Firms of the Future

Business consultant Matthew Jackson is mapping out the next evolutionary stage of the planning/advisory profession.

There’s a concept in evolutionary biology which suggests that the story we usually hear in science class—about random mutations, and how the rare good ones are selected and passed on incrementally to the next generation, and that new species arise one tiny mutation at a time over millions of years—may be wrong.

The new concept involves something called an “adaptive valley.”  As the story goes, a few adventurous members of a species venture out from a very comfortable ecological niche in search of new opportunities.  The adaptive valley represents a less comfortable environment than what they left, but gradually these adventurers, over a few or a hundred generations, find ways to master it, acquire new capabilities, and a new species emerges, often a more advanced species.  Think: a few monkeys leave the comfortable but crowded environment among the tree branches to explore new possibilities in the wide savannah.  Over time, the descendants of the monkeys who survive begin acquiring the mutations that lead to walking on two legs, and they find useful ways to use their freed-up upper limbs to tame fire, build tools, and eventually build cities and invent professions like financial planning.

The journey started when creatures left one evolutionary “peak,” which we’ll call “Peak 1,” and ended with a more advanced version of itself, which we’ll call “Peak 2.”  In many cases, the Peak 2 creatures will eventually outcompete their less advanced Peak 1 evolutionary ancestors.

Matthew Jackson, founder of business consulting firm Dialektic (, believes that our economic system follows a similar evolutionary pattern.  Thinking this way may provide interesting lessons for planning/advisory firms that want to evolve into entities that provide a higher level of client service and enjoy competitive advantages over today’s (“Peak 1”) successful firms.  “In our profession, this is obviously not going to be a random process,” he says.  “But there are already firms that are thinking about what’s next and how to get there ahead of the crowd.”

A quick look back in history shows that our profession has already experienced several trips from one peak to another.  There was a very profitable brokerage industry in the 1970s that was highly-adapted to the investment world.  Then, after commissions were deregulated, a small number of reps joined the newly-formed independent broker-dealers, which eventually created a new sales-oriented peak that forced brokerage firms to adapt from facilitating trades to selling products. 

The next peak-to-peak trip was taken by a handful of advisors who bravely broke off from the sales model and started managing assets for a fee, because, as they would explain, it was a better way to serve clients.  These advisors lived in virtual poverty while they perfected, slowly and painfully, their new revenue model.  That cohort of pioneering fee-only planners eventually created the new evolutionary peak that is today’s ubiquitous AUM model—and outcompeted the salespeople to the point where virtually the entire profession found it necessary to shift to the new way of doing things. 

In each case, the pioneers of the new model went through a painful struggle to survive their evolutionary journey.  There are stories of the original NAPFA members having to order the least expensive item on the menu whenever they met for dinner, and finding the free accommodations when they attended meetings.  Eventually, they were rewarded  with a powerful first-mover advantage; many of those original NAPFA members are owners of the most successful firms in today’s advisor space.

“The valley is characterized by decreased revenues, but there’s often a psychological dip as well,” says Jackson.  “To evolve from a business model that is working really well on Peak 1, you have to stop being this person who is at the top of their game, and start becoming a student again.  You have to invest in your firm in ways you didn’t before.”

Here’s the punchline:  Jackson believes that the planning/advisory profession is on the cusp of the next evolutionary leap, due to changes in technology, changes in consumer preferences, the eventual shift to a younger client demographic and the evolution of more compelling service models.  Meanwhile, the pandemic may be accelerating this imminent shift from one planning “species” to the next higher one.

But this will not be an easy transition, and very few firms will make it initially.  The very success of many planning firms in adapting to the current environment will keep them from becoming the Peak 2 firms of the future.

“I don’t think,” Jackson says, “that there are very many firms today who would be willing to do what it takes to move to a Peak 2 level, even though that might be a higher evolutionary state that is the future of the profession.”

Peak 1 expertise

Mapping the journey from the financial planning equivalent of homo neanderthalensis to homo sapiens requires us to better understand the current Peak 1 environment that most firms are comfortably adapted to.  “The current firms typically employ 50-year-old advisors,” says Jackson, “who are targeting prospects with $1 million and above.”  The Peak 1 firm charges based on AUM, and after years of incremental adaptation, most of these practices now provide very good technical financial planning advice that is paid by the assets.  The planning services will appear to many clients to be free add-ons to the core portfolio management services the firm provides.  “AUM is a measure of how good you were at selling over the last 30 years,” Jackson adds.  “It is a lagging indicator of proficiency, not a leading indicator of future success.”

