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If any of this triggers thoughts/questions, please reach out.  Fun to think on and through the future of financial services.  There’s about 10 pages of content I had to remove that are critical components of the path forward and provide more foundational context.  What is below are the main points we want to make: 

  1. The opportunity is in the long tail 
  2. A Math lesson 
  3. The supply and demand imbalance 

I have to give credit to Chris Anderson and his book, The Long Tail. Incredible book that has changed how I see things and given me the words and context to bring clarity to internal discussions.  In short, go read it if you are at all interested in business.  

Before we dig in, we need to address a couple concepts that matter: 

Scale – Despite this word’s popularity in the business world, it’s an almost irrelevant term to a true financial advisor.  A single financial advisor, that’s responsible for the bulk of their advisory business, is constrained by time.  Once an advisor hits a certain number of relationships, the laws of diminishing returns kick in.  You just can’t treat client #100 like you did client #1. There’s not enough time.  Hire all you want, it changes things. Time is scarce.  Scale is possible, just not in the exact form it looks today.  

Fee Compression – Outright and explicit advisory fees are going to continue to drop. We’d argue, we’ve hit peak financial advisory compensation.  The attractive stream of revenue fee-based advisors generate has garnered attention from all sorts of players.  They are all coming directly to consumers for the inertia of advisory fees…Schwab, Banks, Robos, etc.  The amount of competition that’s battling for the consumers attention is a fee eating force.  This has HUGE implications on the business.  We’d argue that it’s as big of an opportunity as any advisor will ever see if they position themselves correctly.  We’d also argue that if you’re a, more seasoned advisor, who is contemplating an exit…you’d better go.  Your business will look totally different 5 years from now if you plan to operate status quo.  

The Opportunity is in the Long Tail 

The 80/20 rule, I’m sure you’ve heard of it or at least experienced it. 20 percent of something accounts for 80 percent of revenue generated.  The force of the 80/20 is strong in the financial services space, but that’s changing.   

The household with $1mil to $5mil of investable assets, usually between 50 and 75 years old, is the absolute lifeblood of financial services, the cash cows.  Those families are the 20% that accounts for 80%…or more.  Advisors are well aware of this.  Historically, scarcity of time and economics to service, created the focus toward finding more of those families and avoid anything smaller.   

Speaking from experience, when I first started in the business with a wirehouse, I was discouraged from bringing in accounts that were less than $100k.  They wouldn’t even pay me on those!  Then, that number bumped to $250k – that was 10 years ago – who knows what the minimum is now.    

The younger investor, with a smaller asset base, and in need of guidance, is the future financial services cash cow. They are the opportunity of tomorrow that’s being overlooked and passed up on today.  They are the long tail and they are everywhere. The Robos, Schwab, and a long list of others understand the economics here and are going after them attempting to leverage technology that addresses the time and economic constraints of the past.   

Why? Because the numbers are enormous and they see an annuitized stream of revenue that has longevity, growth potential, and dependability thanks to inertia.  Technology has created the ability to lower costs associated with servicing those clients.  With incremental costs approaching zero, who cares about account values.  

The pure number of households with smaller assets in need of solutions overwhelms the cash cows of today.  Finding a way to serve those families while time and markets compound wealth makes a lot of business sense.  My guess, the firms that do it right will blow up the 80/20 rule.  Much more of their revenues and profits will be generated by a broader base of clients.  Their books will transform into natural asset gathering machines because the stage of life they are advising into becomes a blend of accumulation and distribution rather than being dominated by distribution. 

The typical advisor’s asset base is unquestionably tilted towards the higher net worth and older families.  There’s a gap that has to be filled.  Advisors need to make sure they play an active role in filling it.   

A Math Lesson 

I know the section above is pretty much the opposite of what every branch manager has been preaching, but it’s the path forward.  

To directly quote Chris Anderson, “A very, very big number multiplied by a relatively small number is still equal to a very, very big number.” 

Maybe your fee is smaller and the service model is different for smaller households, but math is still math.   

Why else would these Robos raise hundreds of millions of dollars in VC funding?  That tail is long, and those numbers are big.    

Supply and Demand Imbalance   

The supply of advisors willing to deliver relationship based guidance to those that need it most is lacking relative to demand.  Other firms are stepping into absorb some of that demand, but the golden ticket advisors own is the ability to deliver a true relationship.  The opportunity in the long tail is screaming for it.  

I know, I know, not everybody wants to talk to an advisor.  But, a large portion of that long tail will have increasing needs for connection and relationship as complexity in their circumstance arises that a 1-800 number will not be able to deliver. The advisors that provide the right environment (relationship and competitive pricing) will win every time over a chat bot or a random CFP.  

What now 

I view the current landscape of financial services as a battle between technology and relationship.  The relationships need technology to lower cost and the technology needs relationships to bring profitability. Both have realized (the hard way in some cases), the ultimate offering is an efficiently priced combination.   

Those with the advantage, in our opinion, are the ones already delivering on relationships.  Relationships are the most underpriced intangible you have. The pricing power and durability of true relationships creates a moat by itself.  It’s the buffer you need to leverage technology today that lowers your cost, improves your efficiency, and helps meet the demand that sits in the longer tail waiting for you.  It will cost you time, margin, and energy, no doubt, but it’s worth paying.   Your business will thrive moving forward.  

You don’t have to disrupt your current business.  Your transformation can be gradual.  Keep bringing the value you do to your clients, but expand who you can touch by removing bottlenecks.  Easy? No. But as Teddy says, “Nothing in the world is worth having or doing unless it means effort, pain, difficulty…”    

Our biggest objective is to support those that value relationships in transforming their business to profitability serve those that need them most as efficiently as possible.