In 1999, Mark Hurley, founder of Fiduciary Network and now CEO of Digital Privacy & Protection LLC, a cybersecurity company, predicted the wealth management industry would be consolidated into less than 100 firms, that there would be the interest of capital and a lot of M&A.
Now, “The industry itself is waking up from the greatest possible party ever,” Hurley said, speaking at the MarketCounsel Summit this week in Las Vegas.
On Wednesday, Hurley will release his latest white paper, “Welcome to the Jungle: The Next Phase of the Evolution of the Wealth Management Industry,” which again makes some controversial predictions about the future of this space.
The last decade, he argued, sets the stage for what will happen in the next 10-15 years. Over the last 10 years, advisors have enjoyed seemingly ever-higher U.S. equity markets resulting in consistent growth in AUM and revenue. Combine that with a long period of consistently low Inflation and interest rates, and running an RIA was almost foolproof.
“If you own a wealth manager, it’s the economic equivalent of owning an operationally leveraged investment in the financial markets,” Hurley said. “We had a host of firms in this industry—most of the industry—it really didn’t matter what they did. Their earnings just kept going up and up and up by turning the lights on.”
In addition, private equity companies raised some $2.2 trillion since 2016, and they had to find somewhere to put that money to work. The wealth management industry was a big beneficiary of that, with 100 different buyers emerging and 1,600 deals getting done. Deals were getting done at lofty valuations of 20x or even 30x EBITDA.
But the industry, Hurley argued, basically went to sleep, with firms’ organic growth rates in the low single digits. One industry report demonstrated that 70% of firms were actually shrinking, if you back out the impact of market appreciation.
That party ended in March 2022, when the Fed’s tightening cycle began, and the markets turned. As a result, debt is much more expensive and much less plentiful. There’s no more easy money from M&A deals.
The industry remains fragmented. Even the preponderance of aggregators are just confederations of small firms that haven’t been integrated into a single business, he said. “They have all the costs of scale, but none of the benefits."
Yet there’s an enormous opportunity for organic growth. Hurley said it’s a myth that the baby boomers are the most important generation; in fact there are 7 million more Americans aged 45 to 60 years old than there are boomers, and they need financial advice. Few firms are prepared to capitalize on that market.
“M&A is still going to happen; but that’s not how you’re going to create value. It may create scale,” he said. “Currently, the cost of getting clients is far less than the present value of those clients. That is not sustainable.”
Further, the genteel, collegial environment that advisors have enjoyed will go away, he predicted.
“We think the national competitive forces are going to take over, and add to that, being driven by capital providers, and you’re going to see a far less polite, genteel industry,” he said.
The big firms are going to start acting like big firms, doing more for the same fees and squeezing out smaller competitor margins.
There’ll be an all-out battle for talent as seasoned RIA employees retire, Hurley argued. Firms will become much more aggressive in poaching competitors employees.
The single biggest competitive advantage right now is to have an owner that is decisive and also takes a long view of their investment. “They think of their investment in terms of 10 to 15 years, not two to three years,” he said.
After all this shakes out, Hurley predicts that three types of firms will emerge over the next 10 to 15 years. First, there will be 30 to 50 firms with $500 billion to $1 trillion in AUM; these will be the “mega-firms.”
“They’re going to be diversified financial services companies. In other words, they’re going to buy their own brokerages. They’re going to buy other businesses. And they will be direct competitors with Schwab and Fidelity,” he said.
The best owners for these “mega-firms,” he said, are sovereign wealth funds.
“These are the people providing capital to the PE firms already, so they already are investing indirectly in a lot of these things," he said. "But they’re looking for intergenerational assets they could own for 10-15 years, 20 years, 30 years. This is a perfect business for that.”
Hurley also predicts there will be about 200 to 500 “specialist” wealth managers with $5 billion to $100 billion of AUM. These firms will be experts in a niche, serving narrow pools of clients.
Despite the number of firms that claim to be specialists in a niche, few are.
“If you look at the ones who do it, they tend to have categories that are way too broad, and their expertise is way too shallow,” he said.
Rather, the specialists of the future are going to help clients create the wealth in addition to managing it.
“They’re going to have expertise in people’s careers that are going to be as robust as headhunters. They’re going to have expertise people’s businesses as well as some of the industry’s top consultants,” Hurley said.
These firms will offer as comprehensive a service as the big firms do, but they’ll charge a premium over the big firms because they have a unique set of expertise.
The final group—the one advisors don’t want to end up in—are the “generalists". These firms, Hurley argued, will evolve into bookkeepers. They’ll be less profitable and have little enterprise value.
“Nobody is going out of business," he said. "But if you’re in the generalist category you’re going to have to do a lot more for clients, you’re going to get paid the same, and you’re going to make a lot less.”