Jackson’s Dialektic consulting firm is working with a small group of advisors to define and then build a bridge to Peak 2.  “There are a few firms that are at Peak 1 and want to get to Peak 2,” he says.  “But they need help making this descent, especially motivationally.  Because it feels very wrong when you start declining, in terms of your performance and your fitness.  It might involve learning from younger planners about this new world that has sprung up while we have been serenading 60-year-olds to get their money moved over and thinking that is the cutting edge.  You may discover that the world has moved on quite some way since you developed your Peak 1 expertise.

“And,” he adds, “the practice management consultants are all on Peak 1, because that’s where the money is.  The successful people today are all on Peak 1.  But you might be able to make out the final days of Peak 1 when it’s at its zenith, and it may be past its zenith right now.  You can still make money out of Peak 1 activities, but the mountain is starting to get crowded.”

Like the other evolutionary leaps from brokerage to independent BD offices, from sales to AUM, the leaders will actually have to succeed in their new model before the profession follows.  “Most people will be waiting to see how it works,” says Jackson, “and whether there will be a rope bridge set up between Peak 1 and Peak 2, so that you can learn to do it without having to descend all the way into that valley between them.”

Evolutionary drivers

What makes Jackson believe that the profession is ripe for a new evolutionary migration?  Consider the fact that asset under management services are increasingly becoming commoditized and automated, with new software capabilities and new outside providers who will match up client risk tolerances with portfolios and handle rebalancing chores for increasingly smaller annual fees.  If these robo services follow the path of ETFs, there will eventually be essentially free services for AUM-based advisory firms to compete with.

At the same time, a handful of firms, many of them run by younger advisors, are serving younger clients at a life stage before they have accumulated wealth.  When those clients eventually do build portfolios that are appropriate for the AUM model, will they be willing to transfer their loyalty to a more traditional advisory firm?

Perhaps most compellingly, the pandemic has made Zoom meetings with clients virtually mandatory—and clients have been surprisingly quick to adapt.  That means that advisors can now (and forever after) “meet” with clients anywhere—on the far other side of the Mississippi and anywhere in between. 

The Peak 1 model says that advisors typically market themselves within a 50-mile radius of their offices, but that would no longer apply in a Zoom-meeting world.  Suddenly, every advisor in the country is capable of competing in your territory, and your firm will be competing for clients with advisors everywhere.

“I think the pricing question inevitably comes in as well,” adds Jackson.  “At the end of the day, if you charge a certain way, that will define what you do.”  Today’s wealthiest clients may not mind paying more for the same service as someone with a tenth of their portfolio size.  But will the next generation of clients be willing to tolerate a visible mismatch between the fees they pay and the level of service they receive?  Will Gen X-ers be willing to pay AUM at all, or will they prefer to pay by flat fees or via a monthly subscription model?

“Until the AUM part is solved, this is always going to be a sales-driven industry,” says Jackson; “as opposed to a profession where the key skill is expertise.”

Through the valley

So what does Peak 2 consulting look like?  Jackson says that instead of making the current firm incrementally better and more efficient, you start with a brainstorming process.  What do you think the ideal firm would look like if your firm were just starting out today?  “I much prefer starting from a blank sheet of paper than going on Google and finding out what the top people are doing right now,” Jackson explains.

The precise definition of Peak 2 is unclear, and Jackson is actually working on a white paper, with feedback from a variety of industry leaders (with me as a co-author), to better define the next evolutionary stage of the profession and the best way to get there.

“A lot of consultants get along by saying, look, I know what to do.  I have done this many times before,” he says.  “I wouldn’t say either of those things.  The whole point is that we don’t know what to do, because this hasn’t been done before.  But we can think in a structured way about it, figure out where we want to get to, figure out a way to get there, and then adapt from where they are through the valley and then up the next mountain.”

The first thing to identify on that blank sheet of paper—and it will be different for every firm—is the best possible service that the firm could be offering to the clients it wants to serve.

And that, in turn, requires the founding advisor to define a target clientele with more specificity than just a “niche.”  Jackson suggests that advisory firms should move beyond the “niche” concept to something more like other professions, where an attorney specializes in corporate or tort law, where a doctor specializes in knee surgery or dermatology. 

“The Peak 2 advisor has specialized expertise in a particular group of clients,” says Jackson.  The firm would define a specific group of people in the economic landscape and become expert in solving their unique issues.  It would adapt its service model to deliver value specifically to the needs of that group, with a pricing structure that matches the value delivered. 

