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The RIA industry is experiencing an M&A boom. Last year was a record year for the number of transactions involving RIA firms and 2018 is already being forecast to show record-breaking activity. But this activity highlights the risk firms face if they neglect organic growth opportunities.
There are numerous reasons for this upsurge in M&A activity, many of them highlighting the positive attributes and maturing environment in the RIA industry: steady growth of the RIA industry over the past several years, breakaway advisors moving into the industry from the brokerage industry, an ageing RIA ownership contingent who is seeking succession opportunities and future growth opportunities and synergies created by combining complementary firms. Increased merger and acquisition activity is often a sign of an industry that is both healthy and maturing, two characteristics that can certainly be applied to RIAs. In this scenario, mergers and acquisitions can be combined with a firm’s internal organic growth efforts to provide a well-rounded growth strategy.
However, booming M&A activity in any industry warrants a contrarian view. What starts out as mergers and acquisitions to bolster growth becomes an environment where M&A is the dominant growth driver for firms, especially as organic growth rates decline during the later stages of one of an industry’s growth phases. Firms turn more and more heavily to M&A as a means to maintaining industry-leading growth. This shift to an increased reliance on inorganic growth drivers, at the expense of organic growth efforts, threatens the viability of many firms.
We have seen this scenario within the financial services industry several times in fairly recent history. During the 1990s stock market boom, mutual fund asset management companies experienced dramatic growth. This growth surge sparked a consolidation wave within the asset management industry as firms raced to build size in order to benefit from the ongoing market expansion. Similarly, in the early- to mid-2000s banks, flush with buying power, were significant acquirers of RIA firms, using M&A to buy assets and access to the fast-growing wealth management market. These banks chose to purchase growth instead of building it organically from within.
In both of these examples, when the market environment took a negative turn – the post-dot-com market correction for asset managers and the 2007-08 financial meltdown for banks – the buying sprees came to an end. The lack of organic business development efforts within many of these firms meant that firm growth felt the full brunt of the negative market environment and some of the previous M&A deals needed to be unwound.
What’s the key lesson from these cautionary examples? Do not forsake organic growth efforts for mergers and acquisition activity. Maintaining a diversified balance between M&A and organic growth efforts at all times can allow firms to get the shorter-term growth boost from mergers and acquisitions while maintaining the longer-term consistency of organic growth.
Over my more than 30 years in the financial services industry I have noticed that mergers and acquisitions are an important part of any mature industry, especially when combined with organic growth as part of a comprehensive, diversified growth strategy. More importantly, organic growth, while requiring constant daily focus and effort, and not providing the eye-popping percentage increases of M&A activity, is the lifeblood of the long-term health and prosperity of any business. Focusing teams and firms on building a solid business development mindset, impenetrable client relationships, and valuable product and service offerings – organic growth efforts – during periods of prosperity will provide for sustainable growth momentum in all market environments. Waiting until the market environment turns negative to focus on organic growth is too late.
Drew Taylor is the founder and principal of the DTaylor Group, a California-based consulting firm serving the wealth- and asset-management industries.
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Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.
