Seeing the Opportunities in Financial Advisor Firm Consolidation

For the last 15 years, we have heard that the largest transfer of wealth in history is upon us. This was the overarching theme of the sales pitch I received when interviewing for a financial advisor position with a national financial planning firm in 2006. Who wouldn’t want to be a part of the opportunity to collect large commissions as baby boomers, the richest generation in history, pass all accumulated wealth to their heirs?   

Though my career has remained centered within the financial planning and wealth industry, my journey as a financial advisor back then was somewhat short lived. I did not remain with the advisory firm long enough to personally ride the tidal wave of intergenerational wealth, but the choice to make a career giving financial advice has certainly paid off for many advisors and firms. The great wealth transfer is still occurring, with trillions owned by individuals aged 70 years old and a significant portion of all wealth in the US expected to change hands in the next few decades. However, as the industry is grappling with how to best retain beneficiary clients, a new disrupting trend has become prevalent: an increased rate of advisor transition and consolidation.

Making Money Moves

In the US, we have seen a steady increase in firm mergers, acquisitions and some advisors leaving their parent firm to form a registered investment advisor (RIA) practice of their own. Basically, the trend is one of consolidation. Merger and acquisition (M&A) activity has consistently risen since 2014, with a year-over-year growth rate of around 10%. 

Larger advisory and private equity firms are also seeing the great wealth transfer as an opportunity, using their deep pockets to purchase smaller firms and increase their chances of managing the trillions that are poised to pass to the next generation. This strategy of pooling resources and technology is helping to uncover growth opportunities and scale, with more than 5,000 RIAs now grossing $100+ million in assets under management (AUM). 

The advisor consolidation trend stems from three primary causes:  

• Retirement: Many advisors are nearing retirement age. When plans exist in advance to transition a practice, advisors and their firms have time to partner and introduce other advisors into the relationship. Most of the focus here tends to be on client engagement and retention, but many firms are also investing in digital enablement tools to create seamless back-office handoffs, in addition to digital marketing techniques to scale client touchpoints and communications.  
• Unplanned Succession: Just as individuals engage in estate planning to ensure the smoothest, least costly transfer of assets to beneficiaries, wealth firms should be planning for the unexpected. Having a solid succession strategy requires the ability to quickly size a book of business. Strong data analytics reflecting revenue, costs, client demographics and practice management history help firms respond more quickly to these events, reducing disruption in client service.  
• Mergers & Acquisitions: M&A activity is perhaps the most frequently used tool in the advisor industry, as firms look for opportunities to optimize a client base. Firms are using M&As to grow their business by acquiring specialized customer segments, or even eliminating clients that don’t fit the desired firm trajectory. In order to successfully execute these actions, one must possess wide-reaching industry knowledge or partner with a vendor firm that does, inclusive of being able to sync with a network of buyers.

Technology-fueled Enhancement and Evolution

There are certainly plenty of success and failure stories out there when it comes to digital transformation. Smaller and newer advisory firms generally are not held back with legacy architecture and can more quickly adapt, integrate fresh technology, partner with community-based networks or startups, and create niche markets for younger generations. They may struggle to keep pace in spending to improve their products and user experience but will typically allow their advisors more leverage to operate as entrepreneurs, bringing in core client bases that have stuck with them.

Larger firms can struggle with the pace at which they transition from legacy systems and processes, but tend to have deeper pockets to offer advisors:

• Investment in innovative technologies
• Skilled service and operational support staff
• Networks of external resources like attorneys, CPAs and estate planners
• Data analytics and AI-based recommendation engines

Often, any investment or expansion goal comes down to a build-or-buy decision. Buying third-party software and integrating it into an existing business can allow advisors to scale their operation or address clients’ needs quickly and relatively cost effectively. The larger and more complicated task of modernizing system architecture is an effort that requires concentrated resources for a considerable amount of time. Established firms who have been gobbling up smaller advisory practices are all currently facing this cost constraint. How each firm reacts to the challenge of modernizing architecture—while at the same time growing their technology offerings for the next generation of investors—will determine their client retention rate and their AUM growth rate.

In order to get started, there are a few quick wins all advisory firms can focus on in the shorter term:

• Benchmark your firm’s performance and financial analysis against industry peers
• Seek out and identify industry partners with similar values
• Offer succession planning and continuity toolkit resources
• Enhance your recruiting strategies and training plans to attract younger advisors
• Create transition management platforms and processes.
   

On the Horizon

Overall, there is time, cost and burden involved in every transition process, but the end game for advisors is to land with a firm that gives them autonomy, the ability to self-brand and freedom to seek unique growth opportunities through innovative product and investment solutions. The growing flux in both client and advisor transitions are only a threat if a firm is unprepared to handle them. Otherwise, the great wealth transfer continues to present opportunity for firms of all sizes.