Sunday Email - The Pendulum / Outside the Industry

Read time: ~ 5.30 minutes

Happy Sunday!

Every Sunday I offer strategies for the week ahead and a thought to fuel your action.

It was a time marked by famine, poverty, and struggle. People grappled with food scarcity, and children developed rickets due to protein deficiencies. Proud men were forced to seek help for their families' basic needs. Farms closed, and livelihoods were shaken due to droughts and financial strain.

This isn’t a tale from ancient history. It happened less than a century ago.

The Great Depression was a turning point.

It altered mindsets, set back families for generations, and redefined the landscape of financial services. In response to the crumbling economy and widespread hardship, two pivotal pieces of legislation emerged, setting the foundation for today's industry standards.

The Securities Acts of 1933 and the Securities Exchange Act of 1934 brought sweeping regulations to enhance transparency in companies and establish the Securities and Exchange Commission (SEC).

Back then, our industry wasn’t known as “wealth management”, and the key players were brokers. The names Goldman Sachs, Merrill Lynch, and JP Morgan were synonymous with the trade of stocks and bonds, alongside traditional banking services and facilitating IPOs.

But, these services were exclusive to the uber wealthy. The average blue-collar worker owning stock was unheard of, and the high cost of these services further alienated the majority.

With new regulations in place, the industry began to innovate. This process is typical whenever new regulations are introduced – companies adapt and evolve within the new framework.

By the 1970s and 1980s, the mutual fund emerged. Fidelity Investments rose as a leading mutual fund manager. The significance of mutual funds cannot be overstated – they democratized investment, allowing for diversified portfolios without the need for substantial capital.

Then came the 1990s, introducing entities like Charles Schwab, Vanguard, and online brokers like ETrade. The industry's services expanded from mere brokerage to comprehensive investment advice and individual asset management.

The internet's advent further accelerated accessibility of financial services and investment management. Following the mutual funds' lead in democratizing investments, the internet and discount brokers opened up even more avenues for people to access financial services.

The 2000s brought the dot com bubble, instilling fear and uncertainty. Yet, from this tumultuous period emerged the Registered Investment Advisor (RIA) model. These independent advisors, distinct from big names like Goldman Sachs, leveraged firms like Fidelity and Charles Schwab to manage assets, offering personalized investment services.

This freedom spurred an expansion in services offered by financial advisors. From the basic sale of stocks and bonds in the 30s and 40s to comprehensive financial planning encompassing tax and estate planning alongside investment management.

Independent advisors thrived, innovating without constraints, tailoring services to their client's needs.

Post-Great Recession, technological advancements like robo-advisors reshaped the industry, enhancing efficiencies and broadening access. RIAs were now equipped to serve more clients than ever before.

We’ve witnessed remarkable progress. Our industry, once the domain of the uber wealthy, now offers services accessible to all.

However, the last 5 - 10 years have seen a trend that echoes the past – a pendulum swing back to earlier models.

The surge in M&A activity and private equity infusion is creating a divide within the independent sector. Serial acquirers and large RIAs are expanding through acquisitions, driven by the quest for efficiencies and heightened profit margins.

These acquisitions make sense. Founders, after years of hard work, are seeking to cash in. The soaring cost of internal acquisitions and the lure of market liquidity are compelling reasons to sell.

The appeal of this trend is clear. It echoes the allure of the wirehouse model – brand recognition, operational efficiencies, compliance infrastructure – all allowing advisors to focus on growth and client service.

But as we gravitate towards this model, we have a choice – do we embrace the efficiencies of a wirehouse-like environment, or do we maintain our independence?

Here are a few points to consider for those who choose to stay independent:

1. Invest in Your Business: Professionalize your operations. This means having dedicated individuals managing finance, HR, and other critical business functions, not just revenue-generating roles.

2. Lean into Innovation: To compete with larger firms, embrace innovation. Your agility as an independent advisor is your strength.

3. Foster a Partnership Mindset: Consider selling small ownership stakes early and often. This approach provides liquidity and fosters a natural succession plan at a more reasonable price point, engaging your team more deeply in the business.

As we continue to evolve in this new era of M&A in wealth management, I constantly think of the quote from Karl Marx:

“History is never repeated, but it borrows, steals, echoes and commandeers the past to create a hybrid, something unique out of the ingredients of past and present.”

A Thought To Ponder This Week

The secret to success in the airline industry? 

Maximizing air time while minimizing ground time.

Take Southwest Airlines, for instance. Their low-cost model hinges on this very principle. 

To enhance their turnaround time, Southwest turned to an unconventional source for inspiration: NASCAR. 

Known for their pit crew's lightning-fast efficiency in refueling and maintenance, NASCAR teams epitomize coordinated precision. Every member plays a vital, well-defined role, contributing to a seamless operation.

Southwest's operations team absorbed these lessons, fine-tuning their ground crew's roles for optimal synchronization. 

This strategic shift paid off, leading to quicker turnarounds and more flights in the air - a feat many airlines struggle with.

As we step into a new week, let’s take a page from Southwest's playbook. Identify a company outside the wealth management sector that you respect. What valuable strategy can you borrow and apply to your own business?

The best is ahead!

-Matt