Pershing Ria Market Forecast

Uncharted Waters:
navigating the forces shaping the advisory industry
Ideas Without LimitsSM
Our partner in developing

this executive summary:
Moss Adams LLP
Uncharted Waters: Navigating the Forces
Shaping the Advisory Industry
In the midst of tremendous growth and transformation, the entire advisory
industry is entering uncharted waters. This is especially true for the independent
Registered Investment Advisor (RIA). A variety of market forces are at play,
promising to radically change the ways in which advisors service clients and
compete for new business. Based on our own research and consulting experience,
interviews with industry experts, and an extensive review of recent third-party
research, we have identified three key factors of great importance to the RIA:
1) Dramatic growth of the RIA market expected to fuel increased competition. The demand
for comprehensive and objective financial advice is growing rapidly. Responding to this demand
without undermining the client experience or compressing margins will put pressure on the
physical and intellectual capacities of advisory firms. In addition, market growth is attracting
a host of new market participants, which compels the traditional independent RIA to find
innovative ways to differentiate themselves. Regulatory changes are helping to fuel this growth,
especially as they relate to the promotion and clarification of the advisor’s fiduciary obligation
to clients. For the RIA, this is conceivably a “be-careful-what-you-wish-for” scenario, however.
An important differentiator is lost if competing channels adopt the same fiduciary standards
previously owned by the RIA.
2) Growing demand for advice from increasingly sophisticated clients. Clients are poised
to play a more influential role in defining the advisory relationship. This may seem intuitively
obvious, especially since the term “client-centric” is now commonplace. For the most part,
however, clients have been more deferential than assertive in demanding solutions and service
commensurate with the fees they pay. Today, the client’s power is growing, driven by sweeping
demographic changes and increasing consumer sophistication and greater expectations for service.
Advisors can no longer afford to persist in their perception that they may sell whichever product
they want to a client. Advisors must become more selective about which markets they service to
ensure an effective and consistent client experience. In addition, they must clearly communicate
to clients their particular value proposition within their market niche—and in a way that is
strategically distinct from competitors.
3) Competition among RIAs for top talent. Recruiting and retaining the best talent is more
important than ever, and these remain the biggest hurdles for independent advisory firms.
Competent, adaptive, and well-trained expertise is critical to an advisory firm’s success. The
rapidly growing market requires ever-more-complex servicing, and demand is skyrocketing while
supply fails to keep pace. To ensure growth, firms must be more innovative in their recruiting,
IDEAS WITHOUT LIMITS i

but merely poaching talent is not sufficient. Firms must increase their commitment to developing
talent from within their organizations and restructuring incentive compensation programs to retain
talent. Furthermore, more of their overhead costs should go into training and performance coaching.
Organic growth has given most RIAs tremendous lift in the past five years, but soon they will
have to fight to maintain profitable growth. In the future, leaders of advisory firms will be
increasingly challenged by the demands made by both their clients and their staff, who now
occupy positions of increasing power.
As a result, these three trends will all have profound implications for the industry, in general—and
for individual advisory firms, in particular. To navigate these effectively, the successful RIA will
need new charts and, in some cases, whole new systems of instrumentation. We explore these
themes in detail in the pages ahead, elaborating on their importance, detailing implications for
advisors, and prescribing appropriate courses of action.
Imitation Is the Greatest Form of Flattery
The consequence of building a better mousetrap is that innovation attracts a lot of fans—as well
as a lot of imitators. This was certainly the case for financial advisement, when financial planning
and wealth management providers latched on to the independent RIA platform. In the past five
years, the number of retail RIA firms grew by one-third;1 in the next five years, Moss Adams
expects the industry segment will grow by another third. Of those industry participants who have
not yet established RIAs, many are either becoming more like them or acquiring them, outright.
Many of the largest RIA firms are being acquired by banks, trust companies, and consolidators.
The stakes are high. Excluding inflation, we anticipate that investable assets of U.S. households
will grow by more than $5 trillion in the next five years, creating an estimated $35 billion of new
revenue opportunities for the advisory industry. To successfully capitalize on these opportunities,
RIAs will need to be innovative in their services and recognize emerging needs beyond the generic
label of “boomers in retirement.”
Strategic Competition: Where Winners Write Their Own Rules
As a variety of financial services-related providers converge upon the same target, the pressure is
on the independent RIA. Wirehouse brokers, insurance agents, bankers, and even mortgage brokers
are adopting some of the characteristics that distinguish RIAs—transforming their business models
to compete in offering comprehensive and objective financial advice to affluent households. Even
the RIA’s ability to distinguish itself based on its independence is under threat, as competitors
shift from commission- to fee-based pricing structures and shed proprietary products.
In the past, the independent RIA benefited greatly from consumers’ relative inexperience.
Consumers did not walk through the doors of advisory firms with set expectations of which
1
Cerulli Associates, Cerulli Quantitative Update: Advisor Metrics 2006.
ii uncharted waters: navigating the forces shaping the financial advisory industry
processes their advisors would use, how many meetings they should have, which reports they
should see, or who would service them. The unprejudiced attitudes of consumers allowed RIAs
the flexibility to define their service model, including which clients they would work with, as well
as how they would work with them.
Defining a problem and asserting your prominence as the best solution provider is what we
call “strategic competition.” In the overall advice marketplace, independent RIAs are strategic
competitors as long as they enjoy a leadership position—by helping consumers identify their
needs and framing the types of solutions available, directly or indirectly. How do consumers know
if they are ready for retirement? How should they evaluate the investment strategy defined by their
advisor? Should they have an advisor in the first place? Who is an “advisor?” Strategic competitors
will target and influence how consumers answer these questions.
The market may not remain this open forever, however. National firms are moving to influence
the terms of competition by defining service models, pricing structures, customer expectations,
and the measures of success. They are already marketing heavily to consumers and looking to
frame their needs and concerns in a manner that suits larger firms. Furthermore, as the industry
matures, its products and services tend to become more standardized. This, in turn, will challenge
the ability of competitors, and particularly smaller firms, to differentiate from each other.
The risk for independent advisors is that providers’ capacity for strategic differentiation will fade,
to be replaced by a tactical mêlée of market agents (advisors) rushing to establish rapport and
credibility with potential clients. In essence, the RIA may face a tactical battle under rules
determined by others. In this scenario, the danger for RIAs is that they may be left to watch
from the sidelines. Most RIAs are essentially small businesses. They lack the marketing resources,
sales force, and sheer scale to compete effectively in such a marketplace.
The importance of strong differentiation and strategic positioning for the independent advisor
cannot be overstated. Historically, RIAs have relied on the independence proposition, their
individualized attention to the client, and fee-based pricing to differentiate from competing
distribution channels. In the future, these will not be enough.
Successful advisors will need to possess an intimate understanding of their clients and knowledge
of their unique issues in order to deliver specialized expertise and solutions. Social, political, and
religious beliefs will also demand consideration, in addition to such factors as age, profession,
sources of wealth, risk tolerance, and life goals. The firm of the future will identify the unique
nature and needs of these client niches to create and service markets in which the firm is truly
differentiated. The real advantage of the RIA firm is its ability to recognize and attend to the
nuances that are imperceptible to national firms but which clients highly value. This RIA
advantage must be further leveraged by developing and applying service expertise tailored and
targeted to market niches.
IDEAS WITHOUT LIMITS iii

Clients Will Shape the Future
Whether clients know it or not, they are in the driver’s seat for determining the kinds of
relationships they have with their financial advisors. However, most clients do not presently
understand the full extent of their influence and bargaining power. This is partly due to consumer
uncertainty about the services offered by various providers and about the distinctions between
such industry terms as investment advice, financial planning, and wealth management. In
addition, many clients do not yet appreciate how many providers are competing for the privilege
of servicing them and the intensity of this competition.
Today’s relatively low level of consumer awareness is poised to improve. Consumer understanding
of what an advisor is—and how to choose and evaluate one—will be defined with much greater
specificity in the next few years. All industry stakeholders will play a role in forcing clarification.
Consumers will feel increasingly compelled to become better educated as they take on growing
responsibility for their financial futures. The introduction of new service models will help form
expectations. Finally, other market participants, including regulators and industry and consumer
associations, will also fuel the movement toward greater awareness.
As clients become informed consumers, advisors must again be mindful of clearly positioning their
service offerings. This means being deliberate about the type of client served. Further, it means
educating clients on the key areas where the RIA can specifically add value as the steward of the
client’s financial future.
Consumers are making big and bold changes in their lives, which will further set the terms of
their relationships with advisors. Choice dictates some of these changes; necessity, others. The
nature of retirement, itself, is changing. Retirement is becoming a transitional period in the career
cycle, instead of signaling its end. It is no longer defined by the image of a retiree waiting for
pension checks and clipping coupons. Furthermore, society is placing a higher responsibility on
individuals to prepare and provide for their own financial futures, a future in which investments
are only one component.
Servicing clients through these changes creates the need to handle much more than their assets.
Generating investment returns fades in importance, replaced by the ability to manage client cash
flows in a way that reliably matches assets with liabilities. Advisors unable to adapt to changing
client needs risk losing relationships to advisors who can.
Relationships Will Be Won Based on Trust
National full-service firms (“wirehouses”)2 now recognize the power of a true advisor who can
create a strong and lasting relationship with the client, and they are looking for ways to create a
2
I n this report, we use the terms wirehouses and national full-service firms interchangeably to signify large, branded broker-dealers such as Merrill Lynch,
Smith Barney, and UBS (among others).
iv uncharted waters: navigating the forces shaping the financial advisory industry
service model with the same appeal to the investor that RIAs offer today. Throughout the industry,
competitors are becoming more alike—in terms of pricing, product, planning focus, and manager
choices. Consolidation is further blurring the boundaries between advice delivery channels. As the
typical RIA grows, even the difference in size between national firms and the independent RIA is
getting smaller. The one enduring difference, however, is an organization’s culture—the advisor’s
attitude and approach when he or she is face to face with a client, in private.
Overwhelmingly, trust is the characteristic that clients look for and expect in an advisor, as
consumer research demonstrates.3 Advisors must recognize, however, that while professional
integrity and objectivity are necessary conditions for developing trust with clients, they are not
sufficient on their own. Expertise and competence must also be demonstrated, and these will be
increasingly sought after as client needs become more complex.
Trust is most easily created between the client and the advisor; few clients associate trust with
a firm. In order to build long-term value and remain a viable business, however, the successful
firm will learn to expand this relationship of trust to encompass the client and the firm. Doing so
requires a corporate culture of ethics—one beyond reproach—and an ability to recruit and retain
advisors who convey this culture to clients.
Team-based service delivery further helps the firm establish trusted relationships with its
clients, which extend beyond the trust a client has in any one advisor. Teams, with each
individual playing a specialized role, are also better equipped to deliver on the promise of
expertise. In addition, teams are able to personalize the client relationship, while at the same
time institutionalizing the knowledge of the client. Adoption of team-based service delivery—a
relatively easier transition for RIAs than for most distribution channels—is yet another way for
the RIA to stand apart from competitors.
Advisor Development and Recruitment Must Be a Priority
To stand out and to position themselves as trustworthy, credible, and knowledgeable, firms
must consistently develop or attract advisors who, in turn, convey these attributes to their
clients. The individual reputation and skills of a firm’s advisors play a decisive role in the
strength of client loyalty. Ultimately, the quality of the advisor remains the most powerful
and lasting competitive differentiator.
While competition for clients will be intense, the real competition among providers is for skilled
advisors. The demand for professionals is already high, with 37% of advisory firms reporting
that they are actively recruiting experienced professionals.4 Moss Adams forecasts that by 2012,
there will be close to 52,000 advisors practicing inside RIA firms, a net increase of 9,000 advisors
over the next five years. Dramatic industry growth, however, is just one of the factors leading to
3
See, for example, U.S. Trust, 2004 U.S. Trust Survey of Affluent Americans.
4
Moss Adams LLP, 2007 Compensation and Staffing Study, Sponsored by JPMorgan Asset Management and SEI Advisor Network, 2007.
IDEAS WITHOUT LIMITS v

a shortage of talent throughout the industry. Considering the impact of current demographics
on the need for replacements, the actual number needed is probably a few thousand more. The
typical advisor, like their clients, is rapidly approaching retirement.
An escalating requirement for firms to broaden their skills sets further challenges in terms
of the industry’s ability to meet its human capital needs. Business development, relationship
management, retirement, health care, taxes, and estate planning are just some of the key areas
where skills are most needed. New investment and insurance products are also taxing the ability
of advisors to stay current.
If an independent RIA firm can win the difficult battle for talent, it will be firmly positioned to
confront most any other future competitive challenge. As a first step, the RIA firm will be forced
to aggressively recruit from wirehouses, banks, and other channels in the industry. Doing so
requires firms to emphasize features of the RIA business model that are not easily replicated
within other distribution channels. These include a service orientation that emphasizes process
over products and the chance for advisors to receive equity in the firm and grow value of this
ownership over time.
The ability and patience to grow people is another advantage the RIA must exploit. Often, the
right person for a given position simply does not exist in the current market. To assure a steady
and reliable supply of talent, the importance of developing talent from within the firm must not
be overlooked. Specialized training for advisors will be critical.
Furthermore, larger RIAs, in particular, should have in place career paths that facilitate the
development of existing personnel, in addition to attracting desirable new personnel. Smaller
RIAs, unable to offer formal career tracks, may need another approach for attracting and retaining
recruits. This would include emphasizing opportunities for ownership, more rapid business growth,
and the chance to handle a wider breadth of responsibilities than is possible at larger firms.
Strategic Positioning Leads to the Sea of Opportunity
Most of all, the findings in this report should highlight the importance of differentiation and
strategic positioning. In the next five years, consumers will make better choices of advisors, and the
nature of advice will become better understood. This will create opportunity for the independent
RIA, but it also means that firms will need to clearly define their target clients and carefully
position their service offerings against all sectors and channels of the broad investment industry.
Demographics, while important, are only a starting point for understanding and targeting clients.
All clients are not the same; their needs differ even within the same generations and levels of
wealth. More specific niches must be identified, better understood, and serviced accordingly.
Relationships will be won by delivering custom, targeted service models that emphasize innovative
approaches, multiple planning capabilities, and the resources to deal with complexity. RIAs are
well-poised to continue their impressive success—if they devise and commit to the right course.
vi uncharted waters: navigating the forces shaping the financial advisory industry
Acknowledgments
Much of the insight presented in this report was gleaned from interviews with some of the advisory
industry’s brightest thinkers. Our goal was to solicit a variety of perspectives from different
organizations, including government, academia, regulatory bodies, industry associations, and service
providers. Among those who generously gave their time to this project are the following:
Name Title Organization
Chris Boruff President, Advisor Business Morningstar, Inc.
Dale Brown Executive Director & CEO Financial Services Institute
Steven Levitt Principal Cambridge International Partners Inc.
Steven Miyao CEO kasina
Avi Nachmany Executive Vice President, Strategic Insight

