Joe Duran: "I think it’s exactly like the travel agency. These one-man shops think things aren’t changing. They don’t realize it until it’s too late.”

Why Joe Duran believes that classic RIA firms face extinction

Baby Boomers' expectations and rising technology could put a new squeeze on the old model

May 17, 2011 — 2:47 PM UTC by Lisa Shidler

18 Comments

Joseph Duran, the CEO of one of the fastest growing aggregators in the country, predicts the model of financial advice that now dominates the industry will go extinct much more quickly than predicted because of the retirement of the Baby Boomers.

In a new white paper, dubbed “The Consumer Revolution,” the CEO of United Capital Financial Advisors, LLC, points out that the Baby Boomers have transformed many industries as they have aged through the system with demands for customized, cheap services.

“I suspect 10 years from now, there will be a lot of advisors as employees in brokerages and independent advisors who don’t differentiate themselves,” Duran says. “Unless they have billions of dollars, they won’t be able to compete.”

Industry leaders have been predicting gloom and doom for advisors for more than a decade. But the naysayers’ voices have grown louder of late.

Dinosaurs

Laura Kogen, a practice management consultant with Fiduciary Access, LLC, says she agrees with Duran that smaller firms will in fact become extinct.

“I think there will be some disruptive event that will drastically change the industry,” she says. “Like the dinosaurs, a whole bunch of these players will be gone because they can’t adapt to the new model.”

She believes advisors will likely lose business to a do-it-your-self internet model that will likely enter the scene in the coming years. When that happens, these advisors will face price compression and will either sell to larger players or accept dirt low margins.

Transformational shift

Duran says the shift in the industry lead by retired baby boomers will be abrupt, disruptive and transformational because these consumers are accustomed to getting exactly what they want quickly, cheaply and customized to their needs. Baby boomers will demand lower fees.

“For advisors to survive they’ll have to work twice as hard for half of the money,” Duran says.

The winners will be those who offer customized wealth management services, on a scale that allows them to do so at fairly low rates. Not surprisingly, he says United Capital, which has $13 Billion in assets under advisement and 30 offices around the country, will be one of those winners. Its average client has about $2 million in assets. See: United Capital calls its partner firms to Berkeley to help execute ambitious plan.

While Duran sees a fast change in the offing for the advisory business, others see a more gradual process at work.

“People said the sky was falling years ago in this industry,” says Joni Youngwirth, the managing principal of practice management at Commonwealth Financial Network. “If the sky is falling, it is falling rather slowly. I’m not sitting here depressed about everything.” See: What to make of Mark Hurley’s latest prophesy that most RIA firms will go out with a whimper.

Still, Just 10 years ago, Youngwirth acknowledges, about 80% of the large Commonwealth advisors were solo practitioners. Now, the numbers have reversed and about 80% of Commonwealth’s top advisors are ensembles.

Industry veteran Bob Veres, a commentator, author, and consultant for more than 20 years, crafted his own white paper in the fall that delves into the way he sees the industry changing. In his white paper, which he’s currently crafting into a book, he says the advisory firm is “undergoing a metamorphosis unlike anything that has been experienced in the 40-year history of the profession.” See: Bob Veres adds his bottom line to valuation debate started by Mark Hurley.

He takes on a more optimistic approach but agrees with Duran that the scalability in the industry is a key factor.

Bob Veres:Some will hang on to the old ways of doing things.
Bob Veres:Some will hang on to
the old ways of doing things.

“The profession is rewriting its own rules,” he says. “It seems to me the profession has a huge window of prosperity ahead of it. Certain advisors will take full advantage of the prosperity and some will hang on to the old ways of doing things.”

Maturing clients

Duran, an author and expert in entrepreneurship, was president of Centurion Capital Management starting in 1992. He led the company to growth with billions under management, culminating in the sale to GE Financial in 2001. He’s again executing an aggregation strategy to build scale on the path to an IPO with United Capital. See: One of a new breed of roll-ups taking center stage, United Capital is churning out deals again. Starting with modest deals, he’s doing increasingly large ones. See: United Capital scoops up a $1.6 billion wealth manager from M&T.

In his white paper, he argues the career of the financial advisor is headed down the same path as those the careers of travel agents followed. He points to the effect of discount shops like Expedia and Travelocity.

“That’s where I think it’s exactly like the travel agency,” he says. “These one-man shops think things aren’t changing. They don’t realize it until it’s too late.”

In the advisory business, he says, fees for advice will ultimately replace the investment management fee. His company’s fee for advice makes up just 25% or so of the client’s total fee, but he suspects in five to 10 years the fee for advice will actually be 75% of the firm’s fee, with just 25% of that fee as an investment management fee.

