Why Small Firms Should Relish the Effects of Consolidation

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.

Expanding Industry

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.

Instead of running those smaller coffee shops out of business, the entrance of Starbucks into the community increased the demand for coffee overall, which in turn increased the customer base and demand for coffee from the local shops as well.

In the early 2000s when Starbucks grew three-fold times its size, independent coffee shops grew by upwards of 40% over the same time period.

Why does this matter? Because it’s the same story as what we are experiencing in wealth management. As large RIAs buy firms and grow larger, they increase awareness of independent advisors, and that drives demand to the small shops as well as the large ones.

Good for Everyone

It’s important to remember that less than 25-30% of all assets in the United States are managed by independent advisors. There’s still a tremendous opportunity ahead for advisors to build more awareness and bring true financial planning and fiduciary service to a greater number of people.

A high amount of M&A activity, alongside a growing number of independent advisors, shows that the industry as a whole is maturing. Consolidation is not a threat to smaller firms; it is a validation of the independent advisor model and a sign that the industry is growing up before our eyes.

There’s no need for any advisor, of any size, to fear consolidation. Instead, embrace it. If you stick with growing your firm and focusing on the clients you serve, all indications are your firm is going to win, as much as the big firms are winning with M&A.