Director of Research
John Nofsinger Associate Professor of Finance, Department of Finance, Insurance

Lang Fellow, and Author of and Real Estate, Washington State
Psychology of Investing University
Mary Shapiro Chairman and CEO NASD
Ellen Turfe Chief Executive Officer The National Association of Personal

Financial Advisors
IDEAS WITHOUT LIMITS vii

Table of Contents
Executive Summary................................................................................................................. i
Imitation Is the Sincerest Form of Flattery.......................................................... ii
Strategic Competition: Winners Write Their Own Rules............................... ii
Clients Will Shape the Future................................................................................... iv
Relationships Will Be Won Based on Trust......................................................... iv
Advisor Development and Recruitment Must Be a Priority.......................... v
Strategic Positioning Leads to the Sea of Opportunity................................. vi
Acknowledgments................................................................................................................vii
Table of Figures.......................................................................................................................xi
A Rising Sea of Demand........................................................................................................1

Accumulators....................................................................................................................2
Identifying and Taking Advantage of Opportunity.................................3
Providing Access to Alternative Investments.............................................3
Tending to Philanthropic Interests.................................................................4
The Bottom Line......................................................................................................4
Consolidators....................................................................................................................5
Changing Needs Increase Risk of Defection...............................................6
The Bottom Line......................................................................................................8
Liquidators.........................................................................................................................8
Redefining Retirement, Challenging Advisor Capabilities...................9
Addressing Health Care Planning Needs.................................................. 11
The Bottom Line................................................................................................... 12
Consumer Interest and Preferences.................................................................... 12
Growing Interest in Financial Services and Expert Advice................ 12
Responding to Sudden Events....................................................................... 13
Seeking Advice, Performance, Delegation................................................ 14
Choosing an Advisor, Choosing to Stay..................................................... 14
Winning and Maintaining Relationships.................................................. 16
The Changing Landscape of Competition................................................................. 17

RIAs Must Frame Consumer Decisions............................................................... 18
Creating Customer Demand.......................................................................... 20
Influencing the Frame of Evaluation.......................................................... 22
Who You Are Is Irrelevant, but What You Do Matters................................. 23
Positioning Value................................................................................................ 23
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Growth Will Create Larger and More Competitive RIAs............................. 26
Competing in a Consolidated Industry...................................................... 27
Winning the Largest Clients........................................................................... 30
Competitive Positioning and the Blurring of Service Models................... 32
Deepening Expertise.......................................................................................... 34
Competing Through Teams............................................................................ 34
The Disappearing Affiliation Model............................................................ 35
Independence....................................................................................................... 36
Reputation.............................................................................................................. 36
Granting Decision-Making Authority......................................................... 37
Firms Compete Not Just for Clients, but for Advisors.................................. 38
Compensating Advisors.................................................................................... 39
Reps Behaving Like Advisors........................................................................... 40
The Role of Regulation....................................................................................................... 41

Jurisdiction Friction..................................................................................................... 41
The Double-Edged Sword of Regulation............................................................ 41
Pension Protection Act............................................................................................... 42
401(k): The Last Plan Standing?.................................................................... 43
Opt-In Adoption................................................................................................... 44
New Opportunities for Advice Delivery..................................................... 44
Fiduciary Clarity............................................................................................................ 45
The RIA of the Future.......................................................................................................... 47
x uncharted waters: navigating the forces shaping the financial advisory industry
Table of Figures
Figure 1: Rapid Pace of Growth Continues for Household Investable Assets............. 1
Figure 2: Accumulators More Apt to Invest in Alternatives................................................ 4
Figure 3: Segmentation of Investable Assets by Age............................................................. 5
Figure 4: U.S. Adult Population by Age, 2000-2030................................................................ 6
Figure 5: Likelihood of Taking Business to a Competitor by Age and
Retirement Status.............................................................................................................. 7
Figure 6: Switching of Primary Provider by Age Group......................................................... 7
Figure 7: Retirement Assets Held by Those Aged 60+ ($T).................................................. 8
Figure 8: Average Annual Incomes for Pre-Retired and Retired Segments.................. 9
Figure 9: Advice Gap...........................................................................................................................11
Figure 10: Sudden Events That Change Involvement............................................................13
Figure 11: Important Attributes When Choosing an Advisor.............................................15
Figure 12: Top Loyalty Drivers Equated With Primary Advisory.........................................15
Figure 13: Porter’s Five Forces Affecting Competitive Strategy.........................................18
Figure 14: RIAs Make Up 14% of All Advisors.............................................................................19
Figure 15: Choosing an Advisor Is a Four-Phase Process......................................................20
Figure 16: Everybody’s an Expert.....................................................................................................24
Figure 17: Historical and Projected Number of RIA Firms....................................................26
Figure 18: Average Historical and Projected Assets of an RIA Firm, 2003-2012.........27
Figure 19: Percentage of Firms by Size Owned by a Parent Company............................28
Figure 20: Percent of RIA Firms Whose Target Client Is Larger Than $10 Million......30
Figure 21: Median AUM Per Client by Firm Revenue..............................................................31
Figure 22: Client Distributed by Net Worth................................................................................31
Figure 23: Services Offered by Stage of Firm Development................................................33
Figure 24: Employee Model vs. Independent Model...............................................................37
Figure 25: Historical and Projected Number of Advisors in RIA Firms............................38
Figure 26: Firms Anticipating New Hires (2003 and 2005)..................................................39
Figure 27: Advisor Compensation...................................................................................................39
Figure 28: Workers With Pension Coverage by Type..............................................................43
Figure 29: Impact of Auto-Enrollment on 401(k) Participation..........................................44
Figure 30: Selected Advisor Attributes: A Daunting Array of Choices.............................46
IDEAS WITHOUT LIMITS xi

A Rising Sea of Demand
The United States represents the world’s largest and most sophisticated
market for financial advisory services. As of 2006, aggregate household net
wealth was $53.3 trillion,5 of which $21.6 trillion were in relatively liquid or
investable financial assets (Figure 1).
Figure 1. Rapid Pace of Growth Continues for Household Investable Assets
25
20
$ TRILLIONS
15
10
0
56
60
64
68
72
76
80
84
88
92
96
00
04
19
19
19
19
19
19
19
19
19
19
19
20
20
Note: Total financial assets less equity in noncorporate businesses and pension reserves. Inflation-adjusted to current (2006) dollars using CPI-U.
Sources: Moss Adams LLP, Federal Reserve, U.S. Dept. of Labor
Growth in investable assets has been unprecedented in recent decades, tripling in the past 25 years.
Annual increases in assets averaged 4.8% since 1982—after adjusting for inflation. This growth
comes in spite of the stock market bust of 2000-2002. In comparison, assets fell on average at a rate
of 1.9% from 1972 to 1982. Preceding this was a period of prosperity, with asset growth averaging
4.5% from 1956-1971.
We predict the current inflation-adjusted 4.8% average asset growth will continue for another
five years at minimum. Sustaining this asset growth is the combination of pre-retirees, younger
generations, and an encouraging regulatory climate. Thus, excluding inflation, investable assets
of U.S. households are forecast to grow by more than $5 trillion in the next five years, creating
$35 billion of new revenue opportunities for the financial advisor. Further, it’s important to
note that not only are more assets becoming available; more assets are coming under professional
management, as we discuss in more detail in this report.
Will these opportunities persist beyond the upcoming baby boomer retirement wave? How can
RIAs take advantage of these opportunities, now and in the future?
5
istorical data for household net worth and investable assets estimated by Moss Adams LLP from Federal Reserve data-Flow of Funds Accounts of the
H
United States, “Flow of Funds Z.1 Files,” June 7, 2007. Adjusted for inflation using the U.S. BLS Consumer Price Index for All-Urban Consumers.
IDEAS WITHOUT LIMITS 1

Part of the answer lies in the shifting trends of demographics and consumer behavior—and this
means understanding more than just the needs of those much-discussed baby boomer clients.
Advisors must be prepared to help clients across three broad stages—accumulation, consolidation,
and liquidation. They must also recognize that who falls into these stages—and when—is not
always clear-cut.
> Accumulators. Accumulators are those who are just beginning to seriously save and invest. For
many, the first savings goal is purchasing a new home, and not retirement. These individuals are
typically young adults, less than 45 years in age.
> Consolidators. Consolidators are winding up their prime savings years and preparing in earnest
for retirement. Typically 45 to 64 years in age, most of today’s consolidators are part of the
baby boomer generation.
> Liquidators. Liquidators are drawing down their savings. While most are liquidating assets
for the purposes of direct consumption in retirement, others are distributing assets to heirs or
charitable causes. These individuals are typically 65 years or older in age.
Accumulators
The typical advisor’s current growth strategy is set squarely on servicing the financial needs of
consolidators. From the advisor’s perspective, this is a rational approach, given the scope of the baby
boomer market, as well as the wealth and opportunity it has created in the past decade. That said,
the advisory firm of the future cannot operate by looking solely through a rear-view mirror. Advisors
should consider opportunities both within and beyond the baby boomer segment.
An alternate opportunity exists for identifying and solving the financial needs of post-boomer
generations, those who are still in accumulation mode. Today’s accumulators are the first true
investor generations in which responsibility for saving and investing is within the near total control
of the individual. Spurred by necessity brought on by the demise of the defined benefit retirement
plan and uncertainty surrounding Social Security, this age group should prove to be more savings-
oriented, financially conservative, investment-focused, and proportionately greater consumers
of advice than their parents. A variety of research supports these claims, including the following
examples:
> Being “financially successful” is important to 49% of those in the 18-28 age group, a 13%
increase since 2002.6
> This same age group feels a significantly greater need to manage their spending (77%) compared
to their parents in the 43-61 age group (66%).7
6
isa, “How America Spends,” as reported in Visa news release, “As Baby Boomers Begin Transfer of Economic Influence, Echo Boomers Displaying
V
Practical and Mature Spending Habits,” May 23, 2007.
7
V
2 uncharted waters: navigating the forces shaping the financial advisory industry
> The percentage of workers aged 21 to 30 participating in a retirement plan at work is up to
37%, compared to 32% five years ago.8
> Retirement plan participants under the age of 35 are one-third more likely to want advice in
choosing their investments than those over 35.9
Identifying and Taking Advantage of Opportunity

To win post-boomer business, advisors will need to focus less on empathetic sales pitches and more
on an advisor’s ability to assist clients in accumulating wealth and properly managing a client’s risk
exposure. The traditional marketing techniques of advisor—namely, an offering of independent,
objective, and customized advice, will not have currency within these groups. The financial demands of
today’s accumulators are more complex than those of their predecessors, which means that relationships
will not be won on the margin. Moreover, business will depend on the ability of the advisor to identify
inflection points in the financial lives of their potential clients and deliver targeted solutions.
Advisory firms must first understand how and why customers make decisions within a target market
segment. For accumulators, decisions will usually be event-driven. For example, an outside event
may force recognition of the incumbent advisor’s inability to service their needs. Worth noting are
the expected inheritance windfalls of post-boomers with $1 million or more in investable assets.
Some 44% of this group, 27 to 41 years in age, expects to receive an inheritance of over $1 million.10
Additional event-driven financial decisions could include a substantial medical outlay or recovery
from an improper investment strategy. Advisors will have to properly identify what event has caused
an individual to seek advice, look at the client’s needs within the context of the firm’s capabilities,
and clearly identify how they can construct and implement a service solution.
Once high-probability, profitable customers have been identified, it is up to the advisor to deliver a
superior product, given their understanding of the financial needs of the consumer. Customization
can be a risky tool in the advisor’s toolkit, but it will be necessary in order to capture this market
segment. Financial planning for accumulators will be complicated and will need to address issues
specifically related to alternative investments, philanthropic concerns, inheritances, and health care
planning. These needs cannot be met by a generic client service experience.
Providing Access to Alternative Investments

Accumulator millionaires have a noticeably higher allocation of alternative investments than older
generation cohorts (Figure 2). This allocation highlights a broader trend of investment advice
focusing on outcome-related investing as opposed to benchmark-relative investing.
8
Employee Benefits Research Institute, as reported in NU Online News Service, “Retirement Plan Participation Up for Young Workers,” June 2007.
9
Spectrem Group, as reported in PLANSPONSOR.com, “Workers Under 35 Not Confident About Retirement Future,” March 27, 2007.
10
Northern Trust, Wealth in America 2007. The Northern Trust Company, January 2007.