“There will be a whole new wave of firms that will create value by helping clients with their whole financial life,” he says. “In order to survive, advisors will need to learn how to do wealth counseling.”

Certainly, other large firms are hoping to grab clients by becoming massive firms where they can capitalize on scale by offering attractive fees to clients. He concedes there are other national firms rapidly growing and fighting for clients, but argues that these firms expertise is investment management and not wealth management.

Adam Bold’s Mutual Fund Store and Ric Edelman have both announced major expansion plans and are rapidly growing to serve clients across the country. See: Edelman joins ranks of TV RIAs with PBS show that will reach 20 million and Radio-star RIAs drive giant growth at national chains one $400,000 investor at a time.

New wave of financial service firms/How to survive

There’s no question the advisory industry is in a state of flux, agrees Rich Lynch, COO of Fi360, a firm that provides fiduciary training to advisors.

“Advisors need to raise the bar to demonstrate that they need to add value,” he says. “In order to raise the bar, you need to embrace the fiduciary approach.”

Duran predicts that the new wave of financial advisory firms will offer a customized, original and scalable client experience. He says these new firms will view their roles to be truthful and honest to clients – particularly in terms of telling clients no.

In addition to the boomers’ driving down costs, he also predicts that they’ll demand more services which will focus less on investments and more on overall wealth decision-making. “These baby boomers are far more optimistic than their parents but they’re retiring with far less and will live longer,” he says. “Someone needs to say to the client that you can’t afford this.”

Duran says that many advisors are already experiencing cracks in their surface mostly because they’ve already begun cutting costs for clients and their margins are already tight. “We’re seeing firms at $300, $400 or $500 million with very bad profit margins and they can’t charge enough. They’re struggling to grow because they don’t have a compelling offer and they’re not doing anything these individuals can’t get anywhere else.”

Advisors who succeed going forward are those who will charge for their advice and will help their clients make good decisions.

“You need to charge to help clients understand and make good decisions,” he says. “You also need to be able to tell clients if they can’t afford something.”


Mentioned in this article:

United Capital Financial Advisers
Consolidator/Roll-up Firm, RIA Welcoming Breakaways
Top Executive: Joe Duran

Commonwealth Financial Network
RIA-Friendly Broker-Dealer, Tech: Other
Top Executive: Wayne Bloom



Share your thoughts and opinions with the author or other readers.

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Victor M. said:

February 12, 2014 — 1:21 AM UTC

I have a question. If we’re talking about mass affluent clients under $250,000 potentially being targeted by some RIAs and the model moving away from the Schwabs/Fidelitys, it seems like these brokerages should be nervous, not RIAs. I think that their cookie cutter cheap commission / advice approach and the wirehouse model are the dinosaurs here, not the RIA model. I would think that RIAs have the advantage because of the service(s) they provide. Yes, fees would have to go down (I totally agree with the travel agent analogy), but we’re not talking about booking flights (point,click,buy). Anyone could be a travel agent and the one’s that survived are highly specialized. Like someone said previously, fees might go down, but costs will go down, too.

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Stephen Winks said:

July 31, 2013 — 6:59 PM UTC

Mark,

With 70% of industry revenues taking the form of fees by 2015, the next generation of brokers will be advisors which doers not suggest a terend away from fee-based advice.. Professional standing in advisory services requires fiduciary standing, individualized advice and a massive streamlining of cost, not possible with brokerage industry advice products.

“wrap accounts” are a vestige of an outdated suitability standard where advice is a product which is sold rather than an expert authenticated prudent process advisors manage.

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Mark Massey said:

July 31, 2013 — 4:50 PM UTC

Over 2 years since this article was written and it seems that, if anything, the industry is trending toward wrap accounts and away from fee-based advice.

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Stephen Winks said:

June 6, 2011 — 4:07 PM UTC

It is all about transparency and accountability which inturn affects pricing.

Today we can add far more value less expensively than ever before.

You will not notice it, but you will evolve with the market and ten years from now you will be providing a much higher level of counsel at lower cost and make far more money than before. Whether this is achieved through a roll up or on your own is simply a matter of efficiency.

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Bruce E said:

June 6, 2011 — 3:42 PM UTC

Didn’t Mark Hurley suggest more than a decade ago that this sort of fundamental change would occur in the industry in very short order?

There are numerous problems with this model. First, and foremost, to the industry itself there are no barriers to entry. The threat of new entrants is very high. And fracturing of this type suggests that the industry is in a rapid growth phase, not a mature or consolidation phase.

