Present Perfect: What the Future Tells Us About Today's Advisor

The section on the traits of successful buyers and sellers of advisory firms, on the other hand, is excellent, and is a must-read for advisors who are even thinking about transitioning their firm or acquiring one. Hurley provides 10 tasks for each side of a transaction, which clearly have been composed by someone with both substantial expertise and considerable hands-on experience with these transactions. For sellers these include: "Do not go to market until they are mentally prepared to sell their businesses"; "Recognize that buyers invariably underpay for rapid assumption of risk and overpay for certainty"; and "Accept that they are selling their firm to, and not merging with, the buyer." For buyers: "Understand that all potential acquisitions are very-low-probability events"; "Recognize that success in transactions is ultimately based more on psychology than finance"; and "Focus on ensuring a continuity of client experience."

With all that said, the best part of "The Brave New World" is the discussion of why the present is truly different for independent advisors and how that will affect the industry in the future: "An unprecedented bull market, a sudden spike in demand for independent financial advice, and limited competition for clients allowed even average wealth management firms to enjoy two decades of financial success," he wrote. "However, the macro factors are about to change—in a fundamental way. [...] The tailwinds enjoyed during the industry's infancy aren't simply gone; wealth management firms are now flying into stiff headwinds."

Hurley cites seven current macro factors that he believes "will reshape the industry over the next decade." Some seem better-founded than others, while a few, such as increasing operating costs, greater regulatory scrutiny and higher risks of litigation, are pretty common knowledge. Taken together, it's a comprehensive list of the things advisory firm owners should be at least thinking about today. Here are three of the most interesting:

Advisors' client bases are aging and shifting to consumption. Yes, this is a well-known problem, but Hurley's detailed analysis of its effects when combined with lower returns on lowerrisk assets and the end of the 20-year bull market on advisory firms is the best I've seen: "The combination of higher average gross capital consumption and lower nominal rates of return on [lower -risk] investments results in clients consuming much more of their capital over time on a net basis. Consequently, their assets gradually decline over time. [At the same time] wealth managers are effectively capped in the number of new clients that they can service at once. Thus, [many firms] will not be able to accept a sufficient number of new clients to offset the aging of its client base."

Fewer millionaire households. "The supply of millionaire households (the core prospective clients of wealth managers) declined sharply with the 2008-2009 financial correction and, to date, has not recovered to pre-correction levels." This seems to be a more questionable concern. Hurley cites that in 2007, we reached an all-time high of 9.2 million households with $1 million or more in investable assets. In 2008, that figure dropped to 6.7 million. Today, it's up to 8.6 million. That's off by 6.5% from the high, but it's also a 28.3% recovery from the '08 low. To my mind, that's a pretty positive trend. What's more, back in 1999 there were only 7.1 million millionaires—so we're up 21.1% from Hurley's golden age of independent advice. Seems to me, by this metric anyway, that things are looking up, not down, for independents.

Founders are getting old. Mark's belief that the smaller "books of business" firms are too small to be acquisition targets for the largest firms is undoubtedly right. Yet, he seems to have overlooked two other factors. First, they aren't too small to be acquisition targets for other smaller firms or for those firms in the "tweener" category who also want to grow. What's more, the term "book of business firm" is itself a misnomer. In the old days, when commissions were the sole source of revenue, it would have been accurate, but with today's RIAs that are AUM fee-only, those assets do have value to other firms and to their junior advisors. While time is running out for baby boom advisors to create succession plans to transfer their ownership before they retire, we are currently witnessing an entire industry positioning itself for succession or for sale.

Simply put, "The Brave New World of Wealth Management" is Mark Hurley's best research paper, by far. It's far more authoritative than his past efforts, and consequently, his analysis of the present state of the industry is much more useful for independent advisors, regardless of firm size. While his bias toward the largest of firms is understandable, it's also unfortunate: The paper would be even more useful for many more advisors were Hurley to turn his insights and knowledge toward furthering the industry's evolution into business models that enable smaller firms to grow into larger firms.