This will be an asset magnet that supercedes everything we have seen come before it.

SCW

Hurley’s points support my experience as a business manager of a medium size wealth management firm. The chalenges are that the assets, the people, of wealth management firms are NOT scalable and institutionalizing a relationship takes generations if it is possible at all.

Jeff,

It will always be a relationship business, proper resourcing just makes advice (fiduciary standing) safe and easy to execute.

Institutionalization of a new generation of enabling resources that is preemptive to the old commission brokerage model does not institutionalize relationships it just significantly increases the bar for advisory services being provided by enterprising advisors who seek to compete on the basis of the depth and breadth of counsel they routinely provide as a matter of course.

SCW

I’m looking forward to reading the full report and walking through the calculations. Yes, Hurley likes to publish reports that make bold statements, but I think it is good that he is stirring up the conversation about succession. Of course all his assumptions won’t be true and of course there will exist (do exist) other models that work well today; and I believe new players will emerge with new transition equity financing models.

At 114 pages, there is a lot to digest here and I encourge everyone to read the report and compare to their own situation/assumptions. One size does not fit all. (full disclosure here: I’m the Interim COO of Sand Hill Global Advisors (which Hurley’s Fiduciary Network invested in last year) and was formerly SVP of Wealth Mgmt at Boston Private so I’ve seen many sides of this issue up close).

Advisors transitioning their business over time must start early, must have rational assumptions, and yes I agree with Hurley, must have a pre-nup so if things don’t work out you can part ways without a big mess. Easier said than done.