Figure 2. Accumulators More Apt to Invest in Alternatives
28%
19%
12%
ACCUMULATORS CONSOLIDATORS LIQUIDATORS
Note: Individuals with $1 million or more in investable assets. Accumulators are 27-41 in age; consolidators, 42-60; liquidators, 61 and over.
Source: Northern Trust, “Wealth in America 2007,” January 2007.
Advisors cannot rely on an offering of the latest, in-vogue asset class. Like any industry, investment
products have a well-defined product lifecycle, meaning advisors can only use access to alternative
investments as a differentiator for a discrete period of time. The key is for advisors to capture
early innovators who perceive the firm as cutting-edge and are willing to pay for this perception.
Today’s alternatives are tomorrow’s plain vanilla, and an advisor must create a culture that embraces
innovation and change before a market, and its opportunities, stagnate.
Tending to Philanthropic Interests

Younger generation accumulators will seek advice from like-minded advisors, and this means a
philanthropic mindset. Their strong preference for philanthropic giving has already surfaced: 81%
of 18- to 28-year-olds indicate they are “giving what they can” to charities.11 In 2006, 26% of
post-boomer millionaires (27-41 years in age) made charitable contributions in excess of $20,000,
compared with just 15% of boomer millionaires (42-60 years in age).12 Advisors who are conversant
in philanthropic opportunities, as well as their impact on the financial well-being of their clients,
will be able to deliver a powerful message that resonates with today’s accumulators. If they do not
develop this capability internally, a key step will be for advisors to network and develop contacts in
their clients’ communities who can shepherd a client through the process of philanthropic giving.
Advisors who can tend to their clients’ preference for a hands-on approach to philanthropy will stand
out in the advisory marketplace.
The Bottom Line

Capturing the accumulator market will require a service offering that can be distinguished from that
pitched to their predecessors. Their financial needs will be characterized by complexity, and most
opportunities will be created by an outside event in a client’s life that compromises their financial
11
V
12
picture. Relationships will be won by delivering custom, targeted service models that emphasize
innovative approaches to alternative investments, philanthropic planning capabilities, along with
resources to deal with the increasingly burdensome issue of personal and family health care planning.
A team-based approach that leverages the collective expertise of a set of financial professionals will
provide the most appropriate structure for establishing, closing, and maintaining relationships.
Consolidators
Consolidators, making a final push to build up wealth they hope will last them through
retirement, are in their prime savings years. As a result, consolidators are the most significant of
the three broad market segments, accounting for an estimated $8.4 trillion in investable assets.13
As shown in Figure 3, consolidators (45-64 years of age) represented 54% of all investable assets
in 2004, and will peak at 55% in 2010.
Figure 3. Segmentation of Investable Assets by Age
14 13 14 +75
18 18 64-74
24
55-64
% OF ASSETS
30 33 45-54
33
<45
24 22 18
15 13 12
2004 2010 2020
Source: Survey of Consumer Finances, 2004; U.S. Census Bureau; McKinsey & Company, “Asset Management Industry in 2010,” 2007.
The number of individuals between the ages of 45-64 grew rapidly, but after an expected increase
of 75% in the two decades leading up to 2010, little if any growth is anticipated thereafter (Figure 4).
As a result, the asset accumulation associated with consolidators will remain strong in the near
future, but will begin to flatten in the next three to five years.
13
Individuals between 40-59 years of age. Source: Playing the Long Game: Global Asset Management in 2006. Boston Consulting Group, 2006.

Figure 4. U.S. Adult Population by Age, 2000-2030
300
65+
250
45-64
MILLIONS OF PEOPLE
200 20-44
150
100
50
0
2000 2010 2020 2030
Note: 2010-2030 are projections.

Sources: Moss Adams LLP; U.S. Bureau of the Census
Changing Needs Increase Risk of Defection

Aside from the sheer volume of assets that consolidators represent, what is important to note about
this group is their pending, very significant change in financial status and related needs. As they
approach retirement and liquidator status, the interests of most will shift from whether they will
have enough to live on to mapping out a plan for living on what they have. The wealthiest of
consolidators will soon be shifting their attention toward how best to leave a legacy, either through
passing assets down to heirs or through charitable giving.
In the immediate years before retirement, clients’ needs for an advisor grow and typically change.
Frequently, there is realization that the advisor who carried them through their working years
may not have the appropriate skills to carry them through retirement. Viewed another way, these
vulnerabilities represent opportunities for other firms better able to establish loyalty and capture
defecting clients from firms who have failed to underscore their ability to serve the client through
the accumulation, consolidation, and liquidation phases.
More than half of all consumers switch their primary financial providers after the age of 40.14
Retirement and age seem to be especially correlated with retention risk, as demonstrated in
Figures 5 and 6.
14
McKinsey & Company, Cracking the Consumer Retirement Code, 2006.
Figure 5. Likelihood of Taking Business to a Competitor by Age and Retirement Status
10%
Age 50-60
8% 60+ Years
6%
4%
2%
0%
PRE-RETIREES RETIREES
Note: Households with at least $1 million in financial assets. Respondents were asked to indicate the likelihood that they would perform
various actions.
Source: VIP Forum, 2003 Survey of Affluent U.S. Households, 2003.
Figure 6. Switching of Primary Provider by Age Group
40%
30%
20%
10%
0%
UNDER 40 40-49 50-59 60-70 71+
Source: McKinsey & Company, 2006 Consumer Retirement Survey, 2006.
This data, combined with what we know to expect from the current and future waves of aging
and retirement, suggest that potential client defections will continue to present advisory firms with
challenges, as well as opportunities, for many years to come.

The Bottom Line
Consolidators are a large part of the advice market that is difficult to ignore, and they will continue
to be significant for the next several years. They are a market in transition, however—and in order to
retain these clients—advisors must grow and adapt to their increasing and changing needs. Advisors
must continually anticipate the next stage of their clients’ transition, addressing their needs before
these clients have a chance to question the advisor’s adequacy for providing. Further, advisors should
recognize that due to its fluid nature, the consolidator market is also ripe with opportunity. Targets
include not only the dissatisfied clients from other advisory firms, but also first-time advice seekers
compelled to seek guidance during this important period in their financial lives.
Liquidators
The ranks of retirees will swell dramatically in the next five to ten years, creating a multitude of
complex demands. The needs of most will revolve around managing the risk of outliving assets. The
wealthiest will be more concerned with preserving or distributing wealth for heirs or charitable causes.
As previously shown in Figure 4, by 2010, baby boomers will begin spilling into the 65 years and
over liquidators bracket, which will become the fastest growing market segment. Further fueling
the growth of the senior citizen population will be increasing longevity due to advances in living
standards and health care. The average 65-year-old in 2004 was expected to live to be 83.3 years
old.15 This compares to just 79.3 years in 1960. From 2010 to 2030, the population that is 65 and
over will increase nearly 80%. As a result, one in five Americans will be older than 65 by 2030,
compared to just one in eight in 1990.16
Due to an aging population, by 2020 liquidation mode assets will make up 38% of investable assets,
up from just 32% in 2004 (Figure 3). Another estimate, illustrated in Figure 7, shows assets nearly
doubling in the six years from 2006 to 2012.
Figure 7. Retirement Assets Held by Those Aged 60+ ($T)
$19.5
$14.1
$10.9
$6.4
2003 2006E 2009E 2012E
Source: Federal Reserve Survey of Consumer Finances, Cerulli Associates, August 2004.
15
National Center for Health Statistics, Health, United States, 2006, With Chartbook on Trends in Health of Americans. Hyattsville, MD: 2006.
16
Moss Adams LLP analysis based on U.S. Bureau of the Census population estimates.
The most obvious implication of an aging client base for the financial advisor is the much-heralded
shift in focus from asset accumulation to preservations or distribution. Research conducted by the
Retirement Income Industry Association, presented in Figure 8, illustrates the need for liquidation
to occur at all income levels for retirees to maintain pre-retirement living standards.
Figure 8. Average Annual Incomes for Pre-Retired and Retired Segments
Markets Pre-Retired Retired Percentage Decline
Wealthy $242,000 $106,000 44%
Affluent $125,000 $64,000 51%
Mass $66,000 $35,000 53%
Marginal $27,000 $17,000 63%
Source: Larry Cohen and Elvin Turner, “RIIA Retirement Topology, Consumer Research Results,” RIAA conference presentation, February 13, 2007
The growing senior population is significant for advisors in several ways. The financial needs of
the 65+ age group will become increasingly complex and demand higher levels of service; and the
opportunity to manage the assets of this age group should remain strong as well. The traditional
life cycle savings approach would suggest that asset accumulation will transition to distribution at
this stage, reducing the asset management opportunity. Many liquidators, however, may continue
to work part-time and remain active well into retirement, minimizing asset draw-down. As the baby
boomers have introduced so many new paradigms in their past, they will also redefine retirement as
they fashion a post-65 lifestyle to suit their needs and desires.
Redefining Retirement, Challenging Advisor Capabilities

Similar to the ways in which they have tended to blur the lines between work and personal life
throughout their careers, there is no clear line defining when boomer generation retirees stop working.
For many, retirement simply means relinquishing the job you had to do and switching to the job you
want to do. Among men aged 65 and over, labor force participation rates hovered at about 15% from
1984 until 1999 and then started rising gradually, reaching nearly 20% in 2006.17 A recent national
survey reported that 21% of Americans between 35 and 64 say they will be working forever.18
17
Leora Friedberg, “The Recent Trend Towards Later Retirement,” Center for Retirement Research, March 2007.
18
fK Roper Public Affairs & Media survey sponsored by Bankrate, Inc. as reported in PLANSPONSOR.com, “21% of Adults Say They Will Work
G
Until They Drop,” April 23, 2007.

The growing senior citizen share of the adult population will also fuel the continued rise in the role
of women as financial decision-makers, as women on average live seven years longer than men. In
2000, women made up 59% of the over 65 population, and 71% of individuals over 85. Beyond
simple demographics, survey research and anecdotal evidence point to a growing involvement of
women in household investing. Demonstrating an understanding of women’s unique financial needs
is among many new skills that advisors will need to acquire.
Servicing the pending wave of liquidator wealth comes with a host of more specific implications.
As the financial needs of aging clients grow in complexity, generating investment returns fades in
importance and is replaced by the capability to manage cash flow, reliably matching assets with
liabilities at future points in time. In most cases, the advisor’s primary goal will be to manage the risk
that clients will not outlive their assets. In addition to coping with capital market volatility, this
also means hedging against the uncertainties of inflation, longevity, and health care requirements.
For the wealthiest liquidators, the efforts of advisors will be focused on wealth preservation, and
distribution of assets to heirs and charitable causes.
To adequately service the liquidator, advisors must take on a more administrative role and be
prepared to provide guidance on a variety of issues, which may include the following:
> Estate planning and charitable giving

> Retirement planning
> Reverse mortgages
> Medicare, Medigap, and prescription drug plans
> Critical illness and long-term care insurance
> Longevity insurance
> Tax-efficient sequencing of withdrawals across taxable and nontaxable accounts
> Guaranteed income strategies
Tremendous market opportunities await firms who succeed in differentiating themselves on the basis
of these broader aspects of retirement. Unfortunately, many of today’s advisors are ill-prepared to
meet even the most basic of these needs. For example, over half of millionaire households do not
receive asset allocation or retirement planning help from their advisors. As shown in Figure 9, many
advisors remain focused on dispensing investment advice at the expense of financial planning. The
investment-focused advisor can realize efficiencies from a more narrow service offering, but may be
giving up a stronger client relationship and deeper share of wallet.
Figure 9. Advice Gap
80%
70%
60%
50%
40%
30%
20%
10%
0%
INVESTMENTS ASSET RETIREMENT TAX ESTATE
ALLOCATION PLANNING PLANNING PLANNING
Notes: Households with at least $1 million in net worth, excluding primary home.
Source: The Phoenix Companies, 2006 Phoenix Wealth Survey, March 2006.
Addressing Health Care Planning Needs

Perhaps the gravest deficiency in the ability of advisors to service liquidators is in the area of health
and long-term care. Health care costs have outpaced general inflation for years and have recently
been growing at 10% annually. The Employee Benefit Research Institute estimated in 2006 that
a couple should expect to spend $295,000 for health care premiums and out-of-pocket expenses
during retirement. If they live to age 95, they should expect to spend as much as $550,000.19
In most cases, clients do not yet fully understand the scope of the health care crisis that they may
potentially face. An even bigger issue is agreement over who will foot the bill on future health care
costs. More than two-thirds of consumers believe their employer will provide health benefits to
retirees, while only one-third of employers actually do.20
While health care costs are likely the biggest risk to success of a retirement plan, only 7% of financial
advisors rate themselves as well-equipped to deal with health care issues.21 The share of clients who
want advice on long-term care (28%) is more than triple the percentage of advisors who provide it
(8%).22 Even younger generations are concerned. Accumulator millionaires rated rising health care
costs as a greater concern (42%) than issues such as tax increases (35%) and the viability of Social
Security and Medicare (30%).23
19
Jilian Mincer, “Retiree Health Coverage No Longer Sacred,” Dow Jones Newswires Column, May 21, 2007.
20
McKinsey & Company, The Retirement Journey, 2006.
21
Maya Ivanova and Dawn Kehler, “The ABCs of Retirees,” Investment Advisor, January 2007.
22
Fidelity Investments, Adapting a Practice for Retirement Planning, April 24, 2007.
23

