Undiscovered Managers president and chief executive Mark Hurley mapped out the future for independent advisors Tuesday in a session titled "The Future of the Advisory Business - Strategies for Small Companies."

Investment advisors are on the brink of war, he warned. The discussion was based on a recently released white paper that serves as the companion to the much-discussed report, "The Future of The Advisory Business and the Delivery of Advice to the Affluent Investor," issued last September by Hurley's firm.

During the talk, Hurley refuted what he said was a misperception about the controversial first report. Many people interpreted the report, which forecasted that large firms will capture most of the future growth in the advisory industry, to mean the demise of small firms, Hurley said.

"The issue for small firms isn't survival, but prosperity," Hurley said. While the demand for advice today outweighs the number of providers, an industry transformation driven by competition and technology will result in a smaller supply of potential clients than the demand for them. The problem that small firms face is their large competitors can spend a lot of money to capture clients that advisors aren't paying anything to attract now, Hurley said.

"Technology is commoditizing what advisors do," he said. "Competition will squeeze your margins. Your fees will go down, because clients won't pay as much for your services."

Firms face three options: do nothing, which will mean working harder for less money; use scale to become a dominant competitor - a strategy that will be a success for only 40 to 50 firms, according to Hurley; or develop a highly specialized niche strategy.

Hurley named six traits of successful niche firms: the perception that they possess special expertise; the continual improvement of the quality of services; the ability to anticipate clients' future needs; operate efficiently by leveraging technology and forming alliances with other organizations; possess adequate scale ($400 to $500 million in assets under management, in most cases); and have dominant market share within their niche that creates a barrier to entry into the market by competitors.

There are hundreds of niche opportunities available, but there's a narrow window to act, Hurley warned advisors.

A copy of the report is available at www.undiscoveredmanagers.com.

-- By Melissa Klein

Send comments to information@smartpros.com