Counterpoint to Mark Hurley study: Wealth management firms are in rapid transition

Just when we thought that we had seen the last of the doom-and-gloom crowd, it is back, as evidenced by the latest white paper from Mark Hurley. The paper weighs in at over 115 pages. See: What to make of Mark Hurley’s latest prophesy that most RIA firms will go out with a whimper

While we applaud Mark for his ongoing contributions to the RIA industry, I do believe that the third in his trilogy of “the sky is falling” white papers makes some very far-reaching, and I would argue questionable, conclusions.

Hurley’s premise is that the advisory industry does not scale, and therefore most firms do not have any long-term value that can be monetized. But where his argument begins to take on water is that he is basically assuming that it will stay that way.

Yes, many firms are not automated, or streamlined. Many do not have a scalable infrastructure to support growth. However, with the many advancements in technology, there are many opportunities for advisors to build in that scalability, transforming their businesses into lean, mean, scalable machines that will generate long-term business value. Creative destruction and the inevitable ROI of technology will make it so. It’s just a matter of time.

Hundreds of millions to technology

For example, 10 years ago, advisors were using dial-up modems with limited bandwidth to process business. Now, due to the competitive “arms race” in technology development led by the major custodians who are spending literally hundreds of millions of dollars, advisors have access to cutting-edge, integrated, powerful workstations that rival and even surpass the capabilities of Wall Street. The competition between custodians means that even if advisors don’t invest in technology, their custodians will, providing advisors with the horsepower, efficiencies, productivity and the scalability to create leverage and value.

The success and growth of the independent wealth management industry also refutes Hurley’s assertions. In only its first act, the RIA industry is thriving, growing and building the inter-generational client relationships that will ensure its future success. There are literally three decades, trillions of dollars and enough statistics to make even Cerulli researchers dizzy that support this upward trend.

The net asset flows from traditional competitors in the wirehouse and banking channels to RIAs have been net positive by a large margin for the last decade, with early indications from the custodians that this trend is accelerating. If RIAs aren’t creating value, than who in the financial service industry is?

Advisors are busy building passionate, healthy businesses. The perfect storm of Wall Street collapse, Baby Boomer retirement and the rise of independent advice will propel the industry forward. These entrepreneurs are building real value – the kind that will live on and be passed to the next generation.

According to the recent TD Ameritrade Institutional RIA Sentiment Survey, the majority of advisors are looking to pursue an internal transition to ensure the continuity of their firms and plan for a smooth transition for their clients and employees. This bias towards a private transaction is a fact that Hurley pushes aside in developing his conclusions that advisory firms lack public value. My guess is that if you asked an industry veteran that they would ascribe great value to what they’ve built. The broad conclusions Hurley makes are a disservice to the industry.

Naysaying is not helpful

What we need are leaders with vision, inspiration and a compelling message, not another naysayer to dampen the excitement and encourage a quick exit to the sidelines when the going gets tough.

When Hurley’s first paper came out over a decade ago, Bob Veres, the esteemed industry observer, penned a seminal article titled, “Nuclear Autumn.” He too, fell victim to the prediction of a vanilla, rolled-up industry and unfortunately gave Hurley’s flawed analysis a moment in the sun.

History has proven otherwise.

So, my humble recommendation to Hurley is to leave the white-paper writing to the professionals. Let’s get back to the basics of shining a bright light on how independent RIAs are making a difference in individual’s lives, while the industry builds real value in the US economy.

Timothy D. Welsh, CFP® is President and founder of Nexus Strategy, LLC, a consulting firm to the wealth management industry and can be reached at tim@nexus-strategy.com