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Prior to having three kids (in three years, by the way), I never fully grasped what a precarious position it is to be in the middle. Mid-sized advisor firms, upon graduating from being a one- or two-person operation, find themselves contending with all sorts of growing pains. All of a sudden they have the marketing issues of a larger firm – with an infrastructure that hasn’t caught up. Here’s my best advice to escape the trap of the mid-sized advisor firm.

The mid-sized advisor market is ripe for mergers

Take a look at the advisor landscape and it’s clear why mid-sized firms are gaining more popularity than Kim, Kourtney, Khloe, Kendall and Kylie.

  • The average advisor age is about 51.
  • The average advisors’ assets under management is less than $100 million for 72% of RIA firms.

If you combine those two facts, you have a situation where a whole slew of firms are going to need a succession plan. But many of them dwell in what I once termed The Small RIA Firm Poverty Trap and don’t have the wherewithal to execute it themselves. They don’t have a suitable 28-year old to take over the business who has the experience, skill and, most importantly, gets along with your clients. Then, during the assimilation process, you can only hope that this person won’t decide to jump ship and take your business with them.

It’s no wonder why so many small RIA firms are scratching their heads…

That’s where RIA-consolidator firms such as Focus Financial, Hightower and Dynasty step in and gobble up advisors – by offering to put in place a succession strategy that they manage. But professional roll-ups aren’t the only ones at the party. Many advisor firms are turning to acquisitions as a way to expand, as an alternative to growing organically “the old-fashioned way.”

You also have massive shrinkage in the broker-dealer space, which is likely to continue. Smaller broker-dealer firms are are becoming less and less common. This bodes well for firms like Cetera or Piper Jaffrey that can scoop up firms struggling under the crushing weight of regulation and that are forced to rethink their business models.

These integrators are praying for a recession, which will wound more small firms for them to prey upon. Whether in broker-dealer or RIA world, firms are consolidating up like Fruit Roll Ups and this is the entree du jour for the foreseeable future.