Pundits keep predicting that big will “dominate” small in the financial advice space.
I ain’t buyin’ it.
The big wirehouses have been around forever, and they have been losing ground not gaining it. The independent advisory business emerged from the shadows of these giants and has grown from almost nothing into a major force in just 40 years. Big couldn’t keep small in its place.
Mark Hurley predicted decades ago that the independent advisory business would consolidate into a handful of big firms. Instead, there are more small firms now than there were then.
Hurley wasn’t entirely wrong—there was a move toward consolidation. But that trend has not stopped or even slowed the formation of new firms or the growth of smaller firms.
The picture in our industry looks very much like it does in other professional services, like legal and accounting. Big does not dominate small. Big and small have co-existed for years. Despite the consolidation that has taken place in both industries, there are no dominant players.
Why Small Firms Will Thrive
There are a number of reasons why small advisory firms are likely to thrive in the years to come, despite the consolidation we see in the independent advisory business.
First, being big is hard.
How do you like the service you get from your cable company, your phone company, or your health insurance company? Not much, I’m guessing. Providing excellent service on a massive scale is extraordinarily difficult. Yet the advice business is all about personal service.
If you’re building cars, running a railroad or selling commoditized products, scale is important. Big and scale go hand in hand. But neither big, nor scale, are closely associated with quality service. Olive Garden will never put the passionate chef’s local bistro out of business.
Another reason the outlook for smaller firms is bright is that there are legions of firms that provide small advisors with the capabilities to compete effectively with the big guys. These firms provide investment management, technology, marketing, compliance and operational support. They shrink the advantages that size might otherwise have. This trend will only accelerate.
Ironically, many of these firms can trace their roots back to the days when they were large advisory firms. They grew to a size where it made sense to develop businesses that sold or rented the capabilities they developed for their own firms to other, smaller advisory firms.
Rather than crushing the smaller firms under their boot heels, they now depend on them for business. The big now serve the small.
Then there is the legacy technology issue. Large firms tend to build their own infrastructure. Initially, this may give them a competitive advantage.
But within a relatively short period, that infrastructure becomes dated. New technology comes along that enables smaller players to compete more effectively, and maybe even gain an advantage on their larger competitors. The larger firms devote more attention to upgrading their infrastructure and lose focus on serving clients.
Then there is the natural evolution caused by entrepreneurship and the urge to innovate. Face it, big firms are boring. The more they have to lose, the more they become laden with processes, procedures, rules and constraints. The talent that drives the transformation of small firms into big firms often leaves the behemoth in search of a more creative environment.
Thus, big spawns small. How many times have we seen a firm’s founder or spiritual leader slip out the back door of a firm they helped build to set up shop in a garage and start again?
There’s Room for Big and Small
There is always tension between establishing efficiency and scale and creating a memorable client experience. If you are too small, you lack resources. But as you grow, you lose the ability to be nimble and responsive. To find the balance you must focus on being good, not big.
If building a large firm is one of your goals, there’s nothing wrong with that. There will always be clients who yearn for the security and familiarity of a big firm with a well-known brand name. Just don’t do it because you expect to dominate the smaller firms in your market.
Fear not, small firms! Your clients love you. Say it loud: “I’m small and I’m proud!”
Scott MacKillop is CEO of First Ascent Asset Management, the first TAMP to provide outsourced investment management services to financial advisors and their clients on a flat-fee basis. He is an ambassador for the Institute for the Fiduciary Standard and a 45-year veteran of the financial services industry. He can be reached at [email protected].
