Explosion of Firm Models Poses a Human Capital Challenge

What You Need to Know

One way to attract and retain advisors is by providing career paths — clear sequences of steps to achieve their goals.
It’s wise to make sure that your firm’s model matches the candidate’s career goals, thus preventing turnover.
Firms must know what type of firm they are building to garner the best talent for them.

The success of financial advice firms hinges on their ability to attract and retain advisors. One way organizations can accomplish this is by providing career paths — clear sequences of steps by which employees may advance toward their professional goals.

But here’s the tricky thing: As the industry evolves, firm models are proliferating. And that adds another dimension to the hiring process — namely, making sure that your firm’s model matches the candidate’s career goals. If your firm type and the candidate’s goals are not aligned, you’re more likely to eventually lose the advisor and hire and train a replacement, which is expensive.

Not long ago, advisory firm models were limited to investment-only firms, wealth management firms and financial planning firms. That has expanded to include fintech financial planning firms and financial therapy firms. Each type of firm has a different service model, different target markets, different pricing structures and many other points of differentiation. Let’s look at the different firm types:

Fintech financial planning firms: I believe that this model is poised to proliferate strongly. Fintech firms are independent RIAs built around proprietary financial planning software. These fintechs are not to be confused with robo-advisors or the fintech tools that are sold to advisors. They are businesses that developed their own comprehensive financial planning software before hiring advisors and accepting clients. The software serves as the backbone of the client service experience.

We are already seeing market leaders emerge in the fintech financial planning lexicon. The vast majority of independent advisory firms that are starting from scratch today are fintech firms, and I believe that we will see such firms continue to enter the marketplace at a rapid pace over the next five years.

Investment management firms: Two decades ago, the conventional wisdom in the independent advisory firm world was that pure investment management models were not feasible. Without financial planning, firms could not adequately retain clients. For this reason, investment-centric businesses adopted financial planning services as a loss leader. They would offer free planning in order to manage the clients’ assets for a fee.

But the belief that investment accounts can’t be retained without financial planning is fading. It turns out that a significant subset of consumers understand that financial planning is important, but view investment management as their immediate concern. I’ve seen ample evidence that pure investment management firms can be successful and quite profitable if they tap into the right client base.

Wealth management firms: Wealth management firms provide investment management and financial planning, and they are generally known for complex client experiences. Over the past two decades, wealth management firms have expanded their service models to include tax planning, tax returns and retirement plan services. The industry sees wealth management firms as providing a broad cross section of financial services under one roof.

Competition among wealth management firms is high, and clear market leaders are emerging. These dynamics are positive, and there’s still space for many new wealth management firms. But as the space evolves, we will see leading firms continue to consolidate their positions, while many smaller firms focus on offering much more comprehensive, personalized wealth management experiences for key client niches.