Conventional wisdom holds that in Canada advisors associated with financial institutions will gain an increasing share of the market - whether these be advisors working for the banks' investment dealers or as branch based financial planners.

The proponents of this view point to the advantages of scale and the reassurance for investors and advisors provided by Canadian banks, particularly important in market environments such as those in the past couple of years.

In addition, the potential to tap into referrals to existing bank customers can help existing advisors accelerate their business growth and be a strong asset in recruiting new advisors.

 A contrary view from south of the border

A recent white paper suggests a very different path in the United States.

Titled The Future of the Financial Advisory Business, it predicts declining share for bank affiliated brokers and strong growth by independent advisors.

The key question: Is this an area where Canada and the U.S. will fundamentally diverge or will some of the U.S. trends in this area migrate into Canada?

This white paper was written by Bob Veres, a highly respected observer of the U.S. investment scene. For many years editor of one of the major U.S. advisor publications, he is publisher of Inside Information, an online resource for the financial planning and investment advisory profession - the full report can be found on his site.

An overview of the U.S. scene

One big difference in the United States is a thriving segment of advisors called Registered Investment Advisors, commonly known as RIAs.

These advisors typically work as sole proprietors or in small to mid sized firms, are compensated on a percentage of client assets and have no in-house products; they can offer clients a full range of investment products and generally focus on managed money solutions.

The growth of this channel was accelerated by Charles Schwab's launch in the early 1990s of a back office platform on which independent advisors could operate; today other large firms that offer similar platforms include TD Ameritrade and Pershing Advisor Solutions.

 There are an estimated 29,000 RIA firms in the U.S. -  this is also the fastest growing segment, it's projected that by 2012 assets held by RIA's will equal those held by large brokerage firms such as Merrill Lynch and Morgan Stanley Smith Barney.

Today, most of these RIA firms are fairly small - it's estimated that only 4,000 (or about 15% of these firms) have assets over $100 million - and half of those have assets under $250 million.

The growth of the independent segment

There are a number of factors driving the growth of RIAs, not all of which apply in Canada:

• The negative image of Wall Street

One important difference between Canada and the U.S. is investor disillusionment with Wall Street firms.

In a recent survey, 46% of U.S. brokers said that their firm's brand was not helpful in retaining existing clients or attracting new ones.

• Disillusionment by experienced brokers

The U.S. has seen growing defections by "breakaway" brokers, leaving established firms to strike out on their own.

In part, this is driven by the push from head offices to sell inhouse products and an increasing emphasis on higher end clients, penalizing brokers who have a mid market focus.

These defections have been facilitated by the large back office platforms such as Schwab, who actively recruit bank brokers and whose recognized name provides both advisors and clients with confidence.

• Profitability among independents

One contributor to frustration among U.S. brokers has been a continuing pinch on payouts. There is a sense among some brokers that they are paying for staff and resources at head office that don't apply to them and their client base.

One reason for a move to RIAs is the prospect for increased profitability in the short term and higher value of their businesses in the long term.

Factors fuelling the success of independents

A report published ten years ago suggested that there would be substantial consolidation among independents, making it difficult for small independents to survive.

This hasn't materialized - nor in the view of Bob Veres is this likely to happen.

A number of reasons for this:

• Extensive analysis of firm profitability finds little evidence of correlation between firm size and profitability - in his report, Veres cites a number of studies describing overheads that are fixed at roughly 35% of revenue across firm sizes.

Veres also describes a "barbell effect" - in which profitability is highest among the smallest and largest firms.

• Veres also cites an industry consultant who points out that many of the most important activities for advisors aren't particularly scalable - for example meeting with clients and preparing customized financial plans. And in some regards, scale works against the "intimacy" that many clients cite as key reasons for working with their advisor.
• There has been an explosion of online resources around planning and CRM software, practice management and benchmarking and a variety of support services that level the playing field between small and large firms - and in some respects give small firms an advantage by being able to access these services on an as-needed, variable cost basis.
• Many larger firms struggle with the "diseconomies of scale" - past a certain size, the infrastructure of large firms adds costs without necessarily translating into clear benefits for advisors.

The way ahead for independent advisors

Bob Veres concludes by suggesting that the model of the future for RIAs may be a few large firms, with the bulk of independent advisors in firms with two to four principals.

In this regard, he draws a parallel to law firms - in which there are a few large national firms (generally focused on the corporate market, which is willing to pay their fees), with the bulk of lawyers working as sole practitioners or in small and mid sized firms.

This would still result in thousands of small scale mergers, as one-person advisor practices join into associations with others - motivated by higher profitability and succession planning considerations.

This model also has the benefits of promising clients independence, personalized attention and intimacy with what Veres calls "visible scale", the sense that an advisor is part of a larger organization.

Not all of these trends will be seen in Canada; nevertheless, this white paper offers food for thought for those contemplating the future for independent advisors in this market.

 Should you be interested in reading more, you can download the full report here:

http://www.bobveres.com/uploads/sitegraphics/FutureoftheProfession.pdf