The investment advisory industry is one of the most profitable corners of the financial services universe, and this scenario is likely to only get better and better. At the same time, the investment advisory industry is highly fragmented, especially for those professionals serving the most lucrative part of the market – the rich and super-rich (net worth = $500 million or more).
Over the last decade there has been considerable mergers and acquisitions activity in the investment advisory industry. Consolidators such as Focus Financial Partners, United Capital, and Wealth Partners Capital Group, as well as individual firms tucking in smaller investment advisor practices, are all looking to grow through acquisitions. At the same time, some broker/dealers have made considerable efforts to grow by bringing over new investment advisory practices.
The acquisitions approach can be very effective. When combined investment advisory practices can mitigate costs, for instance, there is greater profitability. However, longer-term, an exclusive or primary acquisitions approach is likely to fail – and fail badly – without organic growth. In order for investment advisory practices to increase in value, they usually have to add more assets under management. Often this entails bringing in more and, many times, wealthier investor clients.
While assets under management have increased for many investment advisory practices, for a substantial number of them this is a function of rising financial markets and not new client acquisitions. If the financial markets fall, the need for organic growth will just seriously intensify.
According to John Bowen, co-founder of CEG Advantage and author of Elite Wealth Planning: Lessons From the Super Rich, “There are a number of very systematic ways for investment advisors to significantly organically grow assets under management. Probably, the most consistently effective way to source new wealthy and ultra-wealthy investors is by skillfully combining thought leadership and creating strategic partnerships with non-competing professionals such as trusts and estates lawyers and accountants with high-net-worth clients.”
The great majority of investment advisors seeking to create the greatest value in their practices as well as generate the most profit and personal income are going to have to grow organically. While acquisitions and rising financial markets will certainly help, without meaningful organic growth the longer-term prospects for many investment advisory practices are severely limited.