The Bottom Line
The liquidator wave will bring a close to the era in which an advisor could differentiate solely based
on being “good at investing.” Retirees are already dramatically changing the client base for advisory
firms, opening up opportunities, as well as exposing vulnerabilities for advisors. To succeed, advisors
must develop new skills and expertise. Increased share of wallet and market share can be won by
firms who successfully position themselves as overall retirement administrators, coordinating the host
of new financial-related issues that surface in the liquidation phase.
Consumer Interest and Preferences
Demographic wealth trends go a long way toward helping advisors understand client needs and
determine a business and service model that will sustain future success. Less quantifiable perhaps,
but no less important, are the attitudes and motivations that drive consumer behavior. Ultimately,
success in winning and retaining good clients is dependent on first understanding shifts in consumer
interests and preferences, and second, on delivering what people truly want and value.
Many consumers have yet to seek the services of an advisor, but will in the future as the need for
a financial advisor becomes increasingly standard. Further, those consumers who already have a
financial advisor will continue to represent opportunity for competitors. No particular distribution
channel or firm type yet dominates in terms of client loyalty, and consumers will become increasingly
vulnerable to defection as they age, retire, and discern the specific advice they need.
Growing Interest in Financial Services and Expert Advice

Research indicates that increasing involvement by individuals with their investments and greater
interest in expert advice will continue to support advisory firm growth, even if household investable
asset growth slows. The result is a greater proportion of overall household financial assets that are
professionally managed. Specifically, these factors are fueling the market:
> Greater involvement. In a 2006 NASD®-funded investor survey, 60% of responding

individuals indicated their involvement in savings and investments has increased.24
> More seeking advice. In 1995, an ICI survey found that 59% of all mutual fund shareholders
had consulted with a financial advisor when making investment decisions.25 Eleven years later,
a similar ICI survey estimated that 73% of mutual fund investors consulted a financial advisor
before purchasing a mutual fund.26
> Professionally managed asset share up. On a percentage basis, total professionally managed
AUM represented nearly 60% of total household financial assets in 2005, up from 55% at
year-end 2000.27
24
Tahira Hira and Cazilla Lolbl, Gender Differences in Investment Behavior, Milestone 3 Report, August 31, 2006.
25
Investment Company Institute, Understanding Shareholders Use of Information and Advisors, Spring 1997.
26
Investment Company Institute, Understanding Investor Preferences for Mutual Fund Information, August 2006.
27
Cerulli Associates, Asset Manager Survey Key Findings, September 2006.
Managing your financial affairs without professional assistance is increasingly viewed in much the
same vein as defendants serving as their own lawyers, or car owners replacing the brakes themselves
instead of hiring a mechanic. All of these activities can be done without training or certification, but
the stakes in terms of personal risk are too high not to delegate them to qualified professionals.
Surely, at some point in the future, the increasing propensity for individuals to seek professional
financial advice will taper off as professional advice becomes universally accepted. There is no
indication of this happening any time soon, however, as a good share of the market still appears
ripe for conversion. A recent Cogent Research survey of affluent middle-aged investors found that
more than one-third do not work with an advisor.28 Another survey sponsored by ING indicated
that one-third of all consumers say friends, relatives, and co-workers are their most reliable sources
for financial information.29
Responding to Sudden Events

One of the experts with whom we spoke succinctly summed up what motivates a consumer to seek
professional advice. There are essentially two types of consumers. The first type recognizes the value
of advice. For this group, seeking an advisor is simply based on achieving a certain level of net worth.
The second type does not initially recognize the value of advice. This group is not drawn to advice
until a “tragic event” occurs, shaking their confidence in managing their own investment affairs.
Survey results appear to support this argument (Figure 10). When asked about significant events
that increased their involvement in savings and investments, “sudden financial gain” is among the
leading mentions. In the category of tragic events, death and divorce are especially motivating
factors for women.
Figure 10. Sudden Events That Change Involvement
25%
ALL
20% MEN
WOMEN
15%
10%
05%
0%
MARRIAGE CHILDREN SUDDEN RETIREMENT DEATH DIVORCE
FINANCIAL GAIN
Note: Respondent questioned about type of life event (primary reason) that changed their involvement in saving and investing.
Source: Tahira Hira and Cazilla Lolbl, Gender Differences in Investment Behavior, Milestone 3 Report, August 31, 2006.
28
harles Paikert, “Clients Loyal But Investors Wary, Survey Says,” Investment News, January 29, 2007. Results based on Cogent Research LLC’s
C
Investor Brandscape survey of 4,000 investors. Investors were born between 1956 and 1964 and had investable assets of more than $100,000.
29
ING U.S. Financial Services, “Many View Retirement Planning More Difficult Than Parenting,” <http://www.ing.com>, January 12, 2007.

As one might expect, other leading events that increase interest in savings and investment are
marriage, children, and retirement. Somewhat surprising is that retirement ranked number four
overall, given all the focus on retirement as a current industry catalyst.
Performance and Delegation

Once an individual decides to seek expert advice, what specifically does he want the advisor to
provide? In the most general terms, clients come to advisors for three primary reasons:
> Provision of expertise or insight

> Better investment performance
> Desire to delegate
Most clients, in some way, are looking for expertise or insight that will better enable them to achieve
their financial goals. Desire for expertise can come in the form of taking advantage of a specialist,
getting a different perspective or objective opinion, or simply access to certain types of information.
Ranking much further behind is the desire to delegate, and the expectation that the advisor will
achieve better investment performance than the client could on his or her own. Regardless of what
initiated their visit, clients who come to an advisor for the first time often do not appreciate the true
breadth of services available. The advisor’s and the industry’s challenge is education concerning the
deeper value proposition an advisor can potentially offer clients.
Choosing an Advisor, Choosing to Stay

Despite the growing recognition for expert financial advice, consumers spend more time researching
a new car purchase, job opportunity, or doctor than they do researching a financial advisor.30 In
defense of the consumer, these findings may be attributed to lack of clarity or good information
concerning how to evaluate an advisor. As a result, clients tend to find advisors largely through referrals.
According to the latest survey research from Moss Adams, about two-thirds (65%) of all new clients
come to an advisor through a referral.31 This proportion is constant regardless of a firm’s service
model or affiliation. Further, of the clients coming in through referrals, the vast majority (66%)
are a result of referrals from existing clients.
Once the referral is made, the new relationship between client and advisor is cemented based
on the client’s impressions of the advisor’s expertise and trustworthiness, and, to a lesser extent,
investment performance.
30
ING U.S. Financial Services, “Many View Retirement Planning More Difficult Than Parenting,” <http://www.ing.com>, January 12, 2007.
31
oss Adams LLP, 2006 Financial Performance Study of Financial Advisory Firms, sponsored by SEI Advisor Network and JPMorgan
M
Asset Management, 2006.
Figure 11. Important Attributes When Choosing an Advisor
80%
70%
60%
50%
40%
30%
20%
10%
0%
TRUST- UNDERSTANDS KEEPS ME LOW COSTS TOP
WORTHY MY NEEDS REGULARLY FOR SERVICES PERFORMER
AND GOALS INFORMED PROVIDED
Note: Percent ranking attribute most important when asked, “When selecting an advisor, what attributes do you care most about?”
Source: State Street Global Advisors/Knowledge@Wharton, Bridging the Trust Divide: The Financial Advisor-Client Relationship, May 2007.
The survey results presented in Figure 11 found “trustworthy” to be by far the most frequently
ranked attribute in terms of importance when choosing an advisor. Based on a recent Phoenix
Affluent Marketing Service survey, once the relationship is formed, the strongest loyalty driver is
the advisor’s knowledge and the quality of advice provided—in other words, the advisor’s expertise,
which is consistent with the reason why clients use advisors (Figure 12).
Figure 12. Top Loyalty Drivers Equated With Primary Advisory
NUMBER OF SERVICES
WITH ADVISOR
14% KNOWLEDGE OF ADVISOR,
31% QUALITY OF ADVICE
SERVICE, QUALITY,
PROBLEM RESOLUTION 15%
18%
22%
INVESTMENT PERFORMANCE
TRUST, HONESTY, DEPENDABILITY
Note: Based on 7,396 interviews. The data are weighted to be representative of affluent households nationally (minimum of $250,000 in investable
assets and/or $150,000 household income).
Source: Phoenix Affluent Marketing Service, Financial Advice—The Next Commodity? September 2006.

While trust and expertise serve to attract clients, even the most knowledgeable, trustworthy advisor
can lose clients. In another survey, clients ranked poor portfolio performance, a factor often outside
an advisor’s control, far above others when asked what are the top reasons to switch advisors.32 Other
research cites “lack of attention” as another primary motivator for defection.
Moss Adams’ research, however, suggests that client defection is relatively rare. The latest data indicate
that advisory firms, on average, lost about 5% of their existing client base during 2005.33 By service
model, financial planners experienced the lowest defections. By affiliation, independent RIAs had
the lowest defections.
That said, advisors cannot ignore the importance of guarding retention. Consumer research does not
indicate strong loyalty associated with any particular distribution channel. Few firms have been able
to consistently capture loyalty, either. Further, there are particular points in the lives of clients when
the client becomes especially vulnerable to defection, as we noted in our discussion of consolidators.
Winning and Maintaining Relationships

Clients will be won based on the establishment of trust and credibility; advisory firms ignore
consumer preferences at their peril. Even in the absence of competition, an increasing number of
consumers will be vulnerable to defections due to age and retirement. As clients age, needs change,
and clients reevaluate the ability of their current advisor to meet the new challenges.
The focus on trust and expertise best positions the advisor, and not the firm, to influence client
loyalty. Clients and prospects will be most influenced by the advisor’s ability and reputation for
serving clients in a manner that is credible and knowledgeable.
For firms to stand out and position themselves as trustworthy, credible, and knowledgeable, they
must consistently attract and retain advisors who, in turn, convey these attributes to their clients. This
requires compensating and incenting these behaviors within advisory firms. Further, expertise must be
a focus with advisor training and sufficient support from technical specialists. Finally, firms should be
mindful of the need to have a corporate culture and ethical behavior that is beyond reproach.
32
The Phoenix Companies, 2006 Phoenix Wealth Survey, March 2006.
33
oss Adams LLP, 2006 Financial Performance Study of Financial Advisory Firms, sponsored by SEI Advisor Network and JPMorgan Asset
M
Management, 2006.
The Changing Landscape of Competition
Intensifying competition is inevitable in a market with more than 300,000
advisors. Advisors have always been able to define their own service model,
and face relatively few situations in which the client is evaluating them
against several competitors. The danger in the future is that the large national
firms will define both consumer service expectations and pricing, leaving
independent RIAs in the role of “vendors” rather than strategic competitors.
To understand the landscape of future competition, it is important to know how recent events in
the industry have shaped investor expectations, and in turn, generated opportunities for independent
registered investment advisors.
Scandals at the national full-service firms drove consumers to look for fiduciary objectivity in their
advisors. The current success enjoyed by RIAs resulted from the powerful message of fees as a
conflict-free pricing model, and the acceptance of strategic asset management (asset allocation) as
a model of investment by mainstream consumers. Thus, RIA firms benefited from macro forces,
but they could not control those forces. Now each RIA has to proactively position itself to be
competitive, rather than wait for benefits that result from market forces.
The standard framework for competitive analysis was developed by Michael Porter, a leading
authority on competitive strategy; it focuses on five forces: 1) the bargaining power of customers,
2) the bargaining power of suppliers, 3) the threat of new entry in the industry, 4) the threat of
substitute products, and 5) the nature of the competitive rivalry.34 Using Porter’s Five Forces, we
have focused our analysis on:
1) The decision-making process that consumers go through, and the ability of advisors to influence
that process (consumer bargaining power and the threat of substitute products)
2) The competitive behavior of the broad industry, including wirehouses (competitive rivalry)
3) The consolidation in the industry (again, competitive rivalry)
4) The supply of new advisors (the bargaining power of suppliers)
34
See Porter, Michael E., Competitive Strategy: Techniques for Analyzing Industries and Competitors. Originally published: New York: Free Press, c. 1980.

