Across multiple sectors, there has been an increased drive to merge and acquire as many small companies as possible, until these smaller ventures have all but faded from public memory.
For the past 20 years, the financial industry has supported this idea, believing that the more they consolidate, the less competition they would face and the more their client lists would grow. But are these financial professionals merely following a trend or are they falling into a trap?
Let’s talk about the benefits of opting out of the consolidation mindset and into the small firm framework.
How do small firms continue to survive?
Even as firms continue to grow with consolidation, the rate of small financial advisory firms continues to rise. From 2000 to 2020, SEC-registered, independent RIA firms did not shrink as expected, but grew by 19%, according to the NRS.
While many reasons could be contributing to these numbers, the primary factors to consider are small firms’ ability to provide more personalized service and flexibility in how they approach their clients and the market.
Is the rise of small firms more personalized service thanks to larger firms?
As larger firms focused on more sizeable accounts, many of the smaller accounts found themselves largely ignored or rejected, seeking market direction. This is where the smaller firms were able to step in.
Seizing this opportunity, they not only serviced these accounts but were more deliberate and thoughtful in their delivery of these services in contrast to the behavior of the larger firms.
Instead of clients feeling lost in the shuffle, they felt that their accounts were more valued and therefore, felt more comfortable increasing investment, despite the smaller firms having fewer resources than the more established ones. This led to increased profits and decreased the need to be acquired by a larger concern.
The Key to Smaller Firms’ Continued Success? Flexibility
Even with more personalized services, smaller financial firms would not be able to continue measuring up to their larger competitors if they did not embrace their key advantage: flexibility.
In asset management, it is key that decisions not only be effective but fast. Responding to the volatility of the market, smaller wealth firms have the flexibility of selecting choices more easily that better serve their clients in the context of the market they are facing, rather than the market months ago when the larger firms had a decision approved by their board.
And this flexibility? It shows results. Between 1999 and 2019, small boutique firms did not just outperform larger non-boutique firms in 10 of 11 product categories, but they did so by 116 basis points during points of high volatility and 41 basis points in other periods.
The ability to more quickly adapt to the market and their clients’ needs allows smaller firms to more adeptly navigate the financial markets and score more profits.
While consolidation continues to grow in the financial industry, it seems that a shift in mentality may be useful for larger RIA firms. Instead of the next big idea, it may be time for them to embrace a simple mantra: Think small.