Industry Consolidation Puts Pressure on Firms to Offer More

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If you’re a financial advisor, you know that our industry is always in a state of change due to regulatory demands, technology, and client desires. You may have also noticed an increase in mergers and acquisitions for registered investment advisors (RIAs) and broker-dealers (BDs). Some of the biggest names have announced acquisitions and mergers over the past few years.

What may seem like a few isolated events is actually part of a larger trend towards consolidation in the financial services industry. Many factors are influencing the change, including financial advisors moving away from the wirehouse firms toward more independent models as well as the commoditization of technology.

Big Moves Have Recently Made Headlines

Perhaps the largest recent acquisition was the mega-firm RCAP’s $1.15 billion purchase of Cetera back in 2014. In 2015 Financial Engines acquired The Mutual Fund Store, and since has been acquired by Edelman Financial Services in 2018. Northwestern Mutual (BD) acquired LearnVest, a tech-based RIA in 2015. These large companies made headlines, but even more consolidation may be happening within small firms. In 2017, 82 mergers and acquisitions occurred for RIAs, up 15% from 2016.

Pressures Mount on Both Large and Small Firms

Larger firms are struggling to keep up with newer and more innovative companies, making them attractive acquisitions. Traditional firms focused on baby boomers and retirees are having a hard time acquiring younger clients. Instead of restructuring their business to focus on younger investors, it may be easier to just purchase the innovative company that is getting the business from Gen Xers and Millennials.  

For smaller companies, the rising demands of consumers for robust technology and research is putting a strain on their budgets. Many smaller firms are having a harder time competing with larger firms. These pressures are leading smaller companies to be put up for sale to be purchased by larger firms.

How Can Firms Compete?

The result of recent consolidations has been good for consumers. Firms are offering more technology and client service for the same fee and increased competition has given investors more options.

To survive in the future, a merger or acquisition may be necessary if firms don’t have a plan to adapt to the changing dynamics in the financial industry and client expectations. Firms need to understand that the clients of the future demand tech-based advice. Clients are also less limited by their geographic location and can access greater options when choosing an advisor.

To compete in the future, advisory firms will have to be better than ever. Raising the bar for your firm’s business model and client service can help put you in a position to compete. Being an RIA and being held to the fiduciary standard will help in competitive situations in today’s environment. Offering the highest level of technology and financial planning software can also help position you to compete.

The Golden Age of the Specialist?

Advisory firms of the future will also benefit from increased specialization. To stand out against the largest firms with the deepest pockets, advisors must truly differentiate themselves as specialists and be the best at serving a small group of prospects.

While the financial industry is consolidating and it becomes more and more competitive to gain clients, smaller firms must have a plan to compete. Often, this plan involves increased specialization and becoming known for a specific niche, rather than being a generalist.

Even small firms and solo practices can do very well if they are marketed correctly and have an innovative approach. Financial planning expert Michael Kitces predicts that there could be a coming “golden age” of the “focused” financial advisor.  For advisors that understand what’s happening in our industry and take advantage of it, even if the firm is just one person,4 they may be able to compete with the mega-firms.

Claire Akin