Reporter’s Notebook: At the Schwab IMPACT Conference

SAN FRANCISCO, Nov. 12—The market Charles Schwab & Co. has paved for itself—catering to mid-level investors without using commission-based pay scales—has become more crowded in recent years. In a session entitled “The Future of the Financial Advisory Business,” Robert Worthington, president of money managing group Undiscovered Managers, warned IMPACT conference attendees just how crowded. Riffing

SAN FRANCISCO, Nov. 12—The market Charles Schwab & Co. has paved for itself—catering to mid-level investors without using commission-based pay scales—has become more crowded in recent years. In a session entitled “The Future of the Financial Advisory Business,” Robert Worthington, president of money managing group Undiscovered Managers, warned IMPACT conference attendees just how crowded.

Riffing off colleague Mark Hurley’s highly regarded 1999 white paper that forecasted sweeping changes in the advisory busines, Worthington laid out a scenario in which large firms will grow even larger over the next three years, and small firms could cease to exist. (Hurley was unable to attend the conference because his wife is having their first child.)

In Worthington’s view, smaller firms are fooling themselves in trying to take institutional investors away from larger firms, which are consolidating and expanding their power, particularly in larger urban areas. Worthington claimed that smaller firms’ business plans “simply don’t compute” and that unless they’re servicing a specific niche, “everyone would be better served by selling to a larger firm and becoming employees, if they’ll have them.”

Worthington pointed out an FPA study that showed many of the largest firms are growing as quickly as 30 percent a year, thanks to their ability to reinvest and combine assets rapidly. The study predicted the largest 1 percent of firms could grow “five-fold” over the next six years.

This is all in addition to all the new types of businesses pouring into the institutional investor market, Worthington said, including accounting firms, insurance companies and, of course, banks. The lesson: If you’re not already on top, it’s just going to get tougher to climb that hill.

“Eleven percent of new business in 2002 is coming from pro-active referrals,” Worthington said. “That’s an incredibly low number. With the flood of competition, that’s not going to get it done.”

***

The art for this year’s IMPACT conference is a picture of a man in a tie, holding his suit jacket and looking off into the distance, while standing on an ominous-looking ledge.

With the strain reps are under these days, several attendees found the image amusing--and at the same time somewhat unsettling. Overheard at least three times at the conference: “He looks like he wants to jump.”

***

The early start for all sessions, 7:45 a.m., was a burden to many, and several attendees grumbled about it. It’s likely only going to get worse, with Thursday night’s gala at City Hall lasting until 10:30. The gala is being presented by Vertigo, a mysterious projection system that advertises itself as a “mind-altering evening of tantalizing tastes, kaleidoscopic sights and sensational sounds. As you mingle, Vertigo will shift the way you experience everything.”

One attendee remarked: “Sounds like a headache.”

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