Figure 13. Porter’s Five Forces Affecting Competitive Strategy
Bargaining
Threat of
Power of
New Entrants
Customers
Bargaining Threat of
Power of Competitive Substitute
Suppliers Rivalry Within Products
an Industry
NATURE OF INDUSTRY COMPETION
Source: Porter, Michael E., Competitive Strategy: Techniques for Analyzing Industries and Competitors. Originally published: New York: Free Press, c. 1980.
Economists like Porter distinguish between markets in which competitive behavior is strategic and
models of “perfect competition”—the theoretical notion of a perfect market in which there is perfect
knowledge and information, and consumers can switch providers without cost. The words “perfect
market” can be misleading—in this theoretical model of competition, individual competitors end
up having no ability to influence the market. They can only choose how much service they will
supply but have no impact over the price of client behavior. The advisory industry will never be a
“perfect competition” market—far from it. However, these economic models help us understand the
dynamics that will shape the industry in the next five years and, therefore, help us define the steps
that advisors should take to ensure success in the future.
RIAs Must Frame Consumer Decisions
National TV advertising, newspaper ads, and other marketing are already bombarding consumers
with the message that their needs are defined by their generation (“baby boomers”), that they need
a big, stable company to tackle their retirement, and that they should select a company with a global
reach. Each and every one of these statements is framing the decisions that a consumer makes and
thus defining the terms of competition. Note current market share by affiliation model, as detailed
in Figure 14.
Figure 14. RIAs Make Up 14% of All Advisors
110,027
NUMBER OF ADVISORS
72,691
57,432
43,008
16,892 15,595
INDEPENDENT WIREHOUSE INSURANCE RIA BANK-OWNED REGIONAL

B/DS ADVISORS B/DS ADVISORS B/DS B/DS
Source: Cerulli Associates, U.S. Cerulli Edge, August 2006.
RIAs need to find the forum and means to convey their own messages, which may include:
> Fulfilling client needs is not as simple as defining which generation you belong to; it depends
on an advisor spending the time to get to know you.
> “Big” often means diluted.
> Investing globally can be achieved without having offices in every city with a stock exchange.
The ability to strategically position a firm should not be taken for granted. Competition can result
in consumer expectations being so well-established that individual companies can only match the
expectations and compete on one or two limited characteristics without any pricing power or ability
to change the terms of service.
For example, in the tax preparation business, the relatively simple Form 1040 tax returns are most
often prepared with the aid of software packages, sometimes with the assistance of a real person, and
sometimes in a do-it-yourself model. In any case, the service expectations are well-set, and the service
characteristics are well-known to the consumer. Competition is focused on price, and opportunities
for differentiation are few. A small tax preparation practice that wants to focus on the 1040 market
will have to be tactically superior to the large national chains—more friendly, better situated for
marketing—but will not have the ability to strategically influence the market. It can naturally search
for niches with less competition, but the number of niches is limited, and those can become crowded
as well.

Creating Customer Demand
The key to understanding the competitive future of the industry is to understand who creates
customer demand and how. In the advisory industry, before consumers will hire an advisor, they
have to walk the path from 1) understanding they have a need for advice, 2) self-identifying that
their current solution is not good enough, to 3) identifying the advisors who can potentially offer
a better solution. This process may be triggered by a retirement planning calculator; by a life event
such as inheritance, death, or divorce; or by a frustrating interaction with their current provider.
Once a problem is identified, the process is set in motion; the client goes through the following
general phases:35
A) Identify a problem or need. The problem or need might be dissatisfaction with their current
provider; realization that they are not as prepared for retirement as they would like to be; or
an interest in wealth management after speaking with a colleague or reading an article in a
magazine highlighting those services.
B) Consider the options. Whether consumers choose to act or not depends upon how serious they
perceive the problem to be.
C) Evaluate providers. Next, consumers typically compile a list of providers they believe can help
them address the need or issue, drawing on their centers of influence for possible referrals. This
is also where firm-level marketing typically begins—focusing on prominence in the market of
potential providers.
D) Choose a provider. Finally, the potential client will meet with, evaluate, and select an advisor.
Figure 15. Choosing an Advisor Is a Four-Phase Process
Source: Moss Adams LLP, 2007, drawing from ideas presented in Best, Roger J., Market-Based Management: Strategies for Growing Customer Value and
PHASE A PHASE B PHASE C PHASE D

NUMBER OF CONSUMERS
Consumers recognize
a problem (need for Consider the
a retirement plan, options, whether
better investment Evaluate Select a
or not to act providers provider
strategy, more (how serious is
attention from the problem?)
their provider, etc.)
Profitability, 4th ed.
35
Adapted from Best, Roger J. Market-Based Management: Strategies for Growing Customer Value and Profitability, 4th ed.
RIAs can influence consumers at each of the crucial phases, A through C (Figure 15). During the
past five years, independent RIAs doubled in size and successfully took market share away from
wirehouses and banks, carried by their strength in helping potential clients acknowledge that they
have a problem that needs resolution (Phase A) and consider their options (Phase B). The difficult
markets of 2000, 2001, and 2002 caused much dissatisfaction with the brokerage industry (Phase A).
The mutual fund and wirehouse scandals amplified this opportunity (Phase A), and eliminated them
from the list (Phase B). The increasing recognition of commissions as a potentially conflicted method
of compensation added fuel to the fire (Phase B). Furthermore, financial planning and strategic asset
management helped advisors get into the list of referred or researched potential providers mentioned
in Phase B. Importantly, a high number of consumers recognized a problem (Phase A). Therefore,
the opportunity at the evaluation phase (Phase C) was significant.
From the perspective of an RIA firm, it may seem difficult to influence the initial decision. After all,
how can an RIA help consumers identify whether their investment strategy is adequate or if their
current advisor is doing a good job? Yet this is precisely the phase at which RIAs won many of their
new clients in 2000-2006. We believe that RIAs can and should participate in the definition of the
issues by doing the following:
> Help consumers identify problems. Books, web sites, tools, presentations, events, and one-to-
one conversations—any form of communication that helps consumers understand what their
needs are potentially initiates the search for or change of advisor. RIAs should be very active in
the process.
> Educate consumers about their niches. One of the strengths of RIAs is in identifying
niches and creating unique solutions for those niches. The first step, however, should be to
educate consumers in a niche that their needs are, in fact, different and cannot be tackled by
generic solutions. Much of the competition will be centered on “baby boomer” issues, but
not all consumer needs are defined by their age or generational characteristics. RIAs can help
consumers realize that in addition to baby boomers, they are also business owners, members of a
profession, supporters of a charitable cause, etc.
> Help the industry define its quality standards. This is where a lot of the lobbying effort is
directed in the case of the SEC exemption from registration for incidental advice. The strong
fiduciary statement pursued by the FPA and others created a very clear method for consumers to
diagnose this problem: their advisor is either an RIA or not, and therefore is either a fiduciary or
not. The exception creates a more complex picture and does not position RIAs to win clients at
Phase A nearly as well.

The past five years created a rich opportunity for RIAs at Phase A, and they took full strategic
advantage of it. However, the number of consumers likely to enter Phase A at all is decreasing, and
the factors that made RIAs stand out during the evaluation process at Phase C are diminishing.
Influencing the Frame of Evaluation

Phase A of the consumer path is not only an occasion for providers to make consumers aware of
the problem. It is also the time when consumer expectations are created, and whoever controls
the framework for evaluation of advisors will have significant sway over its results. For example, if
consumers come to expect that a good advisor will be a CFP, work for a large brand name firm, is
recommended by a large local law firm, has a DALBAR rating, and charges an all-inclusive (wrap) fee,
this is very much a definition that favors a specific type of advisor—namely, large wirehouse firms.
A classic example of influencing the frame of evaluation is the discussion regarding the role of
investment performance in the overall evaluation of an advisor. If it becomes universally agreed upon
among clients that investment performance is not necessarily a good measure of their satisfaction
with a financial planning or wealth management advisor, then this will trigger relatively few events
in which clients change advisors as a result of poor performance. And vice versa: if the performance
continues to be a highly rated factor in the evaluation process, the criteria will tend to favor active
managers at the expense of wealth managers.
The ability of advisory firms to define their own criteria for evaluating their services is critical for
the collective success of the advice-focused firm. If advisory firms do not supply consumers with
a clear and easy-to-understand matrix for evaluating potential advisors, the industry will lose the
opportunity to utilize investment performance-driven options such as hedge funds, investment
managers, or self-directed models.
Much of the competition in the industry is local, and therefore, much of the race for influence over
consumers is local, too. While it may seem implausible for RIAs to compete in terms of consumer
influence with national firms, in fact, many of the larger RIAs are already rivaling the size of the local
branch offices of the national firms. This local “dominance” is critical.
Therefore the competition to be one of the top firms in the local market will be intense. It is claimed
that the top three competitors in a market for any service have twice as many revenue opportunities
as the number four firm. In practical terms, that means that if the number three firm in a market
gets 100 prospects in a year, the number four firm sees only 50. The drop-off is not gradual; it is
rather steep. That is why the competition for the top spots will be intense.
Who You Are Is Irrelevant, But What You Do Matters
Independent RIA advisors compete primarily with the local offices of the large wirehouse firms, the
large local trust companies, CPA firms, and banks rather than with each other. From an RIA firm
perspective, competition should be thought of as between channels and affiliation models. RIA firms
rarely report competing with each other for market share. Rather, their new business comes from
clients, who are dissatisfied with their current providers, whether that is a self-service model or a
wirehouse firm.
The average retail wirehouse branch size in larger metropolitan locations is between $8 and $12
million in revenue, and many advisory firms are already approaching this size. This means that
RIAs will successfully compete locally with the wirehouse firms in terms of number of clients and
market presence. However, as we noted earlier, consumer research strongly suggests that clients do
not understand the different affiliation models that the industry uses and do not have a clear frame
for evaluation of their providers. Thus, overwhelmingly, the number one factor for evaluation of
the relationship is “being trustworthy,” looking after their best interests and acting in good faith.
However, trustworthiness is not an easy criterion to evaluate—it is driven by reputation and a history
of past behavior. Therefore, it is no surprise that referrals from existing clients and other trusted
advisors continue to be the primary source of business development for advisors.
Positioning Value
Moss Adams collected the client value proposition statements from the top 50 RIA firms and
another 50 randomly selected smaller firms, and analyzed and compared them to the largest
wirehouses, banks, and trust companies. We found that the positioning of advisors in the overall
marketplace (the entire investment industry) followed four basic patterns (Figure 16):
> Not-a-wirehouse. RIAs who choose such competitive positioning emphasize their independence
and fee-based pricing above all factors.
> Comprehensive solution. RIAs who follow this pattern of marketing emphasize their
comprehensive services and the ability to address all issues in the client’s financial life. This is
very typical of the true wealth management firms.
> Personal attention. RIAs in this category emphasize the personal attention given to the client
by the most experienced advisors in the firm—i.e., the principals. In a way, this is also used
as a contrast to the rather impersonal service offered by wirehouses and other providers. This
approach is very common for smaller firms.
> Expertise. This approach emphasizes the historical experience of clients and/or investment
returns, and leverages either the reputation of high-profile clients (usually not named, but their
presence as a category is marketed) or investment returns.

Figure 16. Everybody’s an Expert
42%
PERCENT FIRMS CLAIMING

28%
16%
14%
EXPERTISE COMPREHENSIVE NOT-A-WIRE PERSONAL

SOLUTION HOUSE ATTENTION
Source: Moss Adams LLP, 2007 (original research conducted specifically for Uncharted Waters: Navigating the Forces Shaping the Financial Advisory Industry).
In terms of frequency, experience was the most emphasized factor, followed by comprehensiveness of
the firm solution and “not-a-wirehouse” positioning.
While expertise and comprehensiveness of the solution will continue to be important parts of the
positioning, we believe that the juxtaposition to other types of affiliation models will lose some of its
appeal as the client service models and organizational models become more uniform across different
sectors of the industry.
What is most interesting is that the value proposition of larger RIAs is converging with that of
the wirehouses. The same factors, such as institutional experience and knowledge, expertise, and
comprehensive resources, are emphasized in both categories. We challenge the reader to distinguish
which is the RIA and which is the large and well-known wirehouse in the following two sets of
statements, as the parallels in messaging are clear:
Affiliation Model A: Affiliation Model B:
> Firm focus on managing financial > Develop a thorough understanding of
assets for private high-net-worth your financial goals and objectives
clients and institutions
> Review and analyze your current
> Experienced investment professionals financial situation
manage your portfolio
> Identify and tailor solutions that can
> Your portfolio manager is the key help you meet your individual needs
client contact
> Implement your customized strategy,
> Unique blend of customized including personalized services
investment products and benefits
> Each portfolio is individually managed > Monitor progress, periodically review
strategies and we will maintain an
> High level of attention to client service
ongoing commitment to you
and administrative detail
> Long-term record of solid

investment results
The competitive factors that drive growth in advisory firms are in the following order:
1) First movers’ advantage (i.e., being first to market) – Firms who can proactively help clients
identify issues in their financial lives have grown the fastest. By priming the first step of
the process, the firm dramatically increases the number of opportunities it receives, and is
strategically capable of writing the rules for selecting the firm who will be the solution provider.
2) Communicating integrity – Firms who can communicate integrity address the number one
criteria clients have: trustworthiness. Communicating integrity is not easy, though—it requires an
impeccable reputation, a strong record for service, and a willingness from clients and affiliated
third parties to endorse the firm as one that is good to do business with.
3) Reputation and references – Firms who have access to referral sources have grown fast on the
strength of the sheer number of opportunities they receive.
4) Public credibility and brand – Naturally, reputation and brand are important. What is interesting
is that local brands have been more effective in our experience than national brands.
5) Personal attention from senior people – This last factor can be a powerful draw for clients, but
can also be a growth killer as soon as the capacity of the main principal is exhausted.
The change from today’s competitive environment will be in the much-increased emphasis on
innovation, being the first mover, and the importance of integrity and references.