Service providers needn’t be educated. An ADV can be submitted and approved in a month. The 65 isn’t a difficult test at all.

Finally, individuals tend to like to work fairly close to home. They like to speak to their service provider, and many feel very, very uncomfortable in a remote or large or even overly polished environment.

These roll ups will certainly gather in their fair share. Heck, I’d sell. But all this consolidation you tell me was or is going to happen seems a reach.

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Stephen Winks said:

May 25, 2011 — 3:11 PM UTC

Michael,

You have raised the pen ultimate question.

Transparency required for fiduciary standing brings clarity on the depth and breadth of counsel provided and its associated cost and value added. The range of expert services provided is easy to authenticate and execute in scale (if you know how to do it). Pricing is the question.

More than 100 basis points can be easily queezed out of today’s expensive packaged product brokerage approach to advisory services while investment and administrative values can be far better managed in the consumer’s best interest. How advisers and their supporting firms choose to redistribute say 100 bps determines pricing. Is it manifest as:
(a) better compensation for broker/dealers as incentive to adopt/support fiduciary standing for its brokers, and/or
(b) better compensation for the adviser, and/or
(c) lower cost to the consumer?

Competitive market forces will eventually gravitate the market toward© as a means to win market share but in the interim, (a) and (b) will initially drive pricing and win market share.

Thus, though 50 bps is possible and is winning billions today for individual practices, I think b/ds will take 75% (75bps) of the savings as incentive adopt a fiduciary standard, take 25% (25 bps) to give the adviser a 40% increase in compensation and the consumer pricing will largely go unchanged.

Mass market consumers, those with less than $100k with far less complex needs could easily be offered the same service by banks with less capable advisers for 60 bps. This will significantly remove a large pool of investors, as 85% of households have less than $100k to invest excluding their home.

Pricing will be the next big issue after it is established that brokers (now literally everyone) is held to the fiduciary standard of care based on objective, non-negotiable fiduciary criteria of statute, case law and regulatory opinion letters. The global faster, better and cheaper modernity mantra will greatly influence advisory services and how it is delivered if the US is to remain a global leaderin financial services. In order to play, the adviser has to be exceptionally good in delivering expert fiduciary advice, must leverage through technology to achieve scale, be exceptional at portfolio construction, monioring and management and will likely have specialization in serving institutional market segments (DC, DB, Foundations and Endowments, Public Funds, Profit Sharing, Taft-Hartley) and HNW individuals entailing more complexity than the Mass market.

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Michael Blanton said:

May 24, 2011 — 10:26 PM UTC

I believe that you are talking about I call the Wal-Mart syndrome. Investment advisors battling it out in the area of managed funds sooner or later it will become unprofitable to maintain the service for the amount of revenue received. All this based on what rate of return our clients may or may not receive for their loyalty to your firm. The truth is the secret is not necessarily in what the make but in what they get to keep. There are so many losing strategies which have little to do with portfolio mix that if we do not begin to focus on the mistakes in the these arenas and the opportunity cost of the wealth transfers made here we don’t deserve their business.

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Stephen Winks said:

May 24, 2011 — 7:00 PM UTC

Bill,

The reference point will likely be 50 bps all in, including investment cost, trade execution and adviser compensation, therefore the emphasis on scale, depth and breadth of authenticated fiduciary counsel supported/provided, tangible quantifiable value added and pricing. Just the financial services industry’s iteration of the modernity mantra: faster, better, cheaper.

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Bill Ramsay said:

May 24, 2011 — 5:56 PM UTC

Interesting. So Joe Duran thinks pricing will come under pressure, yet United Capital’s AUM fees are 100 to 175 basis points, and they use mutual funds and separate accounts so there are costs on top of that. And they add another 10 to 50 basis points for their comprehensive services. So all in, even for > $2mil they are charging probably 1.8% to 2.5%.

If that is an example of what pricing will look like in 10 years, then I’ve got zero worries about price pressure. Anybody that thinks 1.8% to 2.5% is a low price better rethink their business model.

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Stephen Winks said:

May 20, 2011 — 12:53 AM UTC

Thanks Jim,

The opportunity is for EnvestNet, Focus, Dynasty, Fortigent, HighTower et al to create an authenticated prudent investment process that makes the continuous comprehensive counsel required for fiduciary standing, safe, scalable and easy to execute. So far, all are replicating the non-fiduciary brokerage approach to advisory services which treats advice as a product which is sold by IARs rather than an expert prudent process managed by a RIA.

