With an ever-growing wave of mergers and acquisitions, and industry consolidation, amongst both broker-dealers and RIAs, there is an increasingly common view that the solo financial advisor is “doomed” in the coming years. Whether due to the burdens of managing the firm, meeting the rising volume of fiduciary compliance obligations, handling increasingly complex investment or insurance solutions, or just doing all the financial planning work… the presumption is that all together it will simply become “unmanageable” – or at least impossible to do in a cost-effective manner – for the typical solo financial advisor in the future. Thus requiring solo advisors to either be acquired, or at least be “tucked in” to larger firms, in order to access their resources and have better economies of scale. Yet the reality is that “the death of the solo financial advisor” has been forecasted for nearly two decades now, and in the meantime solo financial advisors have actually become more profitable than ever!
In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, we take a deeper dive into the current state of the solo advisor, why it’s actually becoming easier to be a successful independent solo financial advisor, and why the coming decade is more likely to be the GOLDEN AGE of solo financial advisors than the death of them!
As a starting point, it is helpful to pause and reflect on the current state of solo financial advisors as they exist today, nearly 20 years after Mark Hurley famously issued his 1999 report forecasting the death of the solo advisor. Because the current industry benchmarking studies reveal some striking trends, including that the best solo financial advisors take home as much hard-dollar cash compensation as the typical partner in a billion dollar advisory firm! In fact, the top solo advisors are keeping in their pocket as much as 70 to nearly 90 cents of every dollar of revenue that they generate, after accounting for all expenses (technology, office space, staff, etc.). In hard dollar terms, the typical standout solo advisor is netting almost $600,000 per year in take-home profits, on $700,000 to $800,000 of total revenue. So to put it mildly, solo advisory firms are not exactly struggling and dying in today’s marketplace! And while these figures are based on about the top 25% of solo firms – so clearly not all solo advisors are doing this well – even the average solo advisor can do very well on much lower levels of revenue with the potential for a 60% to 80% profit margin!
Accordingly, even if costs rise substantially (say, another 10% on overhead), solo advisors would still have ample profit margins to absorb the impact, and top solo advisors could still be taking home nearly half a million dollars a year in take-home pay. Even an advisor generating “just” $250,0000 in gross revenue and running a 60% profit margin would still be taking home $150,000, which is still almost 3 times the median household income in the U.S. Simply put, there’s a lot of room to succeed as a solo advisor, even if costs rise.
Furthermore, it’s really not even clear if we should expect costs to rise for solo advisors in the future, as the reality is that the cost of what it takes to operate an advisory firm today compared to 20 years ago has been reduced tremendously, due to technology. Tools that make it more efficient to be a solo financial advisor – scheduling software, rebalancing software, tax updates built into powerful planning software rather than proprietary spreadsheets, account aggregation tools that automatically update financial plans, etc. – have all reduced the costs of being a solo financial advisor, in terms of both time and money. And while 20 to 30 years ago the “best” technology was at the wirehouse firms that had the resources to develop them, today almost all of the best solutions are provided by independent technology firms, and accessible for the average solo financial advisor (because the independent technology provider can achieve economies of scale, which transfers down to the individual advisor using the software!).
With all this being said, I don’t want to be insensitive to the plight of many of today’s solo financial advisors today who are not running 60% (or 80%-plus) profit margins, and are not taking home half a million dollars or more in compensation from their firms. For many solo advisory firms, there is often a complaint with growth that “the business isn’t scaling”, which is typically code for “this isn’t getting any easier as my firm gets bigger, so when are all of these efficiencies coming along?” But the real struggles for solo advisory firms, particularly once they cross about 50 clients, aren’t actually the result of being too small to survive, but instead are a result of not having enough focus. Because the reality is that it is time intensive and hard to scale if each client you serve is different and you don’t have a clear target market where you can create a consistent solution. But that means the key to success isn’t more size and staff and growth… it’s finding better focus. Otherwise, growing bigger just makes the problem worse, because you add even more inefficient clients and then throw staff and money at the problem, which doesn’t actually make it more efficient, and just makes you miserable because now you have to manage more and more staff on top of your inefficient business!
However, it’s important to recognize that there is one real challenge that solo advisory firms do face in the future: the marketing challenge of getting new clients, and differentiating yourself, given the coming (and even current) landscape of advisory firms. Because while there was a time where just being a comprehensive financial planner was a sufficient differentiator, but that is no longer the case. Solo advisors have to compete with over 80,000 other CFP certificants now, and every major broker-dealer has been making a big push into financial planning for years. And while it is true that solo financial advisors can often still go deeper than those firms, and have more relevant expertise, and be more specialized…. unfortunately, few solo advisors are. Many are still just generalist financial planners. And there is a problem with trying to outmarket a firm that’s 100 or a 1,000 times your size, or even larger, when all you do is the same generalist financial planning advice that they do. Which means focusing and specializing into a niche helps both your client service efficiency and your marketing!
The bottom line, though, is just to recognize that not only is the solo financial advisor not dying… and I’d argue that there’s never been a better time to become a solo advisor, thanks to the rise of the internet and all this amazing technology that allows us to be solo advisors and leverage that technology at a fraction of the cost of traditional staff members. However, the fact that you can be more efficient than ever as a solo won’t help in the future if you can’t differentiate yourself. But when you get all that right, as the benchmarking studies have shown already, solo financial advisors can make an incredible income (sometimes not even working full time!)! Which means being a solo financial advisor can still be amazing… at least, once you have focus!