Growth Will Create Larger and More Competitive RIAs
As the RIA industry grows, its success will continue to result in new firms being formed. In addition
to that, the traditional competitors of RIAs—wirehouses and banks—will transform their local
presence to more closely resemble the competitive characteristics and behavior of RIAs.
Figure 17. Historical and Projected Number of RIA Firms
20,000
18,000
16,000
14,000
12,000
10,000
8,000
6,000
4,000
2,000
0
99
00
01
02
03
04
05
06
07
08
09
10
11
12
19
20
20
20
20
20
20
20
20
20
20
20
20
20
Source: Cerulli and Associates for 1999-2006 data. Moss Adams forecast for 2000-2012.
Moss Adams estimates that within the next five years, the number of retail-focused advisory firms
will grow to over 19,000, compared to the 15,500 firms currently competing in the marketplace.
Therefore, competitive situations that involve more than one RIA firm will inevitably increase.
The increase in the number of firms will also be coupled with an increase in the general size of
the firm. The size of the typical advisory firm already doubled between 2000 and 2005. Based on
historical data from the 2004-2006 Moss Adams advisor studies, we estimate that the average assets
under management for an RIA will rise from $179 million in 2003 to over $1 billion by 2010. This
projection is calculated from the average historical changes in assets of firms with at least $50 million
in AUM between 2003 and 2005, as shown in Figure 18.
Figure 18. Average Historical and Projected Assets of an RIA Firm, 2003-2012
1,800
1,600
1,400
1,200
$ MILLION
1,000
800
600
400
200
0
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Source: Moss Adams LLP annual advisory firm studies for 2003-2006 data. Forecast for 2006-2012, conducted specifically by Moss Adams LLP for
Uncharted Waters: Navigating the Forces Shaping the Financial Advisory Industry.
The growth will be fueled by an increase in new client assets (13% per year), an increasing wallet
share, especially as pension plans mature (7% assumption), and a historical level market performance
of 8%.36 The attrition will come from loss of clients (-2%) and distributions to existing clients (-%).
Competing in a Consolidated Industry

As Porter’s classic analysis indicates, in order to understand competition in the future, we have
to understand the intensity of competition in the industry, which in the RIA industry means
looking into the trend of consolidation. The advisory industry is still very fragmented and far
from consolidated. Competition is still at the local level, and the large national firms have yet
to demonstrate any advantage over local brands (one-office firms with strong local reputation).
Therefore, the opportunity to take the leading spot in a local market is still available. However,
the trend toward consolidation is very strong at the top, threatening to increase the minimum size
necessary to compete strategically in the market.
36
Based on the historical performance of the broad stock and bond markets since 1926 and an asset allocation of 60% equities, 30% bonds, and 10% cash.

Figure 19. Percentage of Firms by Size Owned by a Parent Company
38%
32%
11%
9%
7% 6%
250K-500K 500K-1M 1M-2M 2M-3M 3M-5M >5M
Source: Moss Adams LLP based on data compiled from Moss Adams LLP, 2006 Financial Performance Study of Financial Advisory Firms, sponsored by
SEI Advisor Network and JPMorgan Asset Management, 2006.
As of 2006, only 10% of RIA firms had a corporate parent, a relatively low number. However,
amongst the largest firms in the industry, those with over $5 million in total, nearly one-third
were already owned by a corporate parent.
Cherry-picking has also occurred, not only in terms of size, but also geographically, with acquirers
moving from one market to another in order to establish presence, and even from a public relations
standpoint with some of the best-known and publicized firms also being acquired. For example, of
the top 50 firms in the Bloomberg Wealth Management list from 2003, eight firms (16%) were
acquired between 2003 and 2006.
The trend of acquisition of the largest firms will likely continue, with over $2 billion in capital
already raised by consolidators.37 The capital raised is enough to acquire as much as $400 billion in
assets, or 22% of the total assets held by RIAs as of the end of 2006.38 This estimate applies only
to the top consolidation firms in the industry and does not include all the banks, trust companies,
insurance companies, and other parties interested in buying RIA firms.
Obviously, such a buying spree, should it occur, would dramatically alter the face of the industry and
change the competitive landscape. From a competitive positioning standpoint, there are two central
questions that warrant discussion:
37
Pershing Advisor Solutions, Real Deals: Definitive Information on M&A for Advisors, 2006.
38
Based on a $1.8 trillion total asset estimate as per Cerulli Associates, Cerulli U.S. Edge, 2006.
1) Are consolidators going to consolidate strategy across the network, or are they going to
retain the independence of the acquired firms?
> At present, most consolidators, and many of the other acquirers, are not planning to alter
the competitive behavior of the acquired firms. There is enough competitive success and
cash flow in the firms to generate high enough returns on the investment without changes
to pricing or other components of the value proposition.
> As valuations go up, however, and as consolidators start to go public or sell to public
companies, the firm “as is” will not be enough. The one financial advisory conglomerate
that went public—National Financial Partners (NFP)—is trading at multiples of 12 to 15
times EBITDA, very close to the pre-IPO valuations already given to RIA firms by some
of the newly started consolidators. Granted, NFP acquired mostly insurance and benefits
firms, but nonetheless, the caution flag is up.
> The value created by consolidators at the first round is the arbitrage between private
and public markets. The second round, however, rests with the ability to demonstrate
organic growth and success as a consolidated firm. This is the stage when we expect to see
consolidated firms starting to behave similarly to wirehouses and pursue standardization of
services and operations.
> This process of consolidated firms starting to migrate to national firm models will not
start for at least another five years, not until the consolidators go public and the current
generation of principals retires. However, as the principals retire and as the control over
the firms passes into the hands of the next generation, there will be a higher propensity to
compete as a single entity rather than individual firms.
2) Can an acquired firm still be independent?
> The acquisitions made in the past five years create an interesting paradox: Can a
firm acquired by a bank still claim that it is independent? As we mentioned in the
previous section, many of the independent firms build their value proposition around
the “nonwirehouse” concept. As they are acquired, that positioning may no longer be
available, and it may create a strategic gap that can damage growth.

What is significant in the industry is not the number of competitors in the market, but rather the
ability of the top competitors to influence the terms of competition. In the advisory industry, that
means the ability to define the service model, the pricing structure, and the measures of success. This
is where consolidation puts independent RIAs at danger—it may lock them out of that ability by
concentrating the strategic power in the hands of national firms and consolidated local firms.
Winning the Largest Clients

The battle for market share among independent advisors will be fought at the $10-$50 million
client segment. At present, RIA advisors appear to dominate the $1-$10 million category, but
at the same time, many aspire to move up to a higher client segment. The question is, can they
extend their brand and their capabilities to compete for the largest clients? While most companies
market themselves as focused on high-net-worth clients, the reality is that at present there is some
stratification of the client base by industry channel, with independent advisors competing very
successfully, and perhaps even dominating, the category of consumers between $1 million and
$10 million in investable assets. Note Figures 20-22.
Figure 20. Percent of RIA Firms Whose Target Client Is Larger Than $10 Million
34%
27%
19%
11%
3%
UNDER $1M $1M-$2M $2M-$3M $3M-$5M >$5M

FIRM SIZE BY REVENUE
Source: Moss Adams LLP based on data compiled from Moss Adams LLP, 2006 Financial Performance Study of Financial Advisory Firms, sponsored by
SEI Advisor Network and JPMorgan Asset Management, 2006.
Figure 21. Median AUM Per Client by Firm Revenue
$1,801,190
$1,496,216
$1,354,162
$926,063
$552,583
$310,680
250K-500K 500K-1M 1M-2M 2M-3M 3M-5M >5M
Source: Moss Adams LLP, 2006 Financial Performance Study of Financial Advisory Firms, sponsored by SEI Advisor Network and JPMorgan Asset
Management, 2006.
Figure 22. Client Distributed by Net Worth
100
>$25M
PERCENT OF CLIENT BASE
80 $10M-$25M
$1M-$10M
60
$250-$1M
40
<$250K
20
0
BANK BD IND. BD INS. BD WIREHOUSE REGIONAL RIA
BD
Source: Cerulli Associates, 2005 Advisor Summary, May 2005.

Compared to other market segments, a much larger share of an RIA’s client base is in the $1-10
million net worth range. For the RIA, 40% of clients in this category are beyond $10 million. A
distant second are wirehouses, or national full-service brokers, where about one-third of clients are
beyond $1 million in net worth.
The appetite for large clients among RIAs is growing quickly, and we foresee RIAs competing
fiercely for these clients. As the Cerulli data indicate, the competition for this segment will be
between wirehouses and RIAs.
Research suggests that the RIA market share at the high end of the market is growing. Celent
estimated that in 2006, approximately 14% of assets in the U.S. private client space were in the
custody of RIAs, an increase from 9% in 2003.39 Further, RIAs accounted for 52% of the mentions
in Worth magazine’s top wealth advisor rankings.40 A distant second were wirehouse brokers,
accounting for 18% of ranked advisors.
Competitive Positioning And The Blurring Of Service Models
The industry uses an increasing number of descriptors for its services: financial planning, investment
advice, investment management, and wealth management are the most common. However, less
and less variation actually exists in the service models of various advisory firms. While quality of
the service set may differ, the service offerings of most firms appear relatively constant. This is
particularly true across the various stages of firm development, as illustrated in Figure 23.
39
FundFire, “RIAs dominate Worth’s Top Advisor List, September 25, 2006.
40
FundFire, “RIAs dominate Worth’s Top Advisor List, September 25, 2006.
Figure 23. Services Offered by Stage of Firm Development
MEDIAN NUMBER OF
SERVICES OFFERED FIVE TOP OFFERINGS, IN ORDER OF MENTION
Early Solo (Firms with one owner/ 9 1. Retirement Planning

professional in business for less 2. Financial Plan Development
than nine years) 3. Income Tax Planning
4. Estate Planning
5. Life, Health, Disability, Long-Term Care
Institutional Planning
Mature Solo (Firms with one 8 1. Retirement Planning

owner/professional in business 2. Financial Plan Development
for nine years or more) 3. Estate Planning
4. Investment Management—Non-Discretionary
5. Income Tax Planning
Early Ensemble (Firms with 9 1. Retirement Planning

multiple professionals with less 2. Financial Plan Development
than $2 million in annual revenues) 3. Estate Planning
4. Investment Management—Non-Discretionary
Mature Ensemble (Firms with 9 1. Retirement Planning

multiple professionals with 2. Estate Planning
between $2 million to $5 million 3. Investment Management—Discretionary
in revenue) 4. Financial Plan Development
Market Dominator (Market 7 1. Investment Management—Discretionary

dominators are firms with 2. Financial Plan Development
multiple professionals and more 3. Retirement Planning
than $5 million in annual revenue) 4. Estate Planning
5. Cash Flow Planning
Source: Moss Adams LLP, 2006 Financial Performance Study of Financial Advisory Firms, sponsored by SEI Advisor Network
and JPMorgan Asset Management, 2006.
The lack of service model variance is evident even across firms claiming different service positioning.
Only those positioning themselves as investment managers stand out. Moss Adams found that
investment managers offered on median just two services. These were typically discretionary
investment management coupled with retirement planning. That said, while wealth managers and
financial planning firms tended to offer a greater number of services, their primary service offerings
also included investment management and retirement planning.
In the coming years, distinctions will continue to blur across firm types. The independent RIA in
particular, will find it increasingly hard to maintain distinct marketplace positioning. In addition to
offering similar services, other firm types will continue to encroach on the value proposition of the
independent, objective, and customized advice traditionally owned by the independent RIA.

Deepening Expertise
In light of current marketplace trends, successful firms of the future will win market share on the
basis of offering deeper expertise in existing services, as well as selectively adding a limited number
of additional services.
One example of deeper expertise to employ is in the area of asset allocation and portfolio
diversification. These concepts, a retail domain first claimed by the independent RIA, are now widely
employed by advisors of all types and readily found embedded in many investment products “off-
the-shelf.” For advisors to stay ahead of the market now, the next level of value-added service will
center on customizing a better asset allocation based on the specific circumstances, preferences, and
risk tolerances of each individual client.
A key example of services that advisors clearly need to more widely offer is life, health, disability,
and long-term care insurance planning. Just over half (53%) of the firms in the Moss Adams
study indicated routinely advising clients on these issues. Independent RIA firms were particularly
deficient, with less than half (48%) routinely providing this service.
However, adding more specialized knowledge and services in a manner that is cost-effective and
manageable will require changes in the service delivery structure. Team-based service delivery is a
key change that can allow RIAs to effectively serve clients and compete in the marketplace.
Competing Through Teams

At present, it is fair to say that the building block of the investment advisory industry is a
relationship between one client and one advisor—a one-to-one system of building trust, exchanging
information, and relating to each other. The building block of the future, however, will be a team
of advisors working together to meet diverse client needs and provide specialized knowledge.
This building block has been used as a competitive strength by independent RIAs who have
successfully emphasized their focus on the relationship between an advisor and a client and have
pointed out that in the larger firms, the relationship that prevails may sometimes be the one
between the advisor and the home office.
The one-to-one model has the advantage of the strength of human relationships; however, it also
has some serious drawbacks that make teaming much more attractive:
> One advisor cannot possibly be an expert in all areas of expertise demanded by a client. The
increasing complexity of financial advice will force investment advisors to seek the help and
participation from other professionals—tax, insurance, etc.—or become an investment—only
specialist, a role that few advisors target.
> The one-to-one model does not allow for any role of the firm in the relationship. In the early
stages of the RIA industry, the advisor/owner was synonymous with the firm. As RIA firms
grow, they will realize that this creates an environment of high professional liability.
> In an environment where the firm cannot emphasize or exercise control over the quality of
advice, the professional liability will be very high. At present, RIAs have maintained a very clean
compliance history. However, as the firm expands and involves more and more individuals who
are not owners, and are not working directly under the owners, the issue will become inevitable.
A peer review structure will be necessary, for safety reasons.
> The risk of client loss at the firm level will also force firms to implement team-based service.
Statistics show that when advisors break away from a wirehouse firm, over 80% of all clients
stay with the advisor when the advisor changes firms.41 Contrary to that, when clients are working
with multiple professionals, their loyalty remains with the firm, not with an individual advisor.
The only reason the team-based model is not already the dominant model in the industry is the
challenge of implementation—the model is theoretically optimal from a client perspective and from
a firm perspective. The only resistance is at the advisor level, where implementing new compensation
structures, creating and coordinating the teams, and assigning roles and expectations create an
insurmountable set of obstacles, at least for wirehouse firms. RIA advisors do not have to follow this
path of segregated silo practices, but should rather create team-based service models that can benefit
the client and the firm.
The Disappearing Affiliation Model

All surveys of investors strongly indicate that clients do not understand the differences between
business models in the advisory industry. Investors, however, expect a high level of trustworthiness
from their advisor and the advisor’s firm, and in the future, that expectation will force all business
models to converge expected behaviors and processes.
SEC consumer research is conclusive in their collective statement that clients do not understand the
differences between the various affiliation models, but nonetheless imply that there should be some
level of trust that consumers can assign to the relationships they have made, regardless of affiliation.
SEC research found that “...Respondents in all focus groups were generally unclear about the distinctions
among the titles brokers, financial advisors/financial consultants, investment advisors, and financial
planners. . . . Investors relied heavily on their personal experiences with their financial services professional
rather than knowledge of the subject matter.”42
41
Moss Adams LLP, Your Roadmap to Independence, for TD Ameritrade, 2004.
42
S iegel & Gale LLC and Gelb Consulting Group, Inc., Results of Investor Focus Group Interviews About Brokerage Account Disclosures: Report the
Securities and Exchange Commission, March 10, 2005.

