Can't tell a book...

But more troubling than the questionable data is Hurley et al.'s ignorance or indifference to larger trends in financial services upon which the independent advice movement is riding. I'll cite just two.

First, financial consumers these days are somewhere in a long learning curve regarding advice. For instance, during the corporate failures of recent years, many were still shocked to learn that stock analysts at brokerage firms were influenced by underwriting considerations. I'm convinced that most people still don't realize that their stockbrokers or insurance agents have no duty to place their client's interests ahead of their own or their firms'. Yet we are still seeing considerable demand for independent financial advice, which will grow exponentially as the public gains a better understanding of the financial world.

Then there's the fact that financial advice is delivered much more efficiently by independent advisors. Entrepreneurial advisors have a great advantage over their captive counterparts in controlling expenses, adapting new strategies, utilizing the latest products, services, and technologies, and even changing business models. When an advisor finds her offices are too small or too extravagant, she moves. What does a bank do with the building it owns? Insurance companies have already figured this out, and brokerage firms are early in the learning curve (Banks? Fahggedaboudit). Providing financial advice through employees in expensive offices only made sense with profits from proprietary products. Those days are over, and so are captive advisors.

In fact, much of the problem with Hurley's analysis of practice economics comes from inadequately valuing the role of the owner of an independent practice. The authors believe that practices will be consolidated by institutions that have profits valued at a higher multiple. Yet this math only works by the accounting sleight of hand by which the independent advisor's compensation is divided into owner's comp and job comp. The consolidator then takes the owner's portion, replacing an advisor making, say, $400,000 a year with an employee making $200,000. I'd suggest the only way an independent practice will work is if you have an owner/advisor(s) with at least the potential to make $400,000 running it.

The Report's Insights

So much for the study's flaws. It also contained a number of valuable insights that Ms. Weinberg pointed out. The great bull market of the '80s and '90s did mask inefficiencies in many advisory practices. Growing numbers of clients with rapidly growing portfolios put a premium on revenues rather than profit margins. But rather than a structural flaw, this seems rather typical of most industries during boom years. Now advisors are in a leaner part of the cycle, which calls for more fiscal responsibility. While not much fun, most practices can be brought into line with this new reality, certainly without an industry shakeup.

One trend that the paper didn't mention regarding rising costs (but which Ms. Weinberg assured me was underlying their thinking) is increased regulatory compliance. If anything could bring about a massive consolidation of independent advisors, it's the skyrocketing price of compliance.

The factor identified by the report that could be viewed as a consolidation of sorts is the increased demand for well-trained, entry-level advisors. Today's practice economics suggest that rather than leaving to start their own firms as did previous generations, new advisors largely will be absorbed into existing practices, to leverage principals and increase economies of scale. This is already happening, and we are indeed beginning to see entry-level salaries rise. I suspect, though, that rather than creating a crisis of overhead, once a reasonable career track complete with ownership equity emerges in the advisory industry, these new advisors will contribute far more than their costs to the revenues and profits of their firms.

The Back to the Future paper paints a bleak future of consolidation with the remaining independent firms struggling for survival. But to me the same "evidence" and broader experience suggests a brighter outcome. I take heart in the droves of brokers who are deserting wirehouses for the better economics and client service offered by the independent practice model. The relatively high values paid for advisory practices by advisors themselves on the independent market that has emerged in recent years is reassuring as well.

The biggest disappointment of this study is to find yet another authoritative source willing to write off 94% or so of independent advisors–rather than to provide smaller firms with useful information and resources to effectively deal with the financial challenges they face. As an industry, our challenge is to ensure that independent financial advice remains economically viable, not to morph it into something more profitable, and less beneficial to the clients. At least that's my vision.

Bob Clark, a former editor-in-chief of this magazine, sagely surveys the advisory landscape from his home in Santa Fe, New Mexico. He can be reached at [email protected].