After spending 11 years shying away from the energy business, Houston-based broker-dealer Sanders Morris Harris now embraces this geographic niche for prospective wealth management customers.

For the first decade that the firm was in business, so many Houston natives grew wealthy from energy (or inherited their money from someone who did) that Sanders carefully avoided that market segment so it wouldn't become synonymous with just one industry. Instead, the firm wanted to be a broad-based service provider for an ultra-rich clientele.

But in more recent years, that strategy changed for several reasons. First, by 1998, Sanders' client base had expanded from ultra-wealthy investors with an average net worth of $10 million to include more mass affluent customers. Also, its footprint had extended beyond its Houston home and many of the new clients did not have oil coursing through their veins. And finally, as luck would have it, oil was on the cusp of a major boom.

In a very real sense, Sanders exemplifies the plight of the regional firms. Like the middle child in a family, regionals are trying to catch the attention of clients while stuck between the big wirehouses and the independents.

The days are gone when regionals may have been able to compete head-on in a particular location with their bigger counterparts. Now, in order to survive, they have to act more like boutiques by picking a segment and specializing, according to some industry experts.

Indeed, it's a heightened focus on energy that has helped Sanders stay competitive while much of the regional channel endured consolidation and defection.

But specializing may not be enough. Opinions vary on the health of the regional market. But make no mistake; there are some dire forecasts that predict the end is nigh.

"The regional firms are dead. There will never be a regional firm again," says Chip Roame, a managing principal at Tiburon, Calif.based research firm Tiburon Strategic Advisors. For starters, regionals lack the breadth of product offerings, as well as marketing and technology budgets available at larger financial services firms. For instance, marketing an investment product to a potential client would cost a regional brokerage firm about 15 times what it would at a wirehouse, Roame says.

Fans will point to the more relaxed culture at the smaller firms, and say that customers still can get more personalized service than they could with the big players. But, as Roame says, the numbers certainly add weight to the notion that this is not a strong business model. There were roughly 200 regional brokerage firms just 15 years ago. Today there are about 15. Last year alone, wirehouses and large firms bought out three high-profile brokerage firms. The biggest catch happened when A.G. Edwards agreed to a $6.8 billion offer from Wachovia Corp., which sparked a fresh round of speculation about the long-term viability of the channel.

But that consolidation chapter is almost over because there are so few takeover targets left, Roame says. It's only a matter of time before the few significant regionals that do remain are acquired by a large wirehouse, bank, insurance company or other financial services firm, he says.

Others are not quite so bleak, but they do say a new strategy is needed. Whether a regional firm is as small as Sanders Morris or as large as Raymond James & Associates (RJA), differentiation is critical in today's market, says Philip Palaveev, president of Seattle-based Fusion Advisors Network, a national independent financial planning group. The bigger regionals, even as they call themselves national players, are not impervious to market dynamics prompting the need for changes, he says.

Wealth management stalwart RJA has a separate, independent arm of 3,000 or so advisors that is the crown jewel that makes the entire company an attractive acquisition target, Roame says. Thomas A. James might argue that he will never sell, but "someday someone is going to offer him a ridiculous amount of money," Roame says.

Yet another threat facing regional brokerage firms is the fact that they are losing the ability to generate life-sustaining revenue via traditional product lines such as equities trading, broker deposits and mortgage-related finance, says Richard Bove, an analyst for Ladenburg Thalmann & Co. Therefore, he adds, wealth management will have to be their revenue mainstay. If they want to survive, these firms should relentlessly court high-net-worth individuals.

"You have to ignore the smaller customer and go after the one that has a sizable amount of wealth or income," Bove says. "Investing is not Republican or Democratic in nature—it's for the wealthy. If you are going to spread stock to the masses, which is what the NYSE was doing about 50 years ago, then you are going to lose money. If you are going to lose money, then you are going to go out of business."