This confusion about titles and regulations should not be misunderstood as indifference. Clients
have essentially declared that they will trust sources other than regulatory designations to find out
what matters to them the most. The reliable sources are always the same—their family, their friends,
their other trusted service providers. This means that in the future, advisors will continue to compete
heavily on reputation and not necessarily on the basis of affiliation model. While new regulation or
strategic maneuvering at the large firm level may change the landscape somewhat, the critical
components of the client-advisor-firm relationship—and therefore, industry competition as a
whole—will be independence, reputation, and client decision-making authority.
Independence
The term independence will have to be clarified in order to hold meaning for clients, and the term
will be challenged by consumers. Is independence limited to the lack of proprietary product in the
investment mix (perhaps the current version of the statement), or does it require further clarification?
Additionally, the industry as a whole needs to come to terms with what it means by proprietary
product—does that cover only the products manufactured by an affiliated company, or does that
include third-party products that carry preferred compensation?
The increasing scrutiny on advisor compensation, especially at the large firms, should eliminate
all product-related compensation and create an environment in which any such compensation
immediately disqualifies the term “independent.” Should that happen, the economics of many of the
larger firms will be altered, and changes to advisor compensation may force a further wave of advisors
to go independent.
Reputation
Reputations will become critical. It is somewhat surprising that while there are many ways to
research customer experience with a new appliance, book, or restaurant, there are no reliable ways
to research clients’ experiences with an investment advisor or the advisor’s firm. Previously available
services such as DALBAR have ceased to be used, and emerging services that could be extended to
the advisory industry meet challenges when they do arise. For example, Avvo.com, a newly-launched
web site service that offers lawyer rankings according to diverse criteria, encountered immediate
resistance and threats of lawsuits by those challenging its methodology.
We predict that this gap will be filled by a new generation of advisor evaluation tools and services
which will create measurable criteria for quality of advice, more transparency around the service
model, and ultimately, more competition.
Granting Decision-Making Authority
The granting of decision-making authority in the investment relationship will rise to prominence
as a key focus for debate. The questions of who has the power to make client decisions, and what
decisions can be made by the advisor, are key for all affiliation models.
This is where the real differences occur between employee-based models (wirehouse, bank, trust, etc.)
and independent advisors—who can make the decision?
Figure 24. Employee Model vs. Independent Model
EMPLOYEE MODEL INDEPENDENT MODEL
Client acceptance The firms typically set broad parameters The advisors determine what
for acceptable clients. Determination is clients they want to work with and
made by the branch manager. typically make the determination.
Pricing Pre-determined client pricing with little, Custom pricing is frequent.

if any, ability to change or customize.
Strategic asset allocation Most firms have pre-determined models Frequently customized by client.
of allocation and require client sign-off
for deviations.
Investment philosophy It is difficult for advisors to have an Every firm has its own investment
“individual” philosophy. philosophy.
Investment managers used Firm selected. Advisor selected.
Choice of other providers Firm selected and often mandated. Advisor selected.
Source: Moss Adams LLP, (original research conducted specifically for Uncharted Waters: Navigating the Forces Shaping the Financial Advisory Industry).
While it may seem that the independent model allows advisors maximum freedom to customize,
the reality is that as RIA firms grow, their policies and procedures will need to more closely resemble
those of larger employee-based firms. The differences between the largest RIAs and a wirehouse will
begin to lessen:
> Advisory firms will have to implement less advisor discretion in order to have the desired
standardization for consistent and efficient delivery of the service experience.
> Wirehouses will give their advisors more discretion in client-facing decisions in order to better
attain the affinity of reps and provide a more localized client experience.
The one difference between firms that will always endure is the culture—what is the attitude and
approach of the advisors when they sit in front of the client and no one is watching? Firms that have
a strong culture of client advocacy will prevail, regardless of their affiliation model. Firms that fail to
create such a culture will struggle to retain their best clients.

Firms Compete Not Just for Clients, But for Advisors
While competition for clients is intensifying, the real competition is for advisors, as a talent shortage
lies ahead. The recruiting advantage of independent RIAs is the potential career path, their ability
and patience, and the high value of equity. If independent RIAs win the recruiting war, they will win
the top competitive challenge of the future.
Recruiting and retention of talented advisors should be the highest priority of every firm. Without
new talent, a firm cannot grow, and without growth, a firm’s market position and long-term value
will erode.
Figure 25. Historical and Projected Number of Advisors in RIA Firms
60,000
50,000
40,000
30,000
20,000
10,000
0
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Source: Cerulli and Associates for 2002-2006 data. Moss Adams forecast for 2007-2012.
Moss Adams forecasts that by 2012 there will be close to 52,000 advisors practicing inside RIA
firms, an increase of 9,000 advisors over a period of five years, or a 21% increase in the number
of professionals.
This dramatic growth will lead to a shortage of talent throughout the industry and will force the
RIAs to aggressively recruit from wirehouses, banks, and other channels in the industry. The ability
to recruit will thus become a critical capability for all firms.
The demand for professionals is already high, with 50% of the firms in the industry reporting that
they are actively recruiting experienced professionals. The demand for new professionals is a direct
function of growth: close to 80% of the largest firms are recruiting, compared to fewer than 40% for
the smallest firms.
Figure 26. Firms Anticipating New Hires (2003 and 2005)
80%
PROFESSIONALS
70%
SUPPORT
60%
50% ADMINISTRATIVE
40% MANAGEMENT
30%
20%
10%
0%
2003 2005 2003 2005 2003 2005 2003 2005
<$1M $1M-$3M >$3M ALL PARTICIPANTS
Source: Moss Adams LLP based on data from annual advisory firm studies.
Compensating Advisors
The recruiting competition between firms is fierce, especially for experienced and productive
advisors. High demand is resulting in rapidly rising compensation and increased recruiting bonuses.
The median advisor salary is up about 60% in just four years (Figure 27).
Figure 27. Advisor Compensation
OTHER COMPENSATION
SALARY
$160,634
$115,214
$61,932
$126,665 $143,340
$115,684
2001 2003 2005
Source: Moss Adams LLP based on data from annual advisory firm studies.
While wirehouses or national full-service broker-dealers had been losing advisors between 2003 and
2005, it appears that they have been able to turn the tide and have increased the total number of
advisors in their channel.43 This apparent reversal comes with some expense. The average recruiting
bonus, 1.2 to 1.5 times the trailing 12 months of revenue of the practice in 2006, compares to 1.0 to
1.2 just two years prior to that in 2004.44
43
Cerulli Associates, Cerulli U.S. Edge, various issues.
44
Gallant Distribution Consulting presentation.

Reps Behaving Like Advisors
Advisors in the broad industry today fully recognize that they—rather than the institution they work
for—have more control over the relationship with the client. As a result, they are able to achieve
better compensation in the form of payouts and bonuses. However, that is not enough—advisors
are increasingly demanding to be recognized by their employer as business units, for example,
independent decision-makers who can dictate strategy and resources.
This shift in culture means that in the next five years, we will see more and more wirehouse teams
who behave very similarly to independent advisors, who:
> Use open architecture for implementation of their advice
> Utilize a combination of in-house and external resources for wealth management
> Combine experienced advisors with junior service advisors
> Develop their strategy and pursue new business as a team
This development goes beyond implications for retaining and recruiting talent. A wirehouse cultural
shift of this nature will further blur the lines between the RIA service model and those of other
competitors. This is especially true since consolidation is already working from the other direction,
prompting RIAs to be a lot more like the large national firms.
The Role of Regulation
While consumer demographics, needs, and preferences, along with the
behavior of competing service providers, are largely responsible for shaping
the advice market, the forces of regulation play a significant role, as well.
To some extent, the consumer also drives regulatory developments. Having
more direct influence over regulation, however, are service providers, product
developers, and political leaders.
In recent years, politicians have shown a keen interest in applying a greater degree of oversight
to financial advisory firms. This spotlight on the industry resulted first from market downturns
and then industry scandal. Motivating political leaders in sustaining this regulatory pressure is the
link between retirement security and financial services providers. In the absence of an employer-
provided defined benefit pension, and uncertainty surrounding long-term solvency of Social Security
programs, financial services providers are increasingly viewed as the last bastions of retirement
security. The growing importance and challenges of preserving retirement security will continue
to motivate politicians in keeping the industry under scrutiny.
Jurisdiction Friction
The key issue at this point, however, may be less about quantity of enforcement and more about the
increasingly challenging issue of jurisdictional authority. This applies to products as well as advisors.
The financial services marketplace is dramatically different than it was more than 60 years ago, when
the foundation for today’s regulatory environment was put in place.
Product development happens rapidly, fueled by both advances in technology and the pressing need
for better retirement solutions. Legislation is increasingly challenged to sort out where oversight of
these products should reside. Two regulatory bodies may have different rules for the same product.
In other instances, such as with equity-indexed annuities, no one agency may have clear authority
over a product.
Issues of jurisdiction are also surfacing regularly due to the blurring of lines dividing formerly
distinct distribution channels. It is no longer clear who has oversight in a world where wirehouse
brokers conduct financial planning and insurance agents sell mutual funds. Finally, the jurisdictional
dilemma is compounded by the increasing involvement of state regulators in the financial arena.
The Double-Edged Sword of Regulation
The quality of the U.S. regulatory structure is one reason the U.S. financial advisory market is
among the world’s most prosperous and developed. Ultimately, regulation instills trust and faith in
market participants, encouraging them to transact and invest with confidence. When this trust is

compromised, the pendulum swings toward greater oversight in an attempt to regain trust, to assure
investors that they can again invest with confidence. This is the scenario of recent years, which has
clearly put an increased burden on today’s advisors, most of whom are paying the full price for
indiscretions committed by a few.
According to the 2006 Moss Adams study, 86% of advisors reported spending more time on
compliance as compared to three years ago, and 81% indicated greater costs related to compliance.45
Increases seem to be most prevalent among the industry’s more sophisticated and profitable firms.
This may be a result of the greater value these firms place on conveying trust, and their recognition
of the irreparable damage that can be done to a firm’s reputation as a result of a regulatory violation.
The same survey revealed that by affiliation model, broker-dealer-affiliated firms have the largest
compliance burden in terms of devoted staff time. Dually registered firms (broker-dealer affiliates
who also maintain an RIA) and independent RIAs followed, respectively.
Pension Protection Act
While the increasing burden of regulation on financial advisors garnered much recent attention,
reforms in the area of retirement are quietly promising tremendous opportunities. The Pension
Protection Act of 2006 (PPA) was the most dramatic change in retirement legislation since ERISA
was signed into law more than 30 years ago. The Act likely represents the final chapter in America’s
transition to a do-it-yourself retirement culture.
For the financial advisor, the PPA brings opportunities in the form of a broader and bigger
retirement savings market and new levels of access to this market. In essence, the Act aims to foster
retirement savings and 401(k) plan participation, in particular. TowerGroup estimates that total
participant contributions in defined contribution (DC) plans will nearly double between 2007
and 2011.46 Several components of the act have implications especially applicable to advisors:
1) A greater level of advice can be provided in DC plans through managed accounts and individual
consultation, allowing advisory firms to direct plan participants on how to invest their
retirement funds.
2) Employers are granted greater flexibility in selecting appropriate default investments,

facilitating the movement toward balanced funds and understanding of the important role
of asset allocation.
3) Higher annual contribution limits for 401(k)s and IRAs are made permanent, providing yet
another stimulus for tax-deferred retirement investing.
45
oss Adams LLP, 2006 Financial Performance Study of Financial Advisory Firms, sponsored by SEI Advisor Network and
M
JPMorgan Asset Management, 2006.
46
TowerGroup Press Release, “Participant Contributions to 401(k) and Other Defined Contribution Retirement Plans to Double by 2011,”
Needham, MA, February 20, 2007.
401(k): The Last Plan Standing?
Some industry experts claim the 401(k) plan will move beyond being the most important retirement
plan structure and soon become the only structure as a result of the PPA. As shown in Figure 28,
TowerGroup predicts that by 2011, 76% of all workers with pension coverage will have only a
defined contribution plan, up from 63% in 2004.
Figure 28. Workers With Pension Coverage by Type
76%
DEFINED BENEFIT ONLY
62% 63%
DEFINED CONTRIBUTION ONLY
44%
40%
20%
12% 11%
1983 1992 2004 2011
Source: TowerGroup Press Release, “Participant Contributions to 401(k) and Other Defined Contribution Retirement Plans to Double by 2011,”
Features of the PPA may make it more appealing for companies to offer defined contribution
retirement plans as opposed to defined benefit plans.
Opt-In Adoption
One of the most significant pieces of the PPA legislation is the provision overriding state restrictions
against companies with 401(k) plans to automatically enroll employees unless the worker opts-out.
Because of laws in 31 states banning paycheck deductions without employee consent, only 19%
of companies automatically enroll employees in 401(k) plans, according to a 2005 study by
Hewitt Associates.47
More than any other of the Act’s provisions, freeing up the employer’s ability to automatically enroll
their employees promises the greatest potential for increasing retirement savings. Research has
demonstrated that plan participation jumps significantly under automatic enrollment, with increases
strongest among market segments where participation is traditionally lowest. As illustrated in Figure
29, these groups include minorities, young adults, and lower-income workers.
47
Jay Newton-Small, “Fidelity, Vanguard to Benefit from Passage of Pension Overhaul,” Bloomberg.com, August 7, 2007.

