For decades, the narrative around the wealth management industry is that it is consolidating. Big firms are buying small firms, big firms are merging with bigger firms, M&A activity is reaching record numbers every year, and all hope for a small firm to survive among all the whales has been lost.
But that narrative isn’t true. Yes, there are firms consolidating, but there is no major consolidation issue happening. And contrary to many reports you’ve heard, it is possible for a small firm to survive.
In fact, the consolidation happening today may even make it more likely for smaller firms to thrive. Here’s why.
Yes, it is true that larger firms are buying smaller firms in record numbers. Several reports found that M&A activity grew 12%-15% over the previous year. However, while consolidation is increasing, the industry is not shrinking; in fact, it is growing.
Near the end of 2019, there were almost 13,000 registered firms — an increase of over 3% from the year prior. Even with M&A going up, the number of independent advisors also is rising.
That alone tells us that consolidation is not happening across the board. Instead, consolidation is, at least one factor that is helping the industry to grow.
The Starbucks Effect
The effect that large and growing firms are having on the advisory industry is similar to the effect that Starbucks had on small, local coffee shops when it entered growing metropolitan areas.