"Advisors are inexperienced and overconfident" when it comes to deal-making, Hurley argues. "M&A is a specialty like wealth management is a specialty."

In contrast to the misplaced hubris among RIAs, most acquirers are sophisticated professionals who do deals for a living and have teams of dexterous lawyers good at wording contracts in subtle ways that dramatically reduce an RIA's options once the transaction closes. "Deals are all about risk allocation," Hurley says. "Doing deals requires a degree in psychology more than a degree in finance. Buyers know this."

That means a minor tweak to the legal language can radically change the range of outcomes. Invariably, the shift in risk and reward favors the acquirer. Some capital structures developed by consolidators transfer all the risk from themselves to the firms they have acquired.

Capital preference structures, commonly used by many consolidators but not by the advisors in their networks, can eat up all of an RIA's remaining equity, leaving the advisors in a financial hole from which they can't escape. Hurley calls this phenomenon "asymmetric dilution." What does that mean? Typically it occurs when consolidators or roll-up vehicles own a different share class, with different shareholder rights, than the advisor in the network. In this scenario, if the consolidator has to recapitalize the firm, its principals may get issued new shares while the advisors' shares get diluted.

But there are other problems. What happens if the consolidator can't do enough deals to reach the critical mass necessary to do an IPO? Then the RIA has a tiny stake in a private company that is worth next to nothing.

Moreover, the consolidator is likely to grow desperate and seek transactions at any cost. This not only continues to dilute the firm, but forces the consolidator to seek deals with lower-quality firms that pollute the others.

If acquirers can't find enough RIAs to reach critical mass, they may start purchasing fee-based advisors, creating the nightmarish possibility of dual regulation by both the SEC and Finra for the entire entity. "You end up having to sleep with everyone they sleep with," Hurley has quipped in the past.

Of course, a consolidator could succeed and make it all the way past the IPO. Both NFP and Boston Private have done so, although they've struggled like many companies in the financial services business over the last two years. Hurley tells advisors they should not only demand transparency from a roll-up firm but also receive the same class of shares as everyone else, including the consolidator. Finally, they should get a prenuptial agreement, outlining how either party can unwind the ownership relationship if it so chooses.

Banks Have Drawbacks
Traditionally, small banks have always been the most aggressive acquirers of advisory firms, though the financial crisis has muted bank activity as many institutions rebuild their balance sheets. Still, it's hard for small bank executives not to see the potential synergies associated with acquiring RIAs.

Small regional banks derive a good part of their business from lending to small family-owned businesses, many of which use RIAs for financial advice, Hurley notes. On the surface, it looks like a win-win for both parties if the bank buys the advisory. When bank acquire them, RIAs get a built-in source of referrals to grow their business, while the bank diversifies and gets a new steady stream of fee income.