Maybe I get grumpy around tax time, but lately I've been watching our government's bailout and fiscal stimulus efforts with a rising sense of anger, and I suspect that you share some of it. First there was the $24 billion in bonus-pool payments to brokerage executives, which you and I know came right off the top of the $700 billion in taxpayer money. Then, there was the revelation that the Paulson/Bernanke bailout team pushed Wachovia to buy Merrill Lynch against the desires of Wachovia's top management, and then paid them extra out of the stimulus package to keep the company alive.

Later, I learned that the Treasury Department, under Paulson, overpaid an estimated $50 billion to $80 billion to some lending institutions receiving bailout money (most of it buying preferred stock at way higher than market value), and—here's the kicker—those bailed-out lenders responded by cutting back on their lending activities. Meanwhile, small and midsize banks, which received no bailout money, stepped up their lending aggressively, providing the only liquidity available to the U.S. business community during the credit meltdown. It feels like our tax dollars were thrown down a rathole.

All of this reminds me of economist/philosopher Joseph Schumpeter's terrific work on creative destruction, the idea (I may be paraphrasing a bit here) that dinosaurs have to die in order to make room for mammals. The enterprises that become too big, unwieldy and sluggish eventually begin to exert a retarding effect on economic growth, and when they fail, it doesn't mean the end of the world; instead, it opens the door to innovative smaller firms that create more value for everyone.

Dinos on Life Support

Of course, this is precisely not what is being allowed to happen in our financial sector. The smaller banks must resent the hell out of these capital infusions into their larger competition. I know that most honest, independent financial advisors are wondering why in the world we need to keep Merrill Lynch alive when there are so many advisors whose business model is something more positive than attaching like a leech to retirement portfolios and sucking consumer investment assets into outsize bonus pools.

Where are we getting our business advice? Perhaps from our largest foreign creditor. One of the biggest problems right now with China's economy is the government's insistence on using tax money from viable businesses to keep alive the state-owned industries—which economists refer to as "zombies" and "the walking dead." I can't imagine any way this strategy, borrowed from a semi-Communist regime, will benefit the U.S. economy in the long run.

Meanwhile, the financial planning ecology is already beginning to experience the full force of creative destruction, and the results will be, in the end, the wirehouse industry's worst nightmare: stronger, better-managed firms, some of them with former wirehouse brokers who can compete against their former employers. However, while the dinosaurs of the financial world limp along on federal crutches, the success/failure slope for planning firms has become dramatically steeper. Everyone reading this column has been forced to rethink how to run a business and provide the most value.

Competitive Evolution

The underlying dynamic of creative destruction is not complicated. Most of us instinctively resist change until and unless it is forced upon us. Today you can hardly fail to pay attention to the possibility that your planning firm will experience protracted losses. The questions those not receiving bailout bucks have to ask themselves are all about becoming more competitive: How can I bring my firm back to profitability? How do I shed unnecessary effort (and cost) and add new services that will enhance my value? How can I attract the attention of new clients, and create a viable, sustainable marketing system? And how can I better position myself against the competition?

The destruction part of the equation is brutal. My guess is that at least 10% of advisory firms will not be able to change quickly enough or provide enough value, and will vanish within the next year or two. The result will be a stronger profession overall, better tuned to the needs of the consuming public, better able to compete with the dinosaurs who are toasting those bonus pools and wondering why it's still snowing outside. Those advisory firms that manage to get and keep their heads above water during these extreme conditions will be far more profitable, stronger and more aggressive once things turn around.

Future Firms