In 1977, Harvard University business historian Alfred Chandler wrote The Visible Hand, taking his cue from Adam Smith's famous treatise, The Invisible Hand of Business, written nearly two centuries before. Chandler's Pulitzer Prize-winning book described how the definable, controllable factor of management exerted a more powerful influence than any amorphous, free-wheeling, "invisible" market forces. Chandler illustrated how managers running large enterprises exerted a far greater influence in determining size and concentration in American industry than other factors such as capital or market forces.

Fast-forward to 1999, when a report by Undiscovered Managers, called "The Future of the Financial Advisory Business and the Delivery of Advice to the Semi-Affluent Investor," forecasted a shocking decline in profit margins and consolidations. When I read the report, I was struck by several things:

• Mark Hurley, the principal author, was bright, focused, and well-schooled. He was not some lunatic forecasting that the sky falling.
• The report was forthright. Its message was in agreement with the findings of a long line of research on business evolution, including Chandler's visible-hand assertion about the unsurpassed power of management in dealing with business challenges.
• Undiscovered Managers had no axe to grind or hidden agenda. The message was unbiased.

There was a firestorm of controversy and just plain bad feelings because the report predicted profit margin compression, firm consolidation, the emergence of niche practices, and a host of financial woes for small practices. Then, as now, the majority of financial planning practices were small, not particularly efficient, unfocused, and independent. Not good news for many practitioners.

Undiscovered Managers followed up about a year or so later with a prescriptive report including a recipe for success: Find a niche or get big. Easier said than done, of course. To muddy the waters more, there were a few highly publicized accounts of some recognized firms following the report's "prescription" but not doing too well. Then the whole issue sort of disappeared from the radar.

So was this just a false alarm? Were Chandler and Hurley wrong? Actually, they were right on target. Chandler's description of the managerial revolution is occurring right now in the financial advisory business, and these are issues you need to think about.

With this in mind, early in 2000 I looked at Undiscovered Managers' recommendations, met with the principal authors, examined their new firm model designed to overcome the imminent business shift, and pondered the whole mess. It was clear things were going to happen--but it wasn't clear how, when, or to whom. More important, it wasn't completely clear what to do about it.

Things are clearer now. Subsequent industry surveys have confirmed that average profit margins at advisory firms have declined substantially. Is this the dreaded margin squeeze about to crush planning firms in its vise-like grip? Not necessarily; my analysis shows that it all depends on what you do next.

The profit drivers in professional service firms. A report on strategy and positioning in professional service firms from the Harvard Business School (written by Ashish Nanda and published last May) shows that maximum profits depend on business strategy, organizational structure, and where the firm fits in the marketplace (see "The Professional Service Practice Spectrum" below). This is a large part of what Chandler and others like him were driving at.

Working to improve your service quality and reduce the cost of providing that service isn't a strategic choice, but a necessity of operational effectiveness. On the other hand, an advisory firm's decision whether to provide its clients with high-quality service at a higher price or low-quality service at a lower price is a strategic positioning choice--a visible-hand management decision.

So what does this mean for you and your business? Simply striving for higher profits without a clear understanding of where you are in your marketplace is a waste of time. Analyzing profit margins must be done within the context of your firm's organizational structure and profitability drivers. Different organizational models with different profit margin structures will work--if you know which one is right for you.

Remember, competition will force the inexorable drift from right to left on the professional service practice spectrum chart. Firms that once practiced so-called rocket science will discover their sophisticated services and tools becoming commoditized. If such firms continues to do the same thing year after year, they will become less competitive and less profitable. So will your firm, unless you do something about it.

Here's what we decided to do:

• Starting in 1999, we looked at different organizational structures.
• Studying industry surveys, we recognized we were realizing the higher margins that describe gray-hair or even rocket-science firms.
• We confirmed how we operate in the financial planning market--as a gray-hair firm--based on a comparison of our group's operating practices and financial characteristics.
• We understood we couldn't compete with Wal-Mart (the Merrill Lynches of the world) unless we changed organizationally to be exactly like them.
• We realized that we couldn't have it both ways--our company could compete well only through either high margins or high volume.
• We recognized that doing nothing would start our "leftward drift" in terms of the practice spectrum.

Here's what we've done since 1999:

• We made a strategic practice decision to remain a gray-hair firm, which meant working to stay in the forefront of the financial planning industry technically and intellectually.
• We became experts, publishing six professional contributions in the Journal of Financial Planning in five years. We also published more than a dozen white papers based on our research. All of this translated into actually knowing stuff that we could put into practice. The gray hairs were showing.
• We wrote one book and are now writing another targeted at clients. We expect the information and ideas will be useful to them.
• We shared our expertise with colleagues and consumers across the nation by writing and speaking about it. We made prospective and existing clients aware we knew our stuff as well as anybody in the country and backed that up with our research and the practical application of our skills.
• We added consulting services on complex issues (more gray-hair stuff). We focused on those clients who were best suited to our skills and service mix by dropping the inappropriate ones.
• We hired several outside organizational, marketing, and financial consultants to do a reality check and install the best practices from firms operating with a similar structure.
• We provided additional, multiple services, such as free tax preparation for certain clients.

Back to the future--the visible hand. Plainly, the financial advisory industry is changing. These changes are typical of all maturing industries, and there's nothing you can do about the change. On the other hand, there is plenty that you can do with your business to take advantage of these changes, if you recognize where you fit in the marketplace and operate your firm accordingly.

Here's what you should consider:

• Get real with your business. Where are you in the marketplace? Not sure? So hire an outsider to evaluate the situation and tell you the unvarnished truth.
• Compare your organizational structure against the models mentioned earlier. Examine it two ways--where you are and where you want to go.
• Decide which way you want to go. If you can't beat 'em, can you join 'em? Consider staying or even transitioning into a competitive commodity or procedure firm. Or how about combining with other firms to be a procedure firm? Realize that becoming a gray-hair firm is going to take a lot of work if you aren't there already. Relatively few firms will be able to operate and maintain themselves as gray hairs, and fewer still will ultimately succeed as a rocket-science specialty firm.

Remember, it's your total profits, not profit margins, that are important. How you consistently increase profits depends on your form of organization, which in turn depends on your strategic goals and long-term vision for your business.

Whatever you do, don't just sit there. The invisible hand is becoming more visible each day.

Glenn G. Kautt, CFP, EA, is president of The Monitor Group, a wealth management firm in McLean, Va. He can be reached at kautt@themonitorgroup.com.