At a time when all the best headlines seem to be about prime acquisitions and stolen advisor teams, small and mid-size firms are righfully eyeing inorganic growth with a bit of froth on the lips.

“It is an absolute perfect storm for growth. In the last 20 years, there has been $15 trillion of wealth creation in this country. The number of millionaires 20 years ago in the United States was ... seven million millionaires. Today, there’s 23 million millionaires,” said Shirl Penney, president and CEO of Dynasty Financial Partners. “During that same 20-year period, the number of advisors in the industry went from 450,000 to 295,000 advisors. At a time where you have more people with larger pools of wealth to be managed, there are few advisors to manage it. It's incredible.”

Along with Tim Oden, managing director Schwab Advisor Services, and Brian Hamburger, CEO of MarketCounsel Consulting, Penney was speaking last week on a Schwab IMPACT 2023 panel dedicated to unpacking how and when an advisory should spread its growth wings and soar from organic growth to inorganic growth.

“The best performing firms are actually managing both organic and inorganic growth. They’ve institutionalized both of these as focusing on one at the expense of the other actually comes with some pretty significant risks,” Oden said during “Field of Dreams: If You Build It, Will They Come?.”

“Advisors in general do a pretty good job on organic. A long as they serve their clients, they can actually continue to grow that business. What they're lacking is direction on how to manage inorganic growth,” he said, adding that over the last five years, nearly half of Schwab-polled advisors have pursued inorganic growth strategies, with 19% of that group going through with an acquisition and 24% of them luring an advisor with an established book of business to the firm.

But unfortunately, this strategy plays out poorly at many firms, he continued, because that the founders have a certain level of “fear of missing out” on the current trend, and that prompts them to jump into the process unprepared.

“Then it becomes one of those situations where one plus one equals one. They're actually diluting some of their core growth because they spend so much time trying to reconcile a poorly executed, or poorly thought out inorganic growth strategy,” Oden said.

Instead, the panelists suggested that advisors be deliberate, have a staff dedicated to M&A, line up the capital in advance and be ready to onboard other advisors as much as they might look for an acquisition.

“So many advisors say they want to grow inorganically, but they haven't done the basics. You have to have a road show deck. You have to have your operating document in good order. It’s never been more competitive than it is right now to grow inorganically, so you have to be over prepared up front,” Penney said. “The firms that are being deliberate and have a plan are in a position to grow massively and disproportionately, not just because of the succession opportunity and M&A that happens. It's because a lot of other advisors coming from other channels want to come and join the firm.”

And above all, Hamburged added, advisors wanting inorganic growth need to be up to the task, which can be daunting and exhausting, for all of its benefits.

“Inorganic growth scares a lot of advisors because you're dealing now with two entities, right? You're dealing with a firm who's doing the recruiting and advisors, who are looking to come in. Or you're dealing with a firm that's looking to purchase and another firm that's looking to sell,” he said. “Everything gets compounded, and it becomes a lot more complex, very, very quickly. Advisors have far less control over inorganic growth because at best they control just half of the ledger.”

In addition, inorganic growth is expensive. Recruitment has to be paid for, and acquisitions have to be paid for, he said.

“And the consequences tend to be more significant because they're not as private, right? If you fail at an organic growth strategy many times, no one outside the firm sees that failure,” he said. “But if you fail in an inorganic growth strategy, it’s much more public.”

To the point of onboarding other advisors, Oden pointed to some Schwab statistics that showed in 2022, there were 300% more assets in play for advisors leaving an independent broker dealer or wirehouse to join a firm than there were people who were starting a new SEC- or state-registered firm.

Questions advisors should ask themselves before embarking on the acquisition journey include the following:

  • What does the firm look like after integration? Is it a single brand? Is there a bespoke separate brand where advisors are allowed to execute different investment strategies under one umbrella?
  • What do you offer that the advisors couldn't otherwise get? Do you have a brand that stands for something? Do you have a technology stack that is attractive and will help them become a lot more efficient?
  • What team is in place that's going to support the new advisor and leverage their capabilities?

Without solid answers to these basic questions, a firm might be taking on more risk than they bargained for when they do a deal and that field of dreams turns into an nightmare, Penney said.

“It could be a deal that just gets done too quickly, and there wasn't enough time to think it all through,” Penney said. “We support independent advisors. It's their business, they can do whatever they want. But we always tell them if it’s a rushed deal, we typically tend to not do it. Eight out of 10 times those end that up bad when they’re rushed and hurried. Let somebody else make that mistake.”