The Misguided Fear of Consolidation in the Advisory Profession
In the early 2000s, the biggest stir in the advisory profession was being caused by reports written by Mark Hurley, then of Undiscovered Managers. Hurley predicted massive consolidation in the financial planning profession, where a very small handful of firms would gobble up their competitors and use their scale, national brand and proprietary technology to drive smaller firms to extinction. Any firm that didn’t get to $1 billion under management in a hurry would be unprofitable or irrelevant.
The Hurley white papers went further than that. They also posited that the great majority of advisory firms had no enterprise value – roughly translated to mean that no buyer in its right mind would pay anything for them. One of the most incendiary observations was that advisors who had gone independent to build transferable value were running a job, not a business.
I had a different opinion and wasn’t shy about taking issue with pretty much everything Hurley claimed. I was asked to debate Hurley on the stage at the Connecticut FPA chapter and later at the NAPFA West Regional Conference. My points, in writing and at the debates were simple:
- We already had national brands that were ostensibly offering investment advice and financial planning – large organizations with massive scale, brand names and proprietary technology. We called them wirehouses. They were losing market share, albeit incrementally, with each passing year, while smaller advisory firms were gaining.
- The financial planning universe was relatively young, and still developing toward a mature service profession. Other service professions that have been through developmental stages that ours can look forward to didn’t take anything close to the evolutionary path that Hurley was predicting. The accounting and legal professions did, indeed, have three to five large national firms with scale and (in the case of the CPA firms, anyway) almost universal brand recognition. But those professions had settled into a steady-state, self-replicating four-tier model, with those aforementioned national firms, a somewhat larger number of significantly sized regional firms, a larger number of locally dominant firms in major cities, and in each case, about 70% of the total profession was made up of smaller solo firms or partnerships with three to 10 principals.
In those professions, we did see consolidation, where some of the smaller partnerships merged with others to move up the tiers. But at the same time, many people dropped off the partnership track of those large national and regional firms to start their own local practices, constantly replenishing the numbers at the bottom.
- The assertion that these smaller firms didn’t have enterprise value was undermined by the fact that, during the ongoing consolidation that Hurley had been pointing to as evidence that he was right, those large firms were paying good money for the practices they were buying. They were paying so much, in fact, that industry pundits thought that we had entered a seller’s market and advisory firms were being grossly overvalued.
I bring up this ancient history because I’m once again hearing from advisors who are worried about the profession's evolution and their smaller firm’s ability to survive in it. They look around and see firms like Focus, Creative Planning and others buying up smaller planning businesses around the country. They see the selling advisors gaining scale in the form of a centralized back office that takes care of the labor-intensive investment work, leaving those selling advisors with more time to focus on their clients. They see those selling advisors rebranding their offices with a big name that potential customers might recognize.
Focus, Creative Planning and others buying up smaller planning businesses around the country. They see the selling advisors gaining scale in the form of a centralized back office that takes care of the labor-intensive investment work, leaving those selling advisors with more time to focus on their clients. They see those selling advisors rebranding their offices with a big name that potential customers might recognize.