Still other firms in the evolving business category will either merge with their counterparts or become much more specialized. However, in all cases, the firms that have made the necessary reinvestments to become an evolving business will become significantly larger enterprises.
The tweener category will largely no longer exist a decade from now. Perhaps counterintuitively, we believe only a small percentage of these firms will be acquired. Only about 50 to 70 tweeners will merge with other wealth managers, 10 to 20 will be acquired by banks and perhaps another 30 to 40 will be purchased by roll-ups. In other words, only about 8% to 10% of these firms will wind up consummating some sort of transaction.
Instead, most tweeners will slowly devolve into BoBs. Their assets under management will slowly shrink while their costs continue to rise. Their profitability will begin a long, slow decline that, at some point in the next four to seven years, will accelerate suddenly. Although they will continue in business in some form, most of the enterprise value that they might possess today will disappear.
Three factors lead us to this conclusion: (i) because most of the owners of tweeners are “anchored” to the operating environment of the last 20 years, and thus are unable to fully appreciate how much and how fast their economics will change, they will have unrealistic valuation expectations or they will wait so long to sell that their firms will no longer be attractive to potential acquirers; (ii) the fact that most wealth management firm owners have no experience in mergers and acquisitions complicates negotiations that are challenging and fragile regardless of the industry; and (iii) the inherent complexity of striking an agreement among three parties—buyers, sellers and the sellers’ successor professionals—with unique (and often conflicting) interests, biases and egos, creates enormous obstacles to deal completion.
Near-term choices will determine where firms land in the brave new world of wealth management.
The ultimate shape of this industry a decade from now is one in which 150 or so extremely profitable, large firms will manage the vast preponderance of its assets and 19,000 other small and marginally profitable firms will remain in business indefinitely. The choices that owners make over the next couple of years will largely determine where their firms ultimately land in this Brave New World of wealth management.
Mark Hurley is the CEO of the Fiduciary Network, which provides passive capital to fee-only wealth management firms for business transitions. Benjamin Robins, Steven Cortez, Yvonne Kanner, Minesh Patel and Erich Bao also contributed to this article. A complimentary copy of the paper can be downloaded at www.fiduciarynetwork.net.