Scale requires a functional division of labor (adviser, CAO, CIO), a more structured prudent process authenticated by statutory documentation confirmed by expert opinion letter and advanced technology supporting a more sophisticated approach to portfolio construction—none of which is presently in place in any of the firms cited. This is the industry redefining innovation which will win market share at the expense of firms less responsive to the best interest of the consumer.

Brokers and advisers are attracted to a safe, scalable and easy to execute fiduciary solution because it is in the consumers best interest. As skilled relationship managers—it is easy for advisers to dislocate business, formerly beyond their reach, which has been based on a series of disjointed unrelated transactions where it is not only not possible to add value but there is no ongoing accountability of the broker for recommendations. This is in contrast to the adviser addressing and managing investment and administratives values on behalf of the client in the client’s best interest.

This is a marketing slam dunk for properly resourced advisers to win market share, but is not possible for todays brokers who can neither acknowledge they render advice or owe their clients the ongoing fiduciary duty of care and loyalty—as it is a violation of the internal compliance protocol of their b/d.

The industry is on the cusp of industry redefing innovation which will reorder the industry around fiduciary duty and introduce a new professional standard and standing which will become the threshold criteria for earning the trust and confidence of the investing public.

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Jim Cannon said:

May 19, 2011 — 8:49 PM UTC

Couldn’t agree more regarding the fiduciary model. I hope the bright light continues to shine on this area.

Regarding the issue of “scale” (one must distinguish between scale which benefits advisors, the owners of firms or clients), there are notable examples of industry innovators that are providing services, including expert resourcing, to independent advisors that deepen their capilities, create efficiencies and lower their operating costs (See Envestnet, Focus Point Solutions, Dynasty Financial Partners, Dynamic Wealth Advisors), and most don’t have brokerage firm conflicts.

But, there will always be conflict (See the aggregators’ Form ADV’s and business plans to roll-up advisory practices!), and disagreements over which model is best for advisors and clients. The opportunity now, however, is that the current environment demands brokerage firms, custodians, product sponsors and every other vendor in the advisor supply chain to intensely compete for their share of independent advisors’ business. And, that will do nothing but benefit clients.

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Stephen Winks said:

May 19, 2011 — 7:29 PM UTC

Jim Cannon,

You are absolutely correct. If properly resourced, based on cost relative to value added, independent RIAs should own the advisory services, assuming all things being equal.

Joe Duran’s point is all things are not equal. Scale and proper expert resourcing are the determinig factors, neither of which is within the reach of the sole practitioner. Thus, it becomes imperative that either custodians significantly up their expert advisory services support which is not likely as they do not want to be prescriptive in their support which would result in them incurring fiduciary liability on all advisers using their services without any offsetting revenues, or the emergence of advisory services intermediaries like United Capital. The distinction Joe makes between Wealth Management and broker advice products is fiduciary standing which is still a work in progress even at United Capital. Thus, the entire industry must evolve toward an expert fiduciary standard, entailing varing degrees of internal organizational conflict, or no conflict at all. Joe is simply saying he has a clearer path to necessary innovation than that of massive brokerage bureaucracies which must overcome conflicted constituencies working counter to each other, outdated technology and a cultural predisposition against advice and fiduciary standing.

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Jim Cannon, Dynamic Wealth Advisors said:

May 19, 2011 — 5:52 PM UTC

Good topic, obviously based upon the input, but getting back to Joe Duran’s thesis….there continues to be and always will be a very significant segment of advisors that desire true independence, which is tyically not available through aggregators, roll-ups or many of the RIA “ensembles” we’re know today. Just look at the success of the IBD model over the last 30 years. The model has evolved, but in most cases is still highly desired.

Like the noted baby boomers desire for “customized and cheap services”, most independent minded financial advisors are seeking value based solutions that enable them to operate in an open source, yet structured environment. Certain RIA custodians really understand this and are executing recruitment strategies much like the IBD community has for several years. Today’s advisors have lots of choices — too many in fact — and are in an outstanding position to have a practice that is not only independent, but offers a breadth of services due to the many outsourcing providers that are available today.

We’ve experienced disruption, major change and adversity in this industry for years, including the last few, and independent minded advisors continue to thrive. Although still sadly not understood by many wirehouse advisors, it’s not the firm that makes a client relationship a success; it’s the personal attention, compassion and emphathy that only an individual financial advisor can bring to clients that creates the value. I wouldn’t bet against them now.

