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Analysts and investors had expected advisory firms such as Greenhill (), Evercore Partners () and Duff & Phelps () to boost revenue by tapping talented bankers from large institutions, where writedowns on credit losses led to U.S. government cash injections and restrictions on pay.

But earnings at these so-called boutique firms have also been squeezed by the global recession and hiring has proved to be costly in spite of the downturn.

"If you're doing M&A advisory in a period where there's a lot of activity going on, then great," said Roger Freeman, an analyst at Barclays Capital. "But when that ends you start scratching your head and thinking how are you going to make money -- and if you've taken that extra step and gone public, now the pressure's on you from shareholders."

Year-to-date, U.S.-target M&A has slipped to $438.1 billion, compared with $725.9 billion over the same period a year earlier, according to Thomson Reuters data.

No matter what unique niche they occupy, advisory shops need to look beyond their core business to expand, Freeman said.

"You inevitably see it expand because you hit the limits of what you can do in that narrow scope and investors want to see revenue growth," he said.

Like the larger banks, advisory companies' stock has been volatile this year. While Evercore shares have leaped more than 80 percent since the start of the year to $22.51, Greenhill shares are up 5.5 percent at $73.82 and Duff & Phelps shares are down 4 percent at $18.28.

ACQUISITIONS

Many advisory shops had been relying on restructuring fees to offset the drop in acquisitions, but there is concern the slowly improving capital markets may curtail the restructuring business without providing an offsetting boost in takeovers.

That has some shops now looking for acquisitions of their own to capitalize on advantages they have over larger firms such as Goldman Sachs () and Morgan Stanley (), which became bank holding companies last year and are now subject to more onerous regulation.

Some, such as Gleacher Partners, an advisory firm run by banking veteran Eric Gleacher, have already joined forces with other businesses. Gleacher agreed in March to combine with Broadpoint Securities Group, a small independent investment bank, to form Broadpoint Gleacher (). Broadpoint shares have soared more than 100 percent since the start of the year to $6.33.

Others, including Evercore, which has climbed to 10th place in the year-to-date league table for global mergers and acquisitions, are planning to build out investment management businesses.

"We're going to ... carefully look at high-quality opportunities to expand that business," Ralph Schlosstein, the firm's new chief executive, said on a call with analysts discussing second-quarter results.

Evercore, which acquired Bank of America Corp's () special fiduciary services division in April, had about $3 billion under management at the end of the second quarter, but it has been hurt by losses on private-equity investments.

The severity of the recession has shown the importance of diversifying one's businesses, bankers said.

"The people who are best positioned in our view are going to be the full-service firms," Broadpoint Gleacher Chief Executive Lee Fensterstock said in an interview.

Broadpoint, after acquiring Gleacher Partners, reported a jump in second-quarter profit to $16.1 million compared with a loss of $1.1 million in the same quarter a year ago, helped by advisory fees that the new firm brought aboard as well as its fixed income unit.

"We don't think we're a boutique," Gleacher, chairman of Broadpoint, told Reuters. "A boutique is what I had before, which is primarily a single-product M&A business."

But shedding boutique status by adding businesses is not easy. The recession has made it difficult to get financing to buy other companies, while creating an asset management or a capital markets business from scratch takes time.

"It is tough for boutiques to get to the next step," said David Gold, analyst at Sidoti & Company. "It's reasonable and maybe even easy to put together an M&A advisory business, but becoming full service -- that's a lot harder," he said.

(Reporting by Elinor Comlay, editing by Maureen Bavdek)