Niche practices are coming to the financial advising industry. A few of them are already here and taking off.
Whether specializing in financial transitions, financial gerontology or Generation X or Y, more and more advisors are targeting their practices to certain demographic groups or specific service circumstances or philosophies.
CNBC.com will be looking at a variety of niche specializations over the coming weeks.
Niches can be tricky to define.
Simply put, "a niche is a group of people with similar problems and solutions who have investable assets and are willing to pay," said Patrick McClain, CEO of Hanson McClain Advisors and co-author of the book "Investment Advisor Marketing."
The concept can be broken down even further, to niches and technical specialties, according to Mark Tibergien, CEO of Pershing Advisor Solutions and co-author of the book "Practice Made (More) Perfect."
"A niche focuses on a community that you can define, such as business owners in transition or the LGBT [lesbian-gay-bisexual-transgender] community, while a technical specialty focuses on a subject matter, perhaps some arcane area, such as sudden wealth," he said, noting the latter is more focused on a process than a certain population.
Specialist practices appear to be more lucrative than their generalist peers. Research from Cerulli Associates found that while only 15 percent of advisors concentrate on a unique clientele, their practices accounted for 29 percent of overall advisor assets as of the end of June 2013.
The growth rates of niche practices support these findings.
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"With generalist practices, growth is organic—a gradual straight line rise, at best, over time," said Michael Kitces, certified financial planner and director of research with Pinnacle Advisory Group. "But when niche practices are established, I've seen exponential growth rates in just three or four years," he explained.
"Look at other professions—doctors, lawyers, accountants—[and] the specialty practices always make more," he said. "It's the natural progression of a profession."
Generalists are starting to feel the pressure to specialize.
"Collectively, growth rates of the industry have slowed," Kitces said. "Consumers are justifiably afraid to try to find an advisor when we use inconsistent labels and have low standards."
Furthermore, the Cerulli report found that "pressured to generate revenue, [generalists] typically accept clients based on one factor: Do these clients have enough money to qualify?"
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"An advisor's lack of focus makes investors apprehensive and raises questions about whether the relationship will create value," the report continued.
According to Tibergien at Pershing Advisor Solutions, advisory firms are prone to stretching themselves too thin, making specialization in the interest of greater efficiency and better branding compelling.
"Also, the reason to specialize becomes apparent when advisors analyze the characteristics of their clients and ask themselves, 'Where and how am I getting groups of clients?'" he added.
Notably, Tibergien has observed a growing number of niche-minded women- and minority-owned firms.
Types of niche focus areas
The evolution of the industry is heading toward more personalized services, Kitces said.
"At the beginning, financial planning itself was a niche, but clients are starting to want more, [such as] 'someone who looks like me,'" he said. "You can see it in the rise of specialty certifications."
Some of these include titles such as certified divorce financial analyst, or CDFA; certified Medicaid planner (CMP); certified financial transitionist (CFT); and retirement income certified professional.
Advisors, too, start to want more.
"When advisors start out, they're generalists, and over time they develop a passion or interest in a certain type of client—say, a nearby corporation or a local industry, like farming," Tibergien said.
"For someone going through a divorce, for example, there's comfort in knowing you've worked with others of their profile," said certified financial planner Janet Stanzak, principal at Financial Empowerment and president of the Financial Planning Association.
"It's a more personal connection," she added. "Both clients and advisors should be asking each other, 'What kind of relationship do you want?'"
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Stanzak herself has developed a niche focusing on clients who are transitioning into retirement or a second marriage.
For his part, McClain of Hanson McClain Advisors said advisors should "look for a demographic that needs your services and will engage you."
"The benefit is that you will add more value to clients because you better understand their situation and speak their language," he added. "They feel that I'm speaking specifically to them."
Implications of a niche strategy
McClain's firm has developed a specialization in telecommunication and electric utility workers throughout the U.S. But having both a generalist and a specialist focus is not mutually exclusive, as about 30 percent of his practice is niche-focused, McClain said.
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Generalist practices are not necessarily going away, said Tibergien.
"The important question is: Is there someone who can relate to me on a personal level?" he said. "Sometimes a niche focus is only marketing. The more complex your life, [the more] you may consider seeking out a specialized practice, but it's not necessarily the only consideration," he said, noting that those considering a large firm should ask: Is there anybody [there] with this type of background?
And what's the fastest-growing niche?
"Almost anything," Kitces said. "You're not trying to build a practice with thousands of clients; you just need something that is common to 75 people on the planet."
—By Deborah Nason, special to CNBC.com