Why Scale Matters to Your Advisory Practice

Written by: Lauren Ruocco

Scale seems to be the buzzword du jour, but what does it really mean for your practice?

Many independent practices reach a point in their lifecycle where growth rates begin to slow and the ability to take the business to the next level becomes increasingly difficult. And it comes with little surprise, as competition is continually on the rise from larger firms, with just 1.1% of SEC-registered advisors – some 148 firms out of nearly 13,000 – managing nearly 60% of the industry’s assets.Yet, the majority of RIAs – nearly 7 in 10 – manage less than $1 billion in assets.While bigger isn’t always better, the fact remains that smaller independent practices can benefit by understanding the example set by these firms when it comes to “scale.” Simply put, most larger RIAs have optimized the management of capital, infrastructure, buying power and resources, resulting in a well-oiled machine that has mastered an optimal balance of organic and inorganic growth.But for many wealth management practices, the notion of “scale” often seems esoteric—and connecting the dots on why scale matters and what well-scaled RIAs can do differently is often a challenge.

8 Ways Scale Can Impact Your Business

Independent firm owners who are exploring how to take their business to the next level can learn the real potential of gaining scale by studying the service models, strategies and infrastructures of the top 1–2% of RIAs. For example:

  • The ability to avoid pricing compression— By offering a greater range of services (i.e., estate planning, tax preparation, business exit planning) above and beyond the commoditized nature of asset management and investing in specialization, these firms demonstrate greater value by playing an “indispensable” role in their clients’ lives.
  • The ability to increase enterprise value Merging with a larger firm results in greater combined enterprise value as a rising tide lifts all boats. (For example, a $200mm firm may sell for 4–5x earnings, while a $5B firm may sell for 10x+ earnings.) When a prospective buyer values a firm they often see more “risk” with smaller practices than larger ones—as they often have a more concentrated client base, are typically dependent upon a “key person” for business development, and may have less developed processes for driving organic growth. Scale helps drive deal multiples as a larger pool of assets reduces concentration risk and enables a firm to invest in hiring the strongest advisor talent behind the leaders of the organization.
  • The ability to grow by acquisition and recruitment— Larger firms are more often on the radar of industry investment bankers, recruiters, capital providers and centers of influence which increases the amount of sub-acquisition opportunities and advisor prospects.
  • The ability to invest in professional management— Onboarding non-revenue generating, C-level roles can help expand the strategic direction, thought leadership, capacity and intellectual capital of the firm.
  • The ability to provide a path for succession— By providing a continuum for clients and a monetization plan for principals, these firms can simultaneously tap into a deeper bench of high-caliber professionals and next gen advisors.
  • The ability to enhance technology and cyber-security —By opening up access to modern tech stacks and platforms they create greater efficiencies and an optimal client experience. Investing in the most up-to-date and integrated technology is costly and time consuming—an expense that is often too great for standalone independents. Larger firms – given their buying power and profitability – can deploy their capital more efficiently to create a best-in-class experience for both advisors and clients.
  • The ability to accelerate organic growth —By accessing larger marketing and media budgets for activities like client and prospect events, targeted digital marketing campaigns and actionable data analytics, these firms turbocharge their growth. Additionally, many of the nation’s most successful firms have a strong referral mechanism through custodial programs, center of influence networks and other strategic partnerships. Some even have dedicated business development personnel to help drive growth for advisors.
  • The ability to expand reputation —Aligning with a well-known entity creates the opportunity to enhance one’s standing in a local market or on a national level.
  • Yet, potential aside, the ability for many practices to achieve scale on their own is often hampered by capital, resources and expertise. It’s an inflection point that business owners reach when they need to decide if a merger or acquisition opportunity should be explored.

    What to Consider When Exploring Ways to Gain Scale

    The robust M&A market is, in part, being fueled by business owners who are looking to gain scale. And the good news is that a myriad of suitors exists, ready to partner with or acquire practices that have like-minded goals and see the world in a similar way.Yet, considering a merger with another firm or even an infusion of capital from an external investor is a decision that needs to be made thoughtfully—taking into account both personal and professional goals.Before making the decision to take this step, principals need to answer these 5 key threshold questions:
  • Am I comfortable with the status quo or am I looking at the potential scale has to offer?
  • Is my firm positioned to make the necessary investments in technology, marketing, human capital and organic growth initiatives?
  • If gaining scale is important, what elements of control am I willing to give up to achieve it?
  • How confident am I in my firm’s ability to compete versus local firms and national brands?
  • What are some things I would accomplish on behalf of my clients if capital and time were less limited?
  • For some, maintaining a lifestyle practice allows them to best serve their clients’ needs as well as their own goals. But for those looking to build an enterprise, maximize growth, and deliver an elevated client experience, merging with a larger firm that shares similar business values and goals may be the missing link. Ultimately, as an independent business owner, it is up to the principal to decide just how important gaining scale is. And in a climate of record M&A volume there has never been a more exciting time for those with greater ambitions to choose from a wide array of potential partners.
Related: Have Multi-Billion Dollar Teams Priced Themselves out of the Market?Data from https://www.wealthmanagement.com/industry/rias-are-staffing