From there, the firm would map out a plan to acquire the specialized knowledge that would allow its advisors to deliver value to a greater depth than the competition.  This should not be difficult, since the firm will be, in its early Peak 2 evolutionary state, competing with a sea of Peak 1 generalists.  In a Zoom world, this firm will stand out to this specialized clientele in whatever city or state they might be sitting in while doing their initial Google search.

Finally, what is the replicable service model that will deliver that value?  Is the current staff appropriate to delivering this specialized advice?  What investments need to be made, in technology, training and maybe also staffing, to get from Peak 1 to Peak 2?

This extra investment in the firm, staff and technology is part of the pain that necessarily comes with any trip through the adaptive valley, comparable to what must have been the great discomfort that monkeys experienced as they learned to walk on their maladapted feet for miles through the African savannah.  Jackson also expects the Peak 2 firm to be capable of working with clients who don’t have significant assets; indeed, there are few specialized clienteles whose members are all, every one, wealthy enough to pay via AUM.  Adapting the pricing structure is another pain point, although the firm doesn’t have to give up its pricing structure for existing clients as it moves forward into new Peak 2 territory.

In fact, to minimize the discomfort of the trip into and through the valley, Jackson suggests that advisory firms create a pilot project as their first step, and then feel their way along to step two.  “The reason my firm is called ‘Dialektic’ is because the process is like a dialogue,” he says.  “We continue the dialogue and feel our way along until we have a tangible output, and then build on that.  In the first phase,” he adds, “you’re moving in the dark to some extent, so you go slowly and deliberately.  You’re following a plan, but you react to things as you go.”

The Peak 2 consulting arrangement will necessarily include a psychological component, helping advisors with the discomfort of making these difficult transitions.  But perhaps more importantly, Jackson expects to find himself serving as a cautionary voice for those advisors who are eager to evolve from one species to another too quickly.  “Trying to change your pricing schedule in a hurry would be a recipe for disaster,” he says.  “Trying to throw together a new value proposition is very very risky.  You want to be doing lots of tests.  But you also want to start as soon as possible, because as time moves on, you’ll have less time to make these transformational changes.”

Dialektic charges by the hour, precisely because there is no easy way to predict how long the consulting relationship will last.  “The advantage is that with hourly, you can stop when and where you want,” says Jackson.  “You can say: let’s meet again next quarter, and the pricing adapts to the work.”

Evolutionary journey

Jackson compares the peak-to-peak-to-peak history of the planning profession to the evolution of the medicine showmen of a bygone era into professional doctors.  The so-called ‘mountebanks’ were the doctors of their day in that they sold nostrums and cure-alls at the end of their performances.  “Eventually, the medicine showmen were driven from the medical profession,” Jackson says.  “Medical practitioners had to go to specialized schools, and the salespeople migrated elsewhere.  Then there evolved specialties, because no doctor could know everything about every medical challenge that people might have—just like no individual planner can know every aspect of every client challenge in all the different businesses and industries and professions.”

But the medical profession’s journey from mountebank to knee surgery specialist was a long one.  Jackson doesn’t expect an immediate migration from Peak 1 to Peak 2, despite the various trends that are making it less comfortable to live on Peak 1, despite his conviction that the Peak 2 firms will be better positioned to compete in the marketplace of the future.  “I think a lot of firms are destined to stay on Peak 1 forever,” he says.  “They’re not going to move from where they are absent something that makes them very uncomfortable.”  There are, after all, still salespeople working in the profession today, having to reinvent their income year after year after year.

Which, of course, raises the key question: is this journey into the adaptive valley toward a not-yet-defined evolutionary stage of the profession really worth the trouble?  At the very least, isn’t it safer to wait until the brave pioneers have mapped out what the next iteration looks like?

If Jackson is right, the rewards at the end of the journey should outweigh the pain of getting there, just as many of the early fee-only planners ended up running some of the most profitable advisory firms while sales reps scrambled to catch up.  He compares the hypothetical Peak 2 future with the London barristers, who have  specialized expertise and never have to market their services.  Similarly, medical specialists don’t spend a lot of their time convincing prospects to become clients.  The next evolutionary stage of planning/advisory firms will be one step closer to functioning the way real, established professions do.

Meanwhile, look for Jackson’s white paper to come out in the next month or two, with industry thought leaders contributing their insights about the management/marketing/tech trends that will come together to create business evolution in the advisory space.  Not all of you will want to jump down off the comfortable trees into the savannah, but you might want to have insight into what the next iteration of the profession will look like, and what it might take to get there.