by Bob Veres

4. The gradual appearance of front-office-only advisory practices

The trend of advisors jettisoning their back office has been coming for a long time, as outsourcing opportunities have become more seasoned and effective. The issue is simple. Virtually all of the value that advisory firms offer their clients comes from the face-to-face relationship and the quality of your advice. But as advisory firms have grown, a huge percentage of their office expenses, and a growing part of the time commitment from the advisors and principals, has gradually been taken up by the chore of managing these growing back offices.

Meanwhile, many advisors are deeply in the weeds of maintaining their software applications, managing an increasingly complex and ever-changing suite of programs that support their core activities.

Does it make sense for 70% or more of the business to be running in the background, hidden away from clients? Does it make sense for advisors to be spending their time managing a growing staff of people who download and reconcile and update and manage the software when their value to clients lies elsewhere? Is the increasingly large tail starting to wag the dog?

When I talk about a front-office-only practice, I’m talking about a team of advisors who have given those back-office chores to a growing ecology of outsource options. Experts who do not work in their office will handle the day-to-day downloading and reconciliation, the opportunistic rebalancing based on their tolerances, the automated tax-loss harvesting and updating and managing their office software. Advisors do what makes them money and adds value to their clients, and let the experts handle the rote work.

We may also see the emergence of back-office-only advisory firms who handle these chores for a network of front offices. These firms will compete with investment management back offices like Allbridge, Black Diamond or Orion, and with the all-in-one offerings from SEI, Inc. Trade PMR, Adhesion and Envestnet.

5. Very public challenges to the value proposition of retail advisors

Remember when the discount brokerage firms were running ads everywhere, cleverly recommending that investors self-churn themselves to financial success? Remember when those ads were a frontal assault on the value of advisors, who were described as expensive hacks totally out-of-touch with the new technology of the investment markets?

Brace yourself: Those days are coming back, and we could see it start as early as next year. This time the advertisers will be this new breed of online investment platforms, what some are calling robo-advisors which I wrote about not long ago.

Companies like Wealthfront, Betterment and Personal Capital have serious venture-capital backing. They view themselves as the future and advisors like you as dinosaurs who can be extinguished by a chilly breeze. The past two years have been spent working out a variety of kinks and making sure the scale is there for the Big Push, which will mean advertising in all the major outlets, telling TV viewers and hip Internet surfers that they are (as the Betterment website says) bringing financial advice into the age of intuitive design, or that advisors are far more costly than the low fees helpfully calculated for you on the Wealthfront home page.

And they are slowly mastering the language of the discount brokerage ads. You (the consumer) are smart enough to invest on your own. Aren’t you?

I am not predicting that these firms will steal your market share in 2014 or any subsequent year. Their business model seems to assume that a growing number of people will prefer a comfortable long-term relationship with a website to an actual living, breathing human being. But I do think that a lot of very public, harsh caricatures of advisors as dim-witted, greedy dinosaurs will create a less-than-ideal marketing environment.

The more time and energy you put into your front-office activities, and communicating proactively and holding clients hands through turbulent investment weather (see various places above), the less impact these advertising onslaughts will have on your business.

6. Merger activity will heat up

Remember that junior high dance that started with the boys on one side of the gym and the girls on the other, and gradually, sometime into the fifth or sixth song, some of the boys wandered over and asked the girls they liked the most to dance? And then after a while, a few more wandered over, and then, at some point, there was kind of a scramble, because, from the guys’ viewpoint, the most interesting girls were being taken.

We’re in the first stage of that scenario in the planning profession, an early mating dance of mergers between some of the most attractive advisory firms who realize that we are entering an era when scale is becoming increasingly important. The first visible evidence that the profession is entering a phase transition from practices to businesses, from solo to ensemble, could come in 2014. These first mergers will extend the working lives of aging practitioners who want to get rid of their administrative duties, but who still enjoy rainmaking and client interaction.

And they will set the stage for a huge opportunity down the road, as established firms with scale start buying retiring advisors at a steep discount. During that phase, fortunes will be made and squandered, as many retiring advisors realize that the best time to have maximized their enterprise value was much earlier in the dance.

The mergers that will be consummated in 2014 will generally involve the most attractive smaller firms, and they will provide everybody else with better models for consolidation and the messy process of blending two individualists, two visions and two staffs. Once those firms fully integrate, they will have experience with integrating other practices into the fold, allowing them to approach retiring advisors and generally causing the trend to accelerate.