Many advisors would greatly benefit from scale yet are hamstrung by the very temperament that led to their success in the first place.
Q1 2022 hedge fund letters, conferences and more
That was the premise behind a highly successful television show four decades ago:
“If you have a problem, if no one else can help, and if you can find them, maybe you can hire the A-Team.” Grew up in the 1980s? Then you remember the A-Team: Hannibal, Face, Murdock and of course B.A. Baracus (Mr. T!). Each team member had a specific skill that acted as a ”force multiplier,” allowing their team of four to defeat more numerous enemies… which they did on a weekly basis for five seasons! It was a classic case of 1 + 1 = 3.
What business wouldn’t like that math?
Yet in the financial planning profession, most advisors are solo acts – akin to Rambo. Partnerships are common but are often formed at the beginning of advisors’ careers when safety in numbers is a good survival tactic.
Today’s headlines are awash with news of hundreds of firms acquiring and being acquired, but we don’t hear much about mergers. In fact, I have heard it said, cynically, that there’s no such thing as a merger, only an acquisition without one side knowing it. If a successful partnership or merger could achieve scale more quickly and reliably, why are proper mergers among advisors so rare?
For starters, the financial advice profession encourages independence, self-reliance and competitiveness. Without those traits, young advisor trainees might not even get out of the stable. On the other hand, a merger requires collaboration, humility and trust.
Ask a room of growth-minded advisors if they are interested in acquiring a book of business and most hands would likely go up. Ask the same group if they’d be interested in a merger, far fewer hands would rise. Acquisitions are easier. The buyer writes the check and gets to call the shots. Unfortunately, acquisitions are incredibly difficult to source and win. It is easier for an advisor to get acquired by a $10 billion roll-up than to choose one person to align with permanently.
If acquisitions are so hard to pull off, an advisor might continue to pursue organic growth, but there is risk in that path as well. Our profession is consolidating. Whether deliberately or through inertia, advisors are picking sides: On one side are small, lifestyle practices whose playbook is to establish a niche and maintain great client relationships (with the certainty of a sale at retirement). On the other side are mega-RIAs, the biggest of which are over $250 billion in AUM.
The middle is a dangerous place.
Firms offering traditional comprehensive planning and investment management may one day be weakened by competition from well-managed enterprise firms. Those firms will offer tax, estate, life-coaching and family office services to smaller and smaller clients and do so efficiently via the use of process and technology. Small firms will fall behind or become more and more dependent on partners like Schwab or LPL.
Read the full article here by Nathan Munits, Advisor Perspectives.