Figure 29. Impact of Auto-Enrollment on 401(k) Participation
100
DEFAULT IS NON-PARTICIPATION
PERCENT OF PARTICIPATION
80 DEFAULT IS PARTICIPATION
60
40
20
0
ALL HISPANIC BLACK AGE 20-29 <$20K INC.
Source: Briggette[PA10] C. Madrian and Dennis F. Shea, The Power of Suggestion: Inertia in 401(k) Participation and Savings Behavior, Quarterly Journal
of Economics, Vol. 116, Issue 4, November 2001.
As a result of automatic enrollment, 9.6 million people are expected to become new 401(k) plan
participants over the next four years, a 20% increase compared to present.48
New Opportunities for Advice Delivery

PPA appears to have at last granted employers the freedom to provide financial advice resources
to DC plan participants. The rule allows for both computer-assisted advice, as well as face-to-face
counseling. As a result, the market for advice within 401(k) plans is expected to grow substantially.
Best positioned to service this new market are the advisors who have traditionally sold retirement
plans to sponsors. These advisors have an immediate opportunity to leverage this relationship by
giving advice to the plans’ participants. Wealth managers may also give the plan market greater
consideration, advising participants in order to open doors for managing all of their assets.
At present, there are fewer than 2,000 ERISA advisers.49 Advisors interested in tapping this opportunity
should consider building relationships with small professional firms, such as law, engineering, or
consulting firms. These smaller firms are less likely to have an established relationship with an advisor
and offer good prospects for advisors wanting to manage taxable assets for these individuals.
A key first step for pursuing the plan advice market is to go through an objective, due diligence process
by a third party. This process should result in documentation that an advisor can provide to plan
sponsors, which will allow the sponsor to more readily demonstrate that they have met the ERISA
standards for proper selection of an investment advisor for their plan’s participants. DALBAR and the
Foundation for Fiduciary Studies are two organizations that provide advisors with assistance in this area.
48
TowerGroup Press Release, “Participant Contributions to 401(k) and Other Defined Contribution Retirement Plans to Double by 2011,”
49
PLANSPONSOR.com, “Voice: Clearing the way. New guidelines open door for advice,” March 2007.
Fiduciary Clarity
One of the less heralded aspects of the PPA may be its reference to “fiduciary adviser” in terms
of who can provide investment advice to qualified plan participants. The act provides a clear
signal that the expectation is for the advice provider to be a fiduciary, with the provider required
to acknowledge this fiduciary status in writing. Some argue that the PPA, in defining a floor for
fiduciary standards, will lead to spillover effects regarding the servicing of retail investors. If 401(k)
plan participants are entitled to a certain standard of care, then perhaps the day is not too far off
when the high-net-worth retail investor is granted this same minimum level of care, as well.50
Better clarification of minimum expectations would be welcomed by consumers, as well as most

advisors. Elsewhere in this report we discussed the important role that trust plays in clients’
relationships with advisors. One-third of investors choose to go it alone, many of whom deliberately
do so because they lack trust in their advisors to act in their best interests. Beyond just the fiduciary
issue, clear advisor standards in general, combined with consumer education, would provide an
important boost of confidence for disenfranchised consumers. The result would stimulate market
growth and allow advisors to more clearly distinguish their practices.
At present, however, consumers are woefully ill-prepared to differentiate between the myriad
combinations of titles, certifications, and other attributes that make up the package for advice
delivery. In Figure 30, we present just a sample of the variety of advisor attributes a consumer must
sort out and evaluate. Without more clarification and guidance, many potential consumers of advice
will continue to sit on the sidelines.
50
or a more complete discussion of this issue see “Connecting the Fiduciary Dots” in the August 2006 issue of Inside Information, a newsletter
F
published by Bob Veres. For more information, visit http://www.bobveres.com/.

Figure 30. Selected Advisor Attributes: A Daunting Array of Choices
CERTIFICATIONS
AND REVENUE
TITLES REGISTRATIONS SERVICE MODEL FIRM AFFILIATION COLLECTION
> Broker > Wealth Advisor > F inancial > ational

N > Combination
> Financial Advisor > ealth
W Planning full-service > Commissions
Consultant > Life Planning brokerage
> F inancial > AUM-based fees
Consultant > Wealth Manager > ealth
W > I ndependent
broker-dealer > Project fees
> Financial Planner > Registered Rep Management
> I nsurance > Retainer fees
> Investment Advisor > IAR > I nvestment
Management broker-dealer > Combination
> I nvestment > RIA > ank broker-
B
Manager > I nvestment
> L ife and Health Advisory dealer
> Life Planner Insurance > Bank trust
> CFA > Independent RIA
> CFP
> ChFC
> ChLU
> CPA
Source: Moss Adams LLP, (original research conducted specifically for Uncharted Waters: Navigating the Forces Shaping the Financial Advisory Industry).
Who will take the lead in providing guidance to the consumer is an open question. Professional
groups such as Financial Planning Association and National Association of Personal Financial
Advisors, trade associations (such as the Investment Company Institute and Financial Services
Institute) and regulatory bodies (the NASD and SEC in particular) all are making an effort.
The results may be a slow lifting of the cloud of ambiguity hanging over the advisory marketplace.
More clarification, guidance, and coordination are needed. In the interim, the burden falls mainly
on the advisor to educate consumers and win their trust.
The RIA of the Future
The growth in client opportunity combined with the severe shortage of experienced advisors and
the high premiums on the advisory business, both in terms of recruiting or M&A, are going to lead
to a fundamental change in the marketplace. While the investment business has historically been
a strategic game played between large companies who deploy thousands of “distribution reps,” the
power today has shifted to the advisor. What had been a small movement of entrepreneurial advisors
who started their own firms is now becoming a cultural shift that permeates the entire industry.
In most industries, the nature of competition and the parameters for competition are external factors
outside the control of the smaller competitors. The investment industry today, however, offers the
opportunity for individual RIAs to influence their own competitive environment. The information
and opinions presented in this report should not remain just an academic discussion of market
behavior. Instead, we believe there are practical actions that RIA firms can take to ensure that they
remain strategic competitors and do not merely accept the terms dictated to them by others. These
include:
> Selectivity. True differentiation and strategic positioning starts with the RIA firm being highly
selective about the markets it serves. Clearly defining target clients and being deliberate about
client type are musts for assuring a consistent and effective client experience.
> Understanding. Demographics, while important, are only a starting point for understanding
and targeting clients. The RIA firm must develop a deeper understanding of its clients, recognize
that client needs go beyond the generation they belong to, and attend to the nuances that clients
value. The specific niches it chooses to serve should be well-understood and serviced accordingly.
> Targeted solutions. The RIA must take leadership in defining the problem and assert its
prominence as the best possible solution provider. Relationships will be won with innovative,
targeted solutions based on an intimate understanding of the client.
> Expertise. Expertise and competence must be demonstrated and will be increasingly sought
after as client needs become more widespread and complex. This expertise should include
multiple planning capabilities, the ability to adapt to changing client needs, and resources to
deal with complexity.
> Positioning. The service offering of the RIA firm must be carefully positioned with respect
to all sectors and channels of the broad investment industry. Clients and prospects must
clearly understand where the RIA specifically adds value as the steward of the client’s financial
future. This value proposition must be communicated in a way that is strategically distinct
from competitors.

Finally, we encourage RIA firms to consider exploiting some of the tactical opportunities presented
in these pages. These include:
> Work the regulatory environment to your favor. Make clear to clients you are a fiduciary
for them and that other financial intermediaries may not be. Educate them about the wide
range of affiliation models and services and how your firm, as an RIA, is best positioned to
serve their needs.
> Adopt a team-based service delivery model in order to better meet diverse client needs,
provide specialized knowledge, minimize the liability of a single client owner, build a system
of checks and balances into your business, and establish loyalty with the firm instead of
with a single advisor.
> Improve your firm’s ability to advise on health, disability, and long-term care issues as one
way to provide clients with deeper expertise.
> Recognize and adapt to changing client needs. Be sure clients understand that you are the
best provider not only now, but throughout their life cycle-from accumulator to consolidator
to liquidator—and that you are prepared to guide them through major life events.
Beyond these actions, perhaps the best advice we can provide RIA firm owners is to focus squarely
on two things: your firm’s culture and its people. What is the advisor’s attitude and approach when
working with clients? How does he or she treat the client when no one else is around to observe?
What do people say about your firm? Are you known as an employer of choice? Your culture and
your people are inextricably linked, one fostering the other.
Registered Investment Advisors should develop and attract advisors who convey trustworthiness and
expertise to their clients. The individual reputation and skills of a firm’s advisors play a decisive role
in the strength of client loyalty. Ultimately, the quality of the advisor remains the most powerful and
lasting competitive differentiator.
About Us
Pershing Advisor Solutions LLC (member FINRA/SIPC) is an affiliate of Pershing LLC and a leading provider of financial business solutions to independent,
fee-based registered investment advisors and dually-registered advisors working in conjunction with many of Pershing LLC’s introducing broker-dealer
customers. Pershing LLC, a subsidiary of The Bank of New York Mellon Corporation, is committed to service excellence and to providing dependable
operational support, robust trading services, flexible technology, an expansive array of investment solutions and practice management support. Through
an innovative custody platform, Pershing Advisor Solutions delivers superior expertise and scalable and customizable solutions to help its customers
manage and grow their fee-based businesses. Additional information is available at www.pershingadvisorsolutions.com.
RR-PAS-UW-7-07

Pershing Ria Market Forecast

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Uncharted Waters:

navigating the forces shaping the advisory industry

Ideas Without LimitsSM

Our partner in developing

IDEAS WITHOUT LIMITS i

Imitation Is the Greatest Form of Flattery

Strategic Competition: Where Winners Write Their Own Rules

IDEAS WITHOUT LIMITS iii

Relationships Will Be Won Based on Trust

Advisor Development and Recruitment Must Be a Priority

IDEAS WITHOUT LIMITS v

Strategic Positioning Leads to the Sea of Opportunity

Name Title Organization

Chris Boruff President, Advisor Business Morningstar, Inc.

Dale Brown Executive Director & CEO Financial Services Institute

Steven Levitt Principal Cambridge International Partners Inc.

Steven Miyao CEO kasina

Avi Nachmany Executive Vice President, Strategic Insight

John Nofsinger Associate Professor of Finance, Department of Finance, Insurance

Mary Shapiro Chairman and CEO NASD

Ellen Turfe Chief Executive Officer The National Association of Personal

IDEAS WITHOUT LIMITS vii

A Rising Sea of Demand........................................................................................................1

The Changing Landscape of Competition................................................................. 17

IDEAS WITHOUT LIMITS ix

The Role of Regulation....................................................................................................... 41

The RIA of the Future.......................................................................................................... 47

IDEAS WITHOUT LIMITS xi

Figure 1. Rapid Pace of Growth Continues for Household Investable Assets

IDEAS WITHOUT LIMITS 1

Identifying and Taking Advantage of Opportunity

Providing Access to Alternative Investments

IDEAS WITHOUT LIMITS 3

ACCUMULATORS CONSOLIDATORS LIQUIDATORS

Tending to Philanthropic Interests

The Bottom Line

Figure 3. Segmentation of Investable Assets by Age

2004 2010 2020

IDEAS WITHOUT LIMITS 5

Note: 2010-2030 are projections.

Changing Needs Increase Risk of Defection

Figure 6. Switching of Primary Provider by Age Group

Source: McKinsey & Company, 2006 Consumer Retirement Survey, 2006.

IDEAS WITHOUT LIMITS 7

Figure 7. Retirement Assets Held by Those Aged 60+ ($T)

2003 2006E 2009E 2012E

Figure 8. Average Annual Incomes for Pre-Retired and Retired Segments

Markets Pre-Retired Retired Percentage Decline

Wealthy $242,000 $106,000 44%

Affluent $125,000 $64,000 51%

Mass $66,000 $35,000 53%

Marginal $27,000 $17,000 63%

Redefining Retirement, Challenging Advisor Capabilities

IDEAS WITHOUT LIMITS 9

> Estate planning and charitable giving

Addressing Health Care Planning Needs

IDEAS WITHOUT LIMITS 11

Consumer Interest and Preferences

Growing Interest in Financial Services and Expert Advice

> Greater involvement. In a 2006 NASD®-funded investor survey, 60% of responding

Responding to Sudden Events

Figure 10. Sudden Events That Change Involvement

IDEAS WITHOUT LIMITS 13

> Broker > Wealth Advisor > F inancial > ational