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Stephen Winks said:

May 18, 2011 — 5:03 PM UTC

How we approach portfolio construction is changing radically:
1. It will be offered in a fiduciary construct.
2. Expensive packaged investment products that cannot be client specific by virtue of an investment mandate specific prospectus will be rendered obsolete.
3. Total cost all in, including investment cost, trade execution cost and adviser compensation will be 50 basis points, could be less.
4. Redundant account administration cost at the product, trustee and client levels that adds no value will be rendered obsolete and will just be performed once at the client level.
5. Scale is essential which is achieved through a prudent investment process for each of the ten major market segments advisers serve.
6. Safety is achieved through authentication of the prudent investment process with each of its three financial services (asset/liability study, investment policy, portfolio construction, monitoring and management) by audit path to necessary statutory documentation, confirmed by expert opinion letter.
7. Expert standing of the adviser for each of the ten major market segments advisers serve will be achieved by substantive professional certification with similar technical competency standards to the CPA.
8. Real time data and data management required for continuous comprehensive counsel will require a functional division of labor to support the specialized skilll set of a CIO function.
9. The administrative function will also require better resourcing of a specialized administrative skill set so more can be done with less greatly elevating the level of service and counsel advisers can provide.
10. Advisers will have a more specialized market focus geared to providing exceptional counsel to the market segments to which they are certified and focused, much like medical specialization.
11. Conflicts of interest will be managed rather than disclosed which just perpetuates conflicts.
12. Totally different technology is required for advisory services than commission sales.

All these advances in process and technology either exist or are presently in the works by a variety of resources and will materially reshape the industry.

The industry giants do not think things are changing and will not realize it until it is too late. The conflicted strategy of owning broker/dealer affiliates and asset management affiliates has largely crippled the industry’s largest firms to innovate because of its adverse affects to status quo. This dangerous insularity to innovation in the best interest of the consumer uniquely play to the benefit of large scale RIA firms Duran envisions but requirs much more structure than presently exists. Perhaps the nearest iteration is large scale TAMPS like EnvestNet/PMC who need further innovation but do not have quite so far to go and face no conflicts for innovation. Essentially, many of our largest institutions are beginning to become high cost, low value added alternatives because of their aversion to innovation and inability to manage conflicts of interest in support of the fiduciary standing of their brokers. This is a high risk strategy where our largest firms are betting the ranch against all odds. The consumer’s best interest always prevails in a free market.

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Stephen Winks said:

May 18, 2011 — 4:59 PM UTC

This will be a classic Business School case study for years to come.

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Frederick Van Den Abbeel said:

May 17, 2011 — 9:20 PM UTC

Informative article. I wonder what role do-it-yourself brokerage firms have on pricing in the years ahead? Will they commoditize the value of advice and I guess the larger question, will RIAs continue to support firms who work with both channels (i.e. Retail Branch & RIA) if these same firms end up commoditizing the value of said advisors advice and put strain on advisory fees going forward?

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Rick Johnson said:

May 17, 2011 — 3:49 PM UTC

I think most of this thinking revolves around obtaining larger clients like mentioned in the article. If you sell what you do based on the price of your fees or even your performance, then you get what you deserve. However, not everyone wants to work with $2,000,000 clients and above. Is your goal in life to grow your RIA firm to billions in AUM and make millions yourself? How is that a benefit for your clients? This is a lofty goal for some and more power to you, but this is not the end all to be all for everyone in the RIA business.

In my opinion, there will always be a niche working in the $100,000 to $250,000 average client range, because of all these RIA’s who will be spending their time chasing after the $2,000,000 clients. Personally, I can provide a lot more hands on advice that is truly beneficial to these $100,000 to $250,000 types of clients. These people need my advice more than a client with $2,000,000. These high net worth clients, I agree are demanding and will expect to pay lower fees. If they are looking at you when they walk in the door demanding lower fees, then what does that say about you if you go along with it? Further, what does that say about how they value you as an investment adviser? Who wants a business where your clients are telling you how much you can make and have little respect for you when they walk in the door? Not I, for one.

A client with $200,000 who finds me and my advice will be ecstatic that they do not have to do business with banks, Wall Street firms or primarily insurance agents ever again. Also, they will not mind paying my fees that I set and require from each client for my advice. The bottom line is that I control what I make. Not my clients.

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Jeff Spears said:

May 17, 2011 — 3:20 PM UTC

We have reached a Tipping Point.

Wealth management firms need to adjust their business to effectively attract and serve the next generation of wealth creators. The strategy needs to be a mixture of the “Expedia solution” (which new wealth grew up using) and the old business model that provides personal advise based on experience.

Fees will go down, but if implemented correctly so should costs.


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