Within seven years, 25 to 50 large financial advisory firms, each managing at least $15 billion of assets and with $50 million of revenue, will dominate the industry as large salaries, operating expenses, and difficult market conditions force a shakeout, JPMorgan Asset Management asserts in a study released Wednesday.
The report by the unit of JPMorgan Chase & Co. noted a large discrepancy between the "have's" and the "have not's" in the financial advisory business. Of the 19,970 firms in the segment, only 1,102 generate more than $1 million of revenue a year.
Mark P. Hurley, a senior adviser at Headwaters MB and a co-author of the JPMorgan report, said some banks and insurance companies will be among the large players remaining as the industry consolidates "but this is easier to talk about than to do."
"It is difficult to understand these financial advisory firms, buy them, and leave them independent," he said. "It requires a great amount of skill."
In the near term, however, Mr. Hurley said, few deals should be expected. "It will happen very slowly and then all of a sudden," he said. "I expect things will occur similarly to the way that they occurred in the investment management business, with a trickle and then a stampede."
Strategic acquirers like banks and insurance companies will make 150 to 200 deals during the next five to seven years, he said. Many of these companies will have tried to build their own advisory businesses and failed, Mr. Hurley said, and will turn to buying large financial advisers.
Bob MacDonald, the president of CTW Consulting in Wayzata, Minn., said banks for the most part have failed in any attempt to develop a strong financial advisory or wealth management business. They muffed a chance to exploit their customer access during the branch-trimming of the early '90s, he said. This "has made it difficult to develop a credible wealth management business."
In the late 1980s and early 1990s, when banks were focused on cutting operating costs by reducing their brick-and-mortar sites, customer contact was sharply reduced, Mr. MacDonald said, and thus banks unintentionally drove customers away.
"The biggest advantage banks had was that they had credibility and customer access. The people came to them," he said.
Mr. MacDonald said most banks are bad at marketing nontraditional products. "Most banks are so worried about losing checking accounts and losing savings accounts by annoying customers by actively marketing product to them that they lost the opportunity to be dominant in" asset management, he said.
Mike Bryson, the chief financial officer at Mellon Financial Corp. in Pittsburgh, said this is a fair observation in some respects but that large banks with a long history in trust and private banking have succeeded in the asset management and financial advisory businesses.
"I think the people that were large trust and investment players had a leg up on those banking institutions that tried to jump in recently," he said. "I think many institutions like Mellon, or State Street, or JPMorgan were in a good position to make acquisitions beginning in the early 1990s and had a foundation and understood the business going forward."
Looking ahead, Mr. Bryson said, any large bank with a strong platform is well positioned to continue to grow and make deals.
"I think many large financial institutions like the asset management and financial advisory businesses because they generate high returns and good opportunity for growth," he said. "This is a fragmented industry, and usually fragmented industries will continue to consolidate."
The JPMorgan Asset Management report updates a 1999 Undiscovered Managers study that forecast a few competitors would dominate by 2009 and many niche advisory firms would survive while most firms would be marginalized. The JPMorgan unit bought the assets of Undiscovered Managers in November 2003.
A team of JPMorgan analysts did 12 months of research to produce the update, which it said confirmed that the decade-long consolidation has begun.
Sharon J. Weinberg, a managing director at JPMorgan Asset Management and co-author of the report, said that 94% of the financial advisory firms generate less than $1 million of annual revenue and firms in this category manage less than $25 million of assets. The volatility of equity markets and rising operating costs have destroyed the profitability of these firms, she said.
A "flood of new entrants" led by banks, insurance companies, and investment firms that wanted to get into offering financial advice when equity markets were strong has left the industry saturated, Ms. Weinberg said.
Mr. Hurley said he does not expect a massive number of small firms to quit the business immediately, and today's dicey market conditions might make this an inopportune time for midsize players to sell. Some small financial advisers are like mom-and-pop convenience stores next to a Wal-Mart, he said.
"There are few transactions right now because the difference between the bidding price and the asking price is enormous," he said. Bids are so low that many financial advisers will make more money by holding on to their marginally profitable businesses than selling right now, he added.
