At a recent gathering of financial services professionals-on the very day the Senate finally passed financial reform legislation-the focus was on what to do to preserve historical business models in the face of financial services reform. I was disappointed in the lack of creative thought associated with the future. Most of the attendees at this conference were generally quite satisfied with the status quo-not yet feeling enough pain to embrace change.

The problem for them is that clients aren't satisfied with the status quo-so the profit margins associated with tired traditional business practices aren't sustainable. We are facing a combination of factors that individually may not represent a threat; together, though, they will be significant. These include regulatory change, margin compression and permanently altered client expectations.

Clearly, incremental improvements of traditional models (broker-dealer and RIA) will not yield sustainable top- and bottom-line growth. Many executives seemed to cling to the notion that current profitability equates to long-term sustainable business practices. Once reality sets in that historical business models are no longer growth engines, the discussion should shift to how we, as an industry, can continue to provide relevant services to our clients. Or so I hope.

Whether your business model, pricing strategy and advisory service offering represent fair value is solely the client's decision. While the market-based value determinant isn't new, what is different this time is that the market-that is, your client-wants and needs more information.

SERVICE, VALUE, TRANSPARENCY

The oft-repeated quip-price is only an issue in the absence of value-is of major relevance as we contemplate our future. The challenge we have created for ourselves is that our pricing is not directly linked to client satisfaction. It seems to me that the typical product or service offering in financial services is a function of what was needed to support manufacturing or distribution strategies-or perhaps the result of decades-long interpretation of the regulatory framework-but not necessarily designed to meet client expectations.

Clearly our world is changing, hopefully for the better. The change in regulation, financial models, client-service expectations, pricing and perhaps the very basis of our business will impact us all. A few years from now, will you look back upon this time as a wasted opportunity or as a watershed moment that created the optimal circumstances for innovation?

In order to embrace innovation effectively, it is first necessary to abandon the familiar, which is difficult, particularly while the familiar is still meeting your profit expectations. Should you have the courage to engage in the exercise of evaluating strategic alternatives to your business model with an open mind, it then follows that you will also have to determine if your industry partners are willing to engage. This means advisors need to think about whether their broker-dealer and RIA firms' interests are aligned with theirs. Broker-dealers need to determine whether their clearing firm or custodian partners are in innovation mode. Absent active participation from all parties in the client-service chain, true innovation that yields improved margins will prove elusive.

So one of the questions that should be asked is whether the existing client-service chain (i.e., advisor-broker-dealer/RIA-custodian/clearing firm-sponsor/fund/manager) is still appropriate. What is really necessary in order to provide your clients with the services they value?

True innovation results from thinking outside of traditional boundaries. Your clients are already outside of your boundaries by definition, so their thinking isn't shaped (and therefore limited) by traditional financial services business models. Listen to your clients-their creativity hasn't been stifled by those who are clinging to the status quo.

Matt Lynch is president and CEO of Capital Analysts in Cincinnati. He can be reached at matt.lynch@capitalanalysts.com.