Advisors, Prepare to Battle for Clients and Employees

It's a jungle out there. That's what the wealth management industry will morph into in the next decade or two if the predictions of Mark Hurley prove accurate.

Hurley, the former CEO of Fiduciary Network who founded and heads Digital Privacy and Protection, delves into this survival-of-the-fittest scenario in a recent interview with ThinkAdvisor.

In his new white paper, "Welcome to the Jungle: The Next Phase of the Evolution of the Wealth Management Industry," Hurley compares the "genteel club" it is today with the fiercely competitive advisory space he envisions.

"The first rule of the jungle is not to get eaten," he says in the interview. "If you play catch-up, you're losing. The big winners are going to be the first movers" to grab new opportunities.

Hurley, who has written a number of white papers over the years, put two years into researching and writing the new one. He interviewed a dozen or so industry thought leaders, including Brian Hamburger, Michael Kitces, Ray Sclafani and Mark Tibergien.

"It's a compilation of ideas we gathered," notes Hurley, adding that he and his co-writers talked with "countless numbers" of firms and industry folks.

Hurley discusses critical traits that the most successful independents must have in order to rise above the competition. Much improvement is needed, he says: Financial advisors only "pretend" to be specialists, and they don't actually have brands, as they claim.

He foresees "a renewed focus on organic growth," but most advisors, he says, are ill-prepared to take advantage of that opportunity.

Hurley left the Fiduciary Network in 2018. Digital Privacy and Protection helps businesses and professionals, such as physicians, avoid cybercrime victimization.

In the phone interview with Hurley, who was on holiday in Majorca, Spain, he examines the "existential threat" of cybercrime. "If you don't have good cybersecurity, you should expect to get an enforcement action," he says.

Here are highlights of our conversation:

THINKADVISOR: Please discuss some of the predictions you make in your new white paper. First: The wealth management industry will be "less genteel" and will become a "jungle."

MARK HURLEY: More people are going to battle not just for clients but for employees.

You'll steal talent from your competitor.

The first rule of the jungle is not to get eaten. Therefore, the smart firms are going to preemptively make sure they lock their people down by paying them a lot more compensation tied to being there.

Next: Ten traits will be common to the most successful industry participants over the next 10-15 years.

No. 1 is having decisive owners with very long-term investment horizons. They'll take advantage of immense organic growth opportunities by pouring a lot of investment into their business but won't realize the benefits for many years.

They'll make a lot of money, but it will take a long while.

So they'll have to be decisive because the steps they take now are going to determine their outcomes 15 years from now.

The big winners are going to be the first movers. These people are going to change the terms of the game as far as what offerings look like, operating model, culture [and so on].

They're going to get out there and start doing all the things they need to do to capitalize on these opportunities right away because the net present value of a client today in zero to seven years is going to be so much higher in, say, eight to 15 years.

If you're playing catch-up, you're losing.

Cyber threats will increase costs and limit productivity, you write. So will cyber threats be worse than they are now?

Absolutely, and for several reasons.

Cyber[crime] is the only true existential threat to a wealth manager. If you screw up cyber, you have several problems.

Cyber [insurance] policies have exclusions that are very broad; for example, "employee error." They are extraordinarily hard to collect on.

If you don't have good cybersecurity, you should expect to get an enforcement action.

There are new rules from the SEC. They should be approved in the next three months:

You have to disclose to your clients the cyber risks they have for using your service.

Custodians require that the client take almost all the risk of cyber theft in the account.

Advisors have to explain that to the client. If you get hacked, and that money gets stolen and you don't get it back, it's gone — and the client agrees to that [beforehand].

What else makes cyber an existential threat?

If an advisor has poor cybersecurity and it results in some of the clients' accounts being hacked, they have to find another custodian.

Wealth management advisors that are deep specialists have immense opportunity, you write.

Today, advisors who call themselves specialists are too broadly focused.

There really aren't any specialists. People pretend to be. They'll say, "I serve business executives" or "I serve doctors." That's too broad.

Real specialists are going to play a role in helping their clients not just manage their wealth but also create and build it.

For example, if I'm an advisor with expertise working with new car dealers, I'm going to know more about these car dealerships than most. That puts me in a position to help build that business.

The real specialists will be very profitable and extraordinarily sustainable.

The big firms will start acting like big firms "in other industries," you forecast.

These companies say, "We're really good at [such-and-such], and we'll do A-B-C-D-E-F for X dollars" because they know their competitors can't afford to do that much for the same price. That's how they squeeze their competition.

That's already starting to happen in the wealth management industry.

[Offerings] will be much broader and much more comprehensive. Part of the reason is because clients are going to demand it.

M&A transactions will be smaller except for some potential aggregator mergers. But later in your paper you say that aggregators won't be buying other aggregators. Please explain.

Most M&A transactions will be smaller because of the vast preponderance of midsize firms.

What's driving the aggregators is the financial incentives of private equity providers.

They have so much money to invest. Their focus is putting money to work, not on the returns side.

One of the eight differences in the future operating environment is a renewed focus on organic growth. However, most advisors are unprepared to take advantage of this opportunity. Why?

Because they've stopped marketing for a very, very long time, and restarting is extremely difficult. It requires a change in culture.

Most people in wealth management are in very comfortable, relaxed [job situations]. Organizations that grow organically tend to be very intense.

Also, the way you generate additional clients is by building a referral network with centers of influence, and that takes a very long time. You have to have relationships with people and build their confidence in you so they'll refer clients.

What's another reason that advisory firms aren't prepared to grow organically?

Most people don't have brands. They may think they have a brand, but a real brand attracts lots and lots of potential clients to the organization, like Schwab and Fidelity.

So organizations have to build brands to take advantage of the opportunities.

There are hundreds of thousands of potential new clients up for grabs. The question will be: Who will take advantage of that?

The guys coming after us are much bigger [in numbers]. There are 7 million more Americans between ages 45 and 60 than there are between 60 and 75. So it's not about boomers.

Artificial intelligence software won't affect wealth managers for some time. Why not?

Two reasons. It's extremely expensive. All AI software requires immense data sets to work.

The problem is that the only organizations that have these are some of the wirehouses, like Morgan Stanley, and Schwab and Fidelity. They have the data necessary to build these things. But they're not going to give it out!

Thus, it will be a long time till you see true AI tools.

You emphasize that advisors have to act now and not be late in capitalizing on the opportunities you indicate. What percentage of them do you think will heed that advice?

Not most [laughs]. I'd guess 5%.

But that's the history of the industry. There's always this lag effect. Change in the industry is both gradual and nonlinear.

Generally, there's a handful of early adopters that capitalize on changes, and then everyone else suddenly tries to play catch-up.

Again, if you're playing catch-up, you're losing.