Why Joe Duran is dead wrong on 2015 marking the end of the Golden Era of the RIA

Brooke’s Note: The timing of Joe Duran’s column was ideal. On Friday, he wrote about the new competition in the financial advice field — which just happens to be the topic of our webinar this Wednesday. Even better for our purposes of sparking spirited debate, he took many of the same inputs and came to an entirely different conclusion. He sees: Uh-oh. We see: Is that all ya got? The RIABiz webinar will delve into many of these new offerings on the premise that they are not what they appear and pose no real threat to the RIA model. There is a danger in being blithely heedless of new competition. But the perils of crying wolf are, I believe, worse. The RIA has a golden track record. Most of these new models really have little track record at all.

In a column for InvestmentNews Friday entitled The big squeeze: End of the Golden Era, Joe Duran laid out his case for why the great rise of the RIA business to its $5 trillion-and-rapidly-growing stature has only three months to go before it starts to revert to its more humble mom-and-pop underpinnings. See: The 10 biggest threats to the RIA business heading into 2014.

In describing the current state of affairs, the chief executive of United Capital Financial Advisers conjures up an idyll of the speedy and nimble before the arrival of the gluttonous and predatory.

Duran writes: “We’ve been like a herd of antelope happily enjoying a wonderful pasture with no huge threats and plenty to eat, but there are lions and elephants coming into our Eden, and they are going to eat all of our food and try to devour us, too.”

The chief of his own $10-billion RIA, largely formed in a roll-up manner, is quite specific about when the financial Gods allowed Eden to come into being: 1990.

Lots of people might agree with him about that date. It was about that time that Chuck Schwab got serious about creating a purpose-built custodian for RIAs. Schwab now has $1 trillion in custody and about 7,000 quality RIAs adding to that haul all the time.

Boiling point

Duran is also clear about when the “end of easy pickings,” as he refers to these asset-gathering efforts by old-fashioned local RIAs, will begin: 2015. See: Joe Duran lays out his latest case for why wirehouses — and classic RIAs — risk losing out to a coming oligopoly of new-model holistic firms.

Though Duran did not explain what exactly will happen between now and the start of the new year, he said “four formidable forces” have built momentum that will be enough to toss us out of Eden and onto the hard tarmac of normal free enterprise competition.

Duran response…

With that threat of hard times almost upon us, I read Duran’s argument carefully to ascertain what precisely will change in the next three months or if, perhaps, we’ve already had our pot boiled like that unfortunate frog we often hear about. See: What is the value proposition of a financial advisor — and how is a budding RIA culture upping the ante?.

Thriving or just surviving?

I certainly see new competition. In fact, the same day Duran’s column appeared I identified a contingent of advisory businesses that have scale and momentum — and the ability to get much bigger.

But I believe that the Golden Era for RIAs is just getting started. The cottage industry springing up to support RIAs is only in about the third inning and RIAs are enjoying a tailwind in addition to their own fiery animal spirits of entrepreneurialism.

Duran himself precedes his presentation of the Four Forces that threaten RIAs by admitting that reports of the demise of Golden Era have proved to be greatly exaggerated.

“We have seen threats before,” he writes. “Remember when accounting firms, law firms and banks were all going to take away our business in the ’90s? But those threats petered out and we have continued to thrive. And while technology and products have certainly evolved over the past few decades, it’s been business as usual for most of us.” (Brooke’s Note: Joe, if you respond to this article formally, it would be especially helpful to our readers to know why those threats 'petered out’ and why this round of threats is deadlier than those.)

Joe Duran is a serial entrepreneur.
If he believed that robo-advisors were
so great, I venture to say
he’d start one on his own.

Resource dominance

But now, Duran warns, there is a “squeeze happening” that starts with what he scarily calls the Mega D2C. He refers to the major direct-to-consumer efforts being implemented by large custodians and giant mutual funds to go directly after high-net-worth investors.

Duran sums up the threat posed by what I can only suppose are the 'phono’ efforts of Schwab Private Client and Vanguard Personal Advisor Services in this way: “They have strong client brands, a huge size and pricing advantage,” he writes in the IN article. “They keep improving their wealth management tools and have endless resources and a unified culture.”

There are arguments to be made both ways, but certainly the RIA Golden Era has big, ponderous, “unified culture” firms with big brands to thank for encouraging them their start in life. And unlike those firms, RIAs have never had their brands tarnished and have been able to adapt to local cultures and form cultures suitable to high net worth investors. See: Part II: RIA custodians’ answer to challenges to their monolithic control: We still have big-time scale advantages.

Along the same lines, but identified as a separate force, Duran points to a second coming of big banks and brokers, specifically Bank of America’s Merrill Lynch and Wells Fargo & Co., which he says are charging nice, reasonable prices these days and offering good planning through new software programs. If he hasn’t already, Duran should read Brain Hamburger’s comments in our article about Merrill Clear. Hamburger makes a good case that it is still a marketing program aimed at selling annuities — and annuity fees are still robust as far as I know. See: The 10 things Morgan, Merrill, UBS and Wells Fargo could do if they really, really wanted to stem the RIA tide.

Rise of the 'Super RIA’

A third argument proffered by Duran almost suggests that Mark Hurley was right — just a decade ahead of his time. In his famous “Undiscovered Managers” study, Hurley predicted small RIAs would eventually consolidate to about 50 mega-firms. Duran does not go that far but strikes a similar note by identifying what he calls “Super Advisors” as one of the four forces. See: What to make of Mark Hurley’s latest prophesy that most RIA firms will go out with a whimper.

Duran writes: “In the next few years, there will be more than a dozen $10 billion wealth management firms and as many as five with assets under management of $25 billion. They will do what you do, but in a scaled and technology-powered way, nationally.” See: United Capital eyes 'Paragon’ brand for the $10-million-plus set after nabbing $1 billion RIA in Seattle.

Duran’s super-RIA theory is not far-fetched. We are already seeing it happening at companies like Mariner Wealth Advisors, Banyan Partners, Aspiriant and Duran’s own United Capital.

But even back-of-the-envelope math does not make these numbers add up to a game-changer for more local firms if there are $10 trillion to $17 trillion of consumer assets floating around out there — and that’s just in the United States.

Key man

Last but not least, Duran lists robo-advisors as one of his four end-of-innocence forces. Again, he is concerned about their ability to build brands and to compete on price. “They are charging a fraction of what any conventional adviser charges and providing better tools than many independent firms. Take a look Wealthfront’s website, FlexScore’s dynamic financial planning or LearnVest’s new financial plans.” he writes See: Online RIAs will mostly fail — and here are 10 reasons why.

Of all the arguments Duran makes, this is the one I am least certain that he actually believes. Duran is a serial entrepreneur, a proven success in business and a man of action. If he believed that robo-advisors were so great, I venture to say he’d start one on his own. Schwab has already signaled its intention to do this and entrepreneurs like Ric Edelman have also made a robo-advice an option.

For now, Duran is banking his success on having top-notch independent advisors operating under a brand name little known to the end-investor and allowing the whole framework to be energized by one charismatic figure that energizes the whole operation. That would be him. In other words, his success is not because of his big-business tactics but because he uses all the essential ingredients of a classic, standalone RIA. See: Joe Duran explains United Capital’s 100% revenue growth to $100 million since 2012 and the firm’s complex plan to grow faster.

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Let the great debate begin.

RIABiz’ live, interactive webinar, “How RIAs Can Swim with the New Competitive Sharks,” features editor-in-chief Brooke Southall, MarketCounsel’s Brian Hamburger, David B. Armstrong of Monument Wealth Management and will be moderated by RIABiz’ own Chicagoland reporter, Lisa Shidler. Register here.