Clients are demanding more. Compliance costs are rising. Retirees are decumulating. Everyone’s going after the million-dollar client. And markets are causing antacid sales to spike.

If it’s tough being an advisor, imagine how your boss feels.

“Unless they’re backed by a big mother ship, I think all [small] firms are struggling to figure out how to maintain everything,” veteran wealth management executive John Cucchiella tells Advisor.ca. “I understand the economics of a small firm, and I believe in the independents. But the independents are under capital constraints. To be profitable means you can’t provide all services, because those services cost money to put on the table.”

And the larger firms know that, so consolidation will continue. Since 2012, the IIAC says 46 investment firms have closed or been taken over, which represents about a quarter of the industry.

Read: Big firms shine as boutiques suffer: IIAC

In another 10 years, says Cucchiella, “I think there will be more investment counselling firms and hybrid home offices than independents if the capital cost structure of organizations do not diminish.”

As the field narrows, “I see payouts at the traditional brokerage firms going nowhere but down,” he warns. “I don’t believe that institutions are going to continue to tolerate 50% payouts for [a few percentage points of] growth.”

Read: Industry leaders expect weaker economic conditions

What it takes to succeed

Given these concerns, several firms recently announced they’ll shift focus to richer clients. But is that elusive high-net-worth market big enough?

“I really do think it is,” he says. “The banks have a clear-cut internal distribution channel they can draw from. It’s not like the independents, where they have to go find those clients. And the benefit that the investment counselling firms have is they’re already deemed, in the eyes of ultra-high-net-worth clients, as high-class shops.”

Read: Former Macquarie, RGMP, Dundee advisors find fourth home

What sets investment counsellors apart, he adds, is a “holistic approach.” That’s arguably an overused phrase, but Cucchiella defines it as connecting clients with a reputable car dealer, helping them choose private schools for their kids or matching them with top accountants for their small businesses. In other words, not just investment management, but things for which an advisor isn’t directly paid (and will pay off).

Firms can pay investment counsellors less than they would traditional brokers, Cucchiella points out. The newly christened TD Wealth Private Wealth Management, for instance, just hired 42 non-securities-licensed wealth advisors whose focus is discovery, not investment management.

He also sees the wealth management arms of insurance companies as formidable competitors. “The sales culture is already in their DNA,” he says. “They’re very good at creating product and getting things to market. They understand that big-picture mentality in terms of looking after health and insurance needs of Canadians.”

Read: Insurers fight for bigger slice of wealth pie

And he says at least some of the Big 5 have unmatchable scale and distribution. “There are a couple of banks that have a great culture internally and are doing a great job.” What’s more, “The banks are continuing to push the advisory business to the branch level. That’s why I think banks will really excel at this. They’ve got a Rolodex of clients.”

It’s also a good time to be an asset manager. “Firms are going to need these partners to create product.” And the large players have the scale to compete on price.

The next big thing

While there may be fewer independents in future, Cucchiella also expects the landscape to become more fragmented.

“Any brokerage firm that’s involved in the principal-agent model, that’s a great business model,” he says. “The only thing [they] have to manage is the risk to [their] brand. The margin is thin, but they download the costs” to the advisors.

That creates opportunity for entrepreneurial advisors with established books.

“You can take five, six advisors who each have $400 million, they can cluster together, go hang their hat at a [principal-agent firm] at an 80-20 split, and create their own hybrid home office,” he suggests. “They own all costs, but if they share all those costs and keep their overhead to a minimum, they’ll end up further ahead than where they are now.”

Read: Building your own equity