COVER STORY

The decade from 2012 to 2021 was an extraordinary time for wealth managers . A raging U . S . equity bull market was accompanied by historically low inflation . Typical diversified portfolios generated average annual inflation-adjusted returns that were nearly three times those of the previous decade .

Record low interest rates accompanied the bull market . Debt became plentiful and cheap . PE firms awash in uninvested capital saw the wealth management industry as an opportunity to put that capital to work , along with large amounts of leverage . More than 100 buyers emerged , and an industrywide M & A feeding frenzy followed .

Nearly 1,600 transactions were consummated as competition drove prices to stratospheric levels . An industry accustomed to pricing metrics of eight to 12 times cash flow saw transactions completed at as much as 20 or even 30 times .

But whether acquirers paid too much did not matter . Asset appreciation papered over any mistakes . Buyers bet heavily on a rising tide and won big .

Meanwhile , many wealth managers went to sleep . They largely ceased marketing efforts and depended on either the prospects handed to them by custodians or erstwhile referrals from existing clients . Seventy percent of the industry ’ s growth came from asset appreciation .

Industry participants placed little emphasis on improving efficiency or recruiting new professionals . Although their fees climbed , many wealth managers provided less value to clients . By one estimate , nearly half are now de facto investment-only firms . But why worry about such things when one ’ s EBITDA is compounding at 15 % to 20 % annually from just turning the lights on ?

Unfortunately , the party ended in March 2022 when the Federal Reserve began to aggressively combat inflation . Markets corrected and have yet to fully recover .

Today the industry remains fragmented and discombobulated . There are nearly 15,000 RIAs , and they have a median of $ 412 million in AUM . Their management and clients are now much older . A chronic shortage of qualified professionals will soon worsen as nearly 37 % of the industry retires over the next decade . And cybercriminals meanwhile pose an existential threat to advisors and their clients ’ wealth .

The easy money from M & A is now gone , and aggregators are paying for some of their earlier sins . Debt is much more expensive and far less available . Some are scrambling to recapitalize their balance sheets . More problematic is that many are not single businesses but rather confederations of small firms that have not recruited new clients for many years . It will be a mammoth task to transform them into integrated , growing companies .

Immense Opportunity Ahead However , there ’ s good news — an immense opportunity is at hand .

Notwithstanding the hype about “ boomers ,” more than seven million more Americans are age 45 to 60 than 60 to 75 years old . Hundreds of thousands of them will need financial advisors over the next 10 to 15 years . More importantly , the current cost of acquiring new clients is a fraction of the value that their fees create for the wealth managers who serve them .

However , most of the industry is utterly unprepared to capitalize on this opportunity . Recruiting new clients is brutally hard , and most advisors rely on outdated operating models that discourage their best marketers and keep businesses from achieving scale . They have anemic brands and comfort-

IMAGERY VIA GETTY IMAGES DECEMBER 2023 | FINANCIAL ADVISOR MAGAZINE | 39