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Investment consulting firms are often engaged for their independence, expertise, experience, and innovative solutions. But the consulting industry is changing through acquisition and consolidation. While these mergers can seem like strategic moves on the surface, they often create a host of challenges and pitfalls, like hidden landmines.
This demands more exploration of the complexities and consequences of acquisitions and consolidations in the consulting world and how these maneuvers create landmines for firms and their clients.
The investment consulting industry has seen a significant uptick in mergers and acquisitions in recent years. Large aggregator advisory firms, insurance brokerages, and wirehouses have been acquiring independent advisory firms at an unprecedented rate. Some of the acquiring firms are backed by private equity investors, and the multiples paid to the acquired firms have been substantial. The primary drivers behind these consolidations include gaining a competitive edge, accessing new markets, acquiring specialized expertise, achieving economies of scale, and, most notably, monetizing the relationships with the acquired firms’ clients.
Monetization is generally achieved through cross-selling additional products and services. Ancillary services include wealth management and advisor-managed accounts, with some advisory practices creating proprietary investment offerings to be recommended to clients. This developing trend to aggressively monetize client relationships contradicts the purpose and mission of independent advisors. Historically there was a difference between broker advisors who sell proprietary products and independent advisors who make objective, conflict-free recommendations to their clients. While strategic intentions to grow revenue might appear sound, the execution of mergers is far from seamless, particularly when this kind of selling-what-you-recommend conflict of interest is in play.
Here are the four big landmines to beware of when working with an investment consulting firm:
- Cultural clash
One of the most prominent landmines in consulting acquisitions is the clash of organizational cultures. Each consulting firm has its unique values and way of doing business. When two firms with distinct cultures merge, it can create significant friction within the newly combined entity. Consultants accustomed to one firm's approach may find it challenging to adapt to the practices of the other. For example, many of these acquired firms built their business and reputation based upon a commitment to remain independent, objective, and conflict-free, but the pressure to cross-sell proