THE LONG VIEW

Evan Simonoff

Advisory firms will start to look different over the next few years — just as their clientele will .

DECADE AGO , ANYONE WHO THOUGHT A FAST-GROWING

Kansas advisory firm like Creative Planning would sport a $ 16 billion valuation ( most definitions of public midcap companies fall under $ 10 billion ) would get laughed out of the room . So trying to anticipate what firms will look like in 2035 requires a powerful telescope . However , the entry of private equity and credit into the advisory space is already having profound consequences , as it fuels consolidation , solves the problem of firm founders finding successors and provides access to the capital needed for firm growth and technology .

Two separate dynamics are in play as the advisory business evolves . The first is the interaction between financial advisors and their changing client base . The second is the interplay between the advisory business and the financial services industry at large .

Sticky client relationships , with low attrition rates , mean advisories are enjoying steady cash flows , something that ’ s caught the fancy of private equity firms and other investors . But researchers such as CEG Insights and J . D . Power think that RIAs ’ retention rates are attributable to bull market tailwinds and inertia almost as much as loyalty . CEG , in particular , found that many clients may be more open to switching firms than their advisors realize .

Moremore , the trend to change advisors could be further fueled by the generational wealth transfer over the next two decades , since adult children often shift assets away from their parents ’ advisors after the older generation dies . A recent Natixis survey claimed 41 % of advisors see the surge in inheritances

A recent Natixis survey claimed 41 % of advisors see the surge in inheritances as an existential threat to their business . as an existential threat to their business .

One of the challenges today ’ s big , asset-rich RIA firms face is that their client bases are skewed toward pre-retirees and retirees age 55 and older , often much older . In the next decade , a big majority of those clients will enter the decumulation phase of their lives , and assets will flow out the advisors ’ doors .

The upshot is that tomorrow ’ s dominant firms will be structured to work with clients in an earlier stage of life and accordingly will look very different from today ’ s big players . As one custodian told a group of chief marketing officers two years ago , there are thousands of high-earning clients in their 30s seeking advice . But they ’ re looking for different services than older , more traditional clients are .

Advisory firms serving emerging affluent clients may approach their peak profitability in the next decade . Right now , their clients are focused on issues like compensation negotiations , stock options , debt management and possibly launching or expanding their own businesses . If firms can continue to add these new clients , they are looking at much bigger streams of recurring revenues in the coming decades .

Because advisory firms ’ service portfolios depend on what a client can or wants to pay , the five leading business models still revolve around a client ’ s net worth . These are :

1 . Full-service , multi-family-office style

DECEMBER 2024 | FINANCIAL ADVISOR MAGAZINE | 25