Against an ever-expanding backdrop of mergers, acquisitions and industry consolidation among both broker-dealers and RIAs, a common view is that the solo advisor is doomed. Whether due to the burdens of managing the firm, meeting the rising volume of fiduciary compliance obligations, handling increasingly complex investment or insurance solutions or just doing the planning work in the first place, the presumption is that solo planning is simply becoming untenable — or at least impossible to perform in a cost-effective manner.

Yet the reality is that the death of the solo advisor has been forecasted for nearly two decades, and in the meantime solo advisors have actually become more profitable than ever. Is the prevailing wisdom flawed?

I would argue that the next decade will not in fact bring the death of the solo advisor, but rather a golden age — albeit with a very important caveat.

Nearly 20 years ago, Mark Hurley famously issued a report on industry trends that forecasted the death of the solo advisor. Industry consolidation and a big push for economies of scale, he argued, would kill off small independent advisors. With the luxury of hindsight, we can now assess those industry benchmarking studies and see whether or to what extent Hurley’s forecast is playing out.

The data reveals some really striking things. When you look at the industry benchmarking studies, the best solo advisory firms take home as much income as a partner in a $1 billion advisory firm. That bears repeating: The best solo advisors are taking home as much cash compensation as the typical partner in an advisory firm managing more than $1 billion of AUM.

Top solo advisors keep as much as 70 to 90 cents of every dollar of revenue they earn, which basically means their overhead — e.g., technology, office space, staff to the extent it’s needed — is as low as 10% to 30% of revenue after all expenses. The last round of industry benchmarking studies revealed that standout solo advisors are netting almost $600,000 a year in take-home profits on about $700,000 or $800,000 of total revenue.

So to put it mildly, solo advisory firms aren’t exactly dying. Obviously this rosy picture doesn’t apply to all firms. Indeed, most benchmarking studies only carve out a subset of the 25% most profitable or fastest growing firms and then take deep looks at those in particular. Consequently, the average solo advisor isn’t necessarily this profitable, but the standout 25% are.

And these metrics mean that even if the forecasts are right and costs rise substantially — e.g., a large firm sees a 3% increase in overhead, which would actually be a big number when you’re a large firm, and small, inefficient firms see a 10% increase in overhead, which would be a monstrous increase — these solo advisors would still be taking home 60 to 80 cents on the margin.

Even if an advisor is simply generating $250,000 of revenue — which frankly is more typical for established experienced advisors — and they ran a 60% margin instead of the 80%-plus profit margins of standard firms, they’d still be taking home $150,000 a year, which is still more than three times the median household income in the U.S. and higher than the average salary of an employee advisor. Simply put, there is a lot of room left to succeed as a solo advisor even if costs do rise.

And yet, when you examine our industry, you see costs falling, not rising.

Twenty years ago, if I had 50-plus clients and I wanted to meet with all of them, I needed an administrative assistant just to contact them and schedule meetings. Now I use a scheduling app like Calendly or TimeTrade for $10 a month. If I wanted to rebalance all of my client portfolios on a regular basis, I needed another staff member just to identify and work up all the trade orders and execute them. To service tax-sensitive clients I might have needed another staff member to help handle the tax analytics. Now I just buy any number of rebalancing software solutions that implement this at about one-tenth the cost.

And to do detailed planning projections, I’d have to manually update spreadsheets whenever tax laws changed. Now I have robust planning software that automatically update. At virtually every possible turn, technology tools have replaced what used to be a wide range of administrative staff support. These tools do the job faster, more efficiently and potentially at one-tenth or one-twentieth the cost of what staff members used to command.

We’re even seeing new categories such as RegTech — i.e., regulation or regulatory technology designed to support all of our compliance obligations — growing as a category unto itself. Technology platforms like RIA in a Box’s ongoing compliance tool and Smart RIA’s technology solution for managing compliance hammer down the cost in both dollars and time to manage a solo advisory firm.

I think we grossly underestimate how brutally hard it was to be a solo practitioner in the past. Listen to some of our Financial Advisor Success podcasts. Deb Wetherby owns a multibillion-dollar RIA in San Francisco serving affluent clients, but when she started 25 years ago, it took her three years just to get to break-even, and she racked up credit card debt paying for the basic staff she needed to support her because there wasn’t much technology; if you were independent, you didn’t get what the mothership provided. Whereas today, technology makes it possible to launch a basic RIA business for under $10,000 in hard cost in your first year.

We also fret that robo-advisor technology will replace advisors, yet what I see is robo-advisor technology being used in what are now being called digital advice platforms. These platforms in turn make it possible to run a solo advisory firm more profitably than ever because the technology isn’t replacing us. Rather, it’s replacing all the administrative staff we used to need just to survive. This dramatically reduces the cost to execute a solo advisory firm. And then it’s even letting us move down market to less and less affluent clientele because those individuals can be served more efficiently.

That in turn is expanding the pie of potential clients to serve, while creating more opportunities for advisors. It’s why we see the growth of new business arrangements like the hourly and monthly retainer models, and entire advisor networks like Garrett Planning Network, ACP and our own XY Planning Network — all of which are using their size and bargaining power to further reduce the costs of these hyper-efficient technology tools for solo advisors.

Consequently, while 20 to 30 years ago the best technology sat within the largest wirehouse firms, the best technology solutions today are suited to solos. A software company can serve tens of thousands of advisors at multiple independent broker-dealers and independent RIAs, and become larger than any proprietary software solution for advisors ever was.

In other words, the ability to access software has so turned the tables that now it’s the independent advisors who have the most direct access to the largest, most efficient technology solutions we have ever seen in our history. So why would you need to consolidate and try to pursue these ephemeral economies of scale when you already get access to some of the best technology for efficiency that has ever existed?

With this being said, I don’t want to be insensitive to the plight of many of today’s solo advisors who are not running 80%-plus or even 60%-plus profit margins. In some cases, firms are just more limited because they’re not serving as affluent of a clientele. And most of us top out somewhere between about 75 to 100 clients.

When you work with affluent clients who pay you $8,000 to $10,000 a year, you can generate $800,000 or $1 million of gross revenue and net more than $500,000 a year. When you work with more middle-market individuals who pay you just an average of $2,500 a year, you’ll only gross $250,000 per year. And at 60% to 80% margins, you may only net $150,000 to $200,000. That’s still a pretty amazing number, but it isn’t quite as eye-popping as netting $500,000 from your practice as a solo.

The complaint I hear most often is, “The business isn’t scaling,” which I find is usually code for, “This isn’t getting any easier as my firm gets bigger. Where are all these efficiencies that were supposed to come along?”

But the root problem is that once they cross about 50 clients, these solo advisors are still trying to do everything for every prospect they meet. Meanwhile they may not have a clear target market, meaning they don’t have a standardized solution that they can apply to make processes more efficient. In essence, it’s a problem of focus.

Think how much faster it would be to produce plans if you had a clear niche. Then all your clients could be prescribed an optimized set of solutions. You’d get to a point where maybe 90% of your plan would be derived from a single template. And yet by dedicating yourself to serving that one niche, you’d be differentiating your service from everybody else’s.

Simply put, that so many advisory firms struggle with efficiency isn’t a function of their smallness. It’s their lack of focus, which — as they layer more and more staff on top of their inefficient business — conspires to make them miserable.

The solution is to focus on a clear target, transition away from or even fire clients who are not a good fit, say no to prospects who aren’t in your focus area and go deeper with the people you can serve best. This not only helps you price your services, but it also helps you become more efficient.

All this said, there is one very real challenge that solo advisory firms face, and it’s how to go about getting new clients while differentiating themselves in the advisory firm landscape.

Not long ago, being a comprehensive planner was a sufficient differentiator because there weren’t very many of us. Fewer than 1 in 10 advisors had their CFP marks 15 years ago. Those days are over. There are currently over 80,000 CFP certificants. Compounding this, every major broker-dealer has been making a push into planning for years. The RIA community and the firms within it are larger than ever. It used to be about becoming a $1 billion firm, now it’s about becoming a $10 billion firm.

If you’re solo, you’re not just competing with other solos. You’re competing with other planners too, whether they’re at large regional firms or in the growing crop of national firms. You’re competing against Schwab and Fidelity branches and the growth of retail CFPs. You’re competing with Vanguard Personal Advisor Services, and they’re at $100 billion of AUM in barely two years — not to mention the hundreds of CFP professionals who can serve clients from any ZIP code.

As a solo advisor you can still go deeper and customize more than these firms can. You can have more relevant expertise. You can be more specialized. But unfortunately, few of us can really do this well. So many of us are still generalist planners. And the truth is if someone wants a generalist, they’re going to find them at a larger firm where economies of scale yield a lower price, and where you’d likely be out-marketed as well. (If you think you can be a better generalist than Vanguard at 30 basis points with a $5 trillion head start on its base of clients, you’re fooling yourself.

So there’s nothing wrong with being a solo advisor in the future. Technology is making it possible to do it more efficiently and profitably than ever, but there’s a problem with trying to out-market a firm 100 or 1,000 times your size, when you offer basically the same generalist planning advice.

That’s ultimately why I pound the table so hard for advisors to pursue a niche. You can get 50 to 100 great clients, serve them profitably, make your mark with specialized services and have a great solo firm. Bonus: Those 100 clients are just trivially small for a mega-national firm like Schwab or Vanguard. They’re not coming after your 100-client niche.

Bottom line, this golden age comes with preconditions. The key for solo advisors is to go niche, or go work for someone else.

So what do you think? Are we about to enter the golden age of the solo financial advisor? Is the real problem for solo advisors focus rather than efficiency? Is having a niche crucial for solo financial advisors going forward? Please share your thoughts in the comments below.

Michael Kitces

Michael Kitces

Michael Kitces, CFP, a Financial Planning contributing writer, is a partner and director of wealth management at Pinnacle Advisory Group in Columbia, Maryland; co-founder of the XY Planning Network; and publisher of the planning blog Nerd’s Eye View. Follow him on Twitter at @MichaelKitces.