Scale This

Editor's Note: This post from the Wealth Consigliere appeared May 23 in Financial Advisor IQ, a Financial Times publication.

Scalability is a proven business strategy across many industries, but is it right for high-end wealth management?

Evidence suggests that it isn’t – and probably never will be.

The recent defections of advisors from RIA aggregators and large Wall Street firms are more fresh proof that scalability doesn’t work in high-end wealth management.  

It’s also a teaching moment for advisors trying to figure out how to run their business.  If you think scale is the road to success, it will likely be a dead end.  The scalable, widget-making model for individual wealth management won’t serve clients well, nor advisors seeking more personal satisfaction and control of what they offer their clients.

Counter To Conventional Wisdom

The lack of scalability in individual wealth management runs counter to the conventional wisdom in financial services.

The six largest international banking companies, all of which have large wealth management units, control 50% of the industry’s revenue according to a recent special report from The Economist

Size matters in international banking because it translates into efficiency and lower costs. The banking giants have grown enormously, powered in part by cheap funding and supported by the predictable fees from their wealth management businesses.

However, the benefit of the wealth management business providing financial support many have run it course. As banks get bigger and bigger, wealth management’s contribution diminishes.

While the institutional asset management business and trading businesses will continue to consolidate because they do benefit from scale, the business of serving individual clients with $5 million or $10 million won’t.  That’s a good development for everyone involved – clients and advisors.

Why Bigger is Not Better

There are two reasons why scalability doesn’t work in serving high-end clients.

First, high-end wealth management requires truly customized solutions. Every person or family has slightly different or even wildly different objectives and circumstances.  Clients don’t all want the same thing. That’s different from a scale business like international banking or manufacturing.  With either one, big investments in infrastructure support higher volume, which in turn drives greater profitability.

Second, wealth advisory is capacity constrained on two levels – staffing and client load.  Wealthy clients have complex needs that demand experienced, skilled practitioners who are in short supply.  The wealthy often require multiple complex services ranging from investment management to family governance – often all at once.  Very few advisors can make the grade.  The largest wealth management firms have attempted to meet the advisor talent shortage by writing hefty recruiting checks because the current staff at Wall Street firms simply can’t meet the sophisticated needs of these highly prized individual clients.

In addition, a competent wealth manager should be able to handle a maximum of 25 to 40 clients with assets of $5 million or more. More than that, all parties suffer. Wealth management is personal. It’s not simply business. An advisor plays a disproportionately large role in the life of a high net worth client.  An advisor is central to a client’s lifestyle, and it’s normal to keep tabs on the person helping finance all the fun.

A successful client relationship also requires ongoing trust. That requires more time and personal attention.  Given the mistrust created by the financial crisis, an advisor needs to continually earn a client’s trust. That, too, takes time; there are only 24 hours in a day and no shortcuts.

How Much Is Enough?

For independent advisors, a lack of scalability isn’t necessarily bad.

Compared to wirehouse advisors, independents who service $250 million or more in fee-paying assets will keep significantly more of their revenue. They’ll make a very comfortable living, sleep better and enjoy work more.  Advisors will reap the psychic rewards of seeing people succeed.

On the other hand, if money is the overriding motivation, which it used to be for many who ventured into the business, that’s a mistake.  With that attitude, an advisor is ultimately destined for a grim crossroad: Me vs. them.  Do I take more for myself at the expense of my clients? The big firms have already sold out. Proprietary products and scale are a clear expression of, “It’s us before them.”

All of which raises one more philosophical question: How much is enough? If an advisor is living well and truly making a difference in the lives of others, isn’t that more than enough?  In the go-go days of Wall Street, wealth management was a ticket to riches. Those days are gone.

Independent wealth management is a mindset game NOT a numbers game.


  1. Josh Brown discussed scale in his recent blog today. We took different roads but be ended up with the same conclusion.


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