Illustration: Michael Glenwood Gibbs/theispot.com

For years, industry experts have been predicting the consolidation of the fragmented independent RIA space due to the macro trends of technology competition, aging advisors, declining fees, expanding investor expectations, the race for scale and a much more complex regulatory environment. All of these consolidation mega-trends definitely have played out over the last decade, but at a much slower pace than predicted. According to industry insiders at the MarketCounsel Summit, it’s fair to say that consolidation is not only here, it’s accelerating.

Attorney and regulatory expert, Brian Hamburger, CEO of Market Counsel — a compliance and regulatory consulting firm — opened up the 12th annual event at Miami’s Fontainebleu Hotel in early December with a compelling agenda focused on this consolidation theme.

“This is the seventh record year of M&A in the industry, along with a very robust breakaway broker pipeline,” Hamburger noted in his opening remarks at the 2019 event. “2020 will be the first time in the history of the industry when there will be more independent advisors, 52%, than employee-based advisors.”

But with the increased numbers of advisors comes a corresponding increase in regulatory actions, Hamburger pointed out. “SEC enforcement actions are up 7%, with 36% of those actions against RIAs, up from 23% just one year ago,” he said.

Picking up on the consolidation theme right out of the gate was a well-received panel of growth experts, including practice management guru Mark Tibergien, CEO of Pershing Advisor Solutions; David Canter, EVP and head of the RIA segment for Fidelity; and Bryce Skaff, co-head of the Global Client Group at Dimensional Fund Advisors. Moderated by Eric Clarke, CEO of Orion Advisor Solutions, this panel discussed how advisors need to keep growing to develop sustainable businesses and to avoid getting scooped up by bigger players with more resources.

“Real growth is slow,” Tibergien said. “The markets have been camouflaging a lot of operational sins, as advisors have been relying on past success and not investing enough in growing their businesses.”

Because so many advisors are “accidental entrepreneurs,” Tibergien suggests they define their optimal client and build a business around that persona, while gaining a technical specialty along with an industry specialty, and “get famous in both,” he said. The greatest threat to advisors in this new environment, according to Tibergien, is their “capacity to serve clients.”

Canter contributed further to this theme with a powerful growth message about attracting the right people in a tight labor market through a firm’s mission and purpose. “There are over 5,000 jobs open in financial services, competition is fierce to hire good people, and millennials are five times [more] likely to stay with a company as long as that firm is aligned with their own personal mission and purpose,” he said.

One way to articulate and communicate a firm’s mission and purpose is by becoming a “B” corporation, Canter noted: “B corporations are required to consider the impact of their businesses on employees, customers, their community, suppliers and the environment. As a result, you have the chance to use the B corporation message to communicate your ultimate mission and the purpose of your firm through this strategy.” Currently, there are over 3,000 B corps, 81 of which are RIAs, he said, adding that this trend is just beginning to emerge in the industry.

Another way to grab onto top talent is through M&A, Canter advises.

“According to our recent research on RIA buyers, 87% of the deals done are to acquire talent,” he said.

To put a finer point on this growth mandate, DFA’s Skaff revealed some compelling data on the differences between fast-growing firms and the rest of the industry. “Growth is actually a cocktail of stuff,” he said, highlighting the results of the firm’s recent benchmarking study that showed the separation of the two cohorts, with AUM growth rates for bottom quartile firms of -8% vs. 36% for top firms.

“The firms institutionalizing their use of technology and automating workflows [find that these processes] are key components to growth,” Skaff said. “But it’s not just good enough to have technology; firms need to bring in the human-capital component to systematize processes and firmly integrate technology into the day-to-day client experience.”

Another key takeaway from the fast growers is that they have a much more diversified source of new business. “While most firms gain new assets from referrals, the fast growers also focus on digital marketing and events, which count for 24% of new clients for them, while the average firm only sources 6% of new clients through digital channels,” Skaff pointed out.

Echoing the consolidation theme that comes from growth, or a lack thereof, Tibergien’s parting thoughts (shared in his inimitable style) expressed both concern and optimism for independent advice. “In this new environment, we will see the demise of hundreds, yet the growth of thousands,” he said.

M&A Advice

The MarketCounsel Summit also populated its agenda with industry star power in the form of Joe Duran of United Capital (now a Goldman Sachs company).

Duran entertained the crowd with the rationale for selling his $26 billion national RIA to financial giant Goldman Sachs for $750 million. “The sale was my bet on where the industry is going,” Duran said, as he believes that even at United Capital’s size, his firm would not have been able to compete on its own.

Of course, the biggest deal of the year — Schwab’s planned acquisition of TD Ameritrade (aka Schwabitrade) — was a hot topic of discussion among the attendees. While many hoped to glean some insight into this mega-merger from Schwab Advisor Services’ COO Jon Beatty, they were disappointed as Beatty couldn’t discuss the deal due to company policy.

Hallway chatter was ripe with thoughts on what the Schwab-TDA tie-up will mean for the RIA landscape. Many worried that a mega-custodian-dominant world would not be good for small advisors, as service levels likely could decline and the historic pro-advisor advocacy of TDA might be swallowed up into the belly of a much larger financial-services beast.

Post-Sale Process

Yet another star-studded M&A-focused panel wrapped up the industry event, highlighting what should be done with firms after they’ve been acquired.

Dave Barton, chairman of Mercer Advisors — which has been on an incredible streak of 10 deals in 2019 and more in the pipeline — pointed out the importance of having dedicated resources to facilitate integration. Barton described how his ace team has a detailed process to onboard a new firm’s employees and clients, while switching the firm’s systems and technology to Mercer’s. At its volume of roughly one deal a month, the Mercer team has become uber efficient and nimble at being able to manage the many moving parts of an acquisition, he said.

HighTower CEO Bob Oros said integration is such an important aspect of any deal’s success that his team doesn’t wait until the day a deal is signed to start it; instead, the firm begins the process in early meetings about a deal through the inclusion of integration teams.

To many, the MarketCounsel Summit is known across the industry as much for its executive networking as for its outstanding content and celebrity speaker lineup. Hamburger and his team definitely didn’t disappoint in late 2019, as attendees represented some of the largest and most innovative firms in the RIA ecosystem.

To learn more about what went on at the MarketCounsel Summit, check out the many tweets on the #MSUM19 hashtag on Twitter.

Timothy D. Welsh, CFP, is president, CEO and founder of Nexus Strategy, LLC, a leading consulting firm to the wealth management industry and can be reached at tim@nexus-strategy.com or on Twitter @NexusStrategy.