Maintaining independence in a consolidating industry

It’s no secret that the global wealth management industry is undergoing a trend toward consolidation. According to a 2023 PwC survey, 16% of firms are projected to be acquired or exit the market by 2027.

Multiple factors are driving this trend, including the complexities of running a business, struggles to achieve organic growth and the appeal of attractive private equity investor incentives.

Advisors weighing their career and business ownership options have much to consider – from becoming a W-2 employee to joining forces with another firm. These moves, however, may come with tradeoffs.

Advisors who wish to avoid becoming a statistic must identify the path forward that will help them remain competitive without compromising their values..

Navigating a consolidating environment

The next decade is shaping up to be both disruptive and rife with opportunity. Advisors face a historic generational wealth transfer, shifting client expectations, an increased appetite for advice and growing interest in succession planning. To successfully navigate the headwinds of a changing industry, they must strategically evaluate their options.

Here are a few possibilities – each with its own considerations:

1. Do nothing - With median industry organic growth at an anemic 2% in 2024, according to Tiburon, many advisors can ill afford to do nothing if they hope to stay afloat.
2. Become a W-2 employee - A salary, benefits and corporate support may sound appealing, but requirements to hit production targets or loss of autonomy could outweigh the advantages.
3. Grow inorganically - Acquiring another practice can boost assets under management (AUM) and increase a firm’s ability to stand alone; however, the process isn’t always smooth sailing. These transactions can be riddled with setbacks, ranging from cultural misalignment to tech integration challenges. This could drive away key staff members, compromise service and result in client attrition.
4. Sell majority stake - The financial appeal of a majority investor might overshadow what a firm owner is agreeing to surrender. From diminished decision-making authority to a potential role reassignment, the stakes are oftentimes higher than most are willing to sacrifice.
5. Sell minority stake - Although taking on a minority investor usually allows a firm owner to retain substantial control over the business, there are disadvantages. Sharing control with minority investors could dilute a founder’s voice or introduce opposition to their vision for the firm’s future.
6. Remain independent - Maintaining independence offers autonomy and flexibility; however, running a business requires resources that could prove costly and time-consuming.

Looking beyond the big check

Before accepting incentive money or making their next move, advisors should thoughtfully weigh what they seek to gain against what they stand to lose.

While a large payout from a broker-dealer might be tempting, there could be hidden disadvantages lurking beyond the robust infrastructure and W-2 benefits. The same holds true for firm owners selling a stake in their business or pursuing aggregation. In both instances, there is a potential for unanticipated challenges or unfavorable compromises, from loss of control to cultural clashes.

The stakes are high, and advisors who make the wrong decision could soon find themselves among the 82% who report they are not thriving.

Calculating the value of an advisor’s time

Opting for independence stands out as a viable path for advisors set on preserving the business they’ve worked hard to create. However, they, too, face decisions that could impact their potential for success – most importantly, where to turn for support.

For these advisors, investing in a strategic partnership may help bridge the gap between meeting the operational demands of running their business and finding the time to pursue growth.

At first pass, it might seem counterintuitive to invest in a partnership instead of accepting a check – that is, until you monetize the value of an advisor’s time.

A solid partner can offer support with a host of offerings, from access to integrated technology to a robust investment selection. They also provide brand-amplifying marketing with built-in compliance, succession planning solutions and concierge-level service – all within a framework that supports the advisor’s mission.

Investing in a strategic partnership could prove especially beneficial for advisors struggling to grow because they spend 60% of their time on non-revenue-generating tasks such as compliance, technology and administrative duties.

To that end, outsourcing functions like marketing, portfolio management or cybersecurity could easily save them 10 hours per week. If redirected toward growth, that time could generate an estimated $541,000 in additional revenue for a $1 million practice.

This example demonstrates how advisors might be able to not only survive, but actually thrive without walking away from their independence.

Of course, an advisor’s potential for growth hinges on their alignment with a partner that is invested in their success and motivated by a shared mission and vision.

Connecting the dots

For advisors who built their practice on independence, the decision to consolidate can be wrought with trepidation and uncertainty. It may be comforting for them to learn that they needn’t forgo that autonomy to remain competitive. By leveraging a partner that honors their journey and lends support where it matters most, they can rise above the challenges without selling out.

When advisors look beyond the “big check” and consider the true value of independence, they may find that a strategic partnership can return value far beyond a short-term financial gain.

Shannon Spotswood is chief executive officer at RFG Advisory, an innovator in the wealth management industry committed to serving independent financial advisors and their clients.