Let’s look at the correlation between size of independent advisory firms and the average wealth of the clients they serve.

Recently, in separate conversations, Michael Kitces of Nerd’s Eye View and Angie Herbers of Herbers & Company told me something very similar. Kitces said that the larger an advisory firm becomes, the more it has to rely on wealthier clients to sustain itself financially. The internal expenses become so great that the firm has to move upscale to survive.

Meanwhile, Herbers said that she is witnessing a vacuuming effect in the profession, where the largest advisory firms are gaining a very high percentage of the wealthiest clients. It is becoming very difficult for smaller firms to compete in the high-net-worth space.

Being naturally excitable by nature, I found these pronouncements – from people I greatly respect –alarming. They brought back unhappy memories of the dystopian landscape that Mark Hurley predicted (albeit wrongly) 20 years ago for the advisory space: that the profession would be dominated by a small handful of very large firms, with a diminishing number of smaller firms in fierce and unprofitable Darwinian competition for the meagre scraps off the table.

Is it true that, if your firm grows dramatically, you will have to give up the unprofitable smaller clients and rely on attracting larger ones (surely a risky bet) to survive?

Is it true that, if your firm is small, you will find it difficult or almost impossible to attract wealthier clients?

It turns out that I was in possession of some data that explored the accuracy of these observations and could see whether we are traveling down the dystopian path predicted so long ago. Our annual T3/Inside Information software survey collects demographic data on the survey respondents – 5,255 advisors from our upcoming (not yet released) 2021 survey. These advisors rate the software products they use on a scale of 1-10 in 32 different categories (CRM, financial planning, portfolio management etc.), but the survey also asks for information about their revenue model (fee-only, dually-registered, wirehouse), about the annual revenues of the firm (which tells us the size of the firm), and the average “size” of its clients, measured by investible assets.

Before I get into the statistics, I should warn the reader that there are a variety of ways that this data can be skewed, leading to potentially misleading conclusions. Perhaps the most worrisome is that a brokerage rep would report average client size in his/her book of business, and then report the size of his overall firm – Morgan Stanley or Merrill Lynch, perhaps – which would give a misleading view of the match between average client size and firm size. Reps with 100 clients mostly under $1 million in portfolio size would report the size of their firm at the top of the scale – which might provide evidence that larger firms are working with smaller clients.

The same problem would exist with of investment advisor representatives of independent broker-dealers, who would be reporting the size of their employers rather than the size of their actual offices.