With each passing quarter, mergers and acquisitions specialists report more transactions involving advisory firms. In some cases, firms merge with strategic consolidators. Sometimes they are targets of financial buyers. Other deals come about when the selling practitioner hopes another advisor will take care of his or her clients when they no longer can.
This activity may have created the perception of a roll-up boom, yet as Dan Seivert of Echelon Partners points out, not every buyer is a true roll-up. Dan says that true “roll-ups” rely heavily on private equity firms who usually seek a liquidity event in order to realize their return on investment. Further, he says, they often want additional capital to continue their aggressive acquisition strategy. He identifies classic roll-up firms such as United Capital, Focus Financial, HighTower and AMG.
Dan also describes a new breed of roll-up he calls “strategic consolidators.” While they wish to buy up as many firms as they can as quickly as they can, they may be less motivated by a liquidity event and more focused on building a large enduring business with scale. Firms in this category include Mercer Advisors, Wealth Enhancement Group and Bronfman L. Rothschild.
Certain industries may be ripe for consolidation — those that are highly fragmented, subscale or going through deregulation. Nevertheless, most successful consolidations occur with companies that are more process- or brand-dependent as opposed to people-dependent. Funeral homes, medical practices and real estate agencies saw this sort of rapid consolidation.
Small businesses built on the individual reputations of the founders are harder to transform into scalable enterprises. Firms that have removed the identity of the owner by emphasizing a process or brand have greater success in a consolidation movement.
When I participated in my annual debate with Dan at Echelon’s annual “Deal & Deal Makers Summit” this fall, I remembered how fragile the financial advisory business model is in regard to transferability. Not every consolidation effort will emerge victorious. Growth-oriented firms must achieve faster growth, greater efficiency and clearer brands while at the same time becoming recognized as employers of choice in an industry suffering from an acute talent shortage.
So, which firms will get a seat when the music stops? Firms with the best chance have a strong understanding of the phases of consolidation and the will to act quickly.
In preparation for my debate with Dan, I reached into my archives for a Harvard Business Review piece written in 2002 by Graeme K. Dean, Fritz Kroeger and Stefan Zeisel. While this article focused on large, global, capital-intensive companies, many of their observations apply to the financial advice business as it experiences its own transformation today.
Stages & Phases
In “The Consolidation Curve,” Dean, Kroeger and Zeisel say that it takes 25 years to progress through all four stages of the consolidation process. While the independent retail advice model has been around for more than 25 years, the consolidation wave only began about a decade ago.
For years, lifestyle practitioners dominated financial advice. These advisors rarely viewed their business as anything more than an extension of their personality and not something that would outlive them. They typically did not seek to become the dominant provider in their markets, or to create something of lasting value.
The introduction of professional management changed this dynamic in many independent RIAs, making “The Consolidation Curve” a relevant and instructive article today.
The authors refer to Stage 1 as the Opening Phase, in which new companies emerge from a newly deregulated or privatized industry. This phase began when certain retail RIA practices did not want to set up shop as registered reps under broker-dealer supervision once the deregulation of commissions came into play.
Up until then, most RIAs were asset managers who had soft-dollar arrangements with brokerage firms. The ability to use discount brokers liberated advisors from the old model and allowed them to transform into practices operating under a fiduciary standard, as professional “buyers” instead of professional “sellers.”