It is unclear whether the business strategies that carried the wealth management industry to its present prosperity are the right ones to use going forward, Fiduciary Network has said in a new report.

The number of prospective clients who do not already have a financial advisor is declining and client bases are aging, resulting in net capital consumption as opposed to capital accumulation, the firm explained in Brave New World of Wealth Management: Opportunities, More Competition, Demographics, and Growth Conundrums.

Additionally, operating costs are still increasing at a high rate, while “experienced and capable successor professionals are hard to find,” it said. As a result, many wealth management business owners are anxious about the future and sense that the operating environment is becoming more challenging.

On the one hand, the firm believes that the demand for independent financial advice is “immense” and will continue to grow, saying: “Few (if any) firms will go out of business.” On the other, it warns that because “easy money” from this industry has already been made, organizations must adapt their strategies and business models “to the realities of the next decade” if they want to prosper.

If firms cannot adapt, they will have to “work harder for less money” and their businesses will leak enterprise value, it said.

Broad industry business models  

Although the wealth management industry - with some 19,000 firms - is “far from homogenous and is extremely fragmented,” the report said industry participants can be grouped into one of three general business models. They are:

· Evolving businesses that are sustainable in the long-run (such as after the departure of the founder/s) and have meaningful enterprise value;

· Books of business with no clear strategic plan and which, in many ways, are better described as “jobs” than “businesses,” and

· "Tweeners": This category represents between 1,000 and 1,200 firms that Fiduciary Network said have greater scale and profitability than books of business, but haven’t taken the necessary steps to evolve beyond a founder-centric model.

Forces affecting the wealth management landscape

Meanwhile, however, the firm has identified five forces that it believes will combine to create an operating environment that is “vastly more challenging and competitive.” The impact of these drivers will vary among individual firms depending on their current business model, it said. These drivers are:

1. Fewer new millionaire households with more firms competing for them;

2. Aging client bases with higher capital consumption;

3. A potentially prolonged period of low return on lower risk assets;

4. Operating costs accelerating at a rate higher than inflation in general; and

5. Aging founders.

Rather than forecasting a wave of industry consolidation as a result of these forces, the firm predicts that the more likely outcome will be to see an industry where the majority of assets are concentrated in the hands of a few firms.   

“The vast preponderance of the 18,000 participants that today fall in the books of business category will remain in business,” it said. “However, owning a book of business will be far less pleasant than in prior decades.”

Meanwhile, those evolving businesses that are able to successfully acquire other wealth managers over the next five to ten years will become “very large enterprises,” it added.

As for the “tweeners,” the firm anticipates that this category will no longer exist a decade from now, adding that only a small percentage of these firms will be acquired. Most will devolve into books of business; their assets under management will shrink while their costs continue to rise, it said.

In the end, the shape of this industry ten years from now will be one in which some 150 “extremely profitable, large firms” will manage the lion’s share of assets. And while the industry’s remaining 19,000 participants will “remain in business indefinitely,” they will be “marginally profitable and have little enterprise value,” the firm said.   

“The choices that owners make over the next couple of years will largely determine where their firms ultimately land in this brave new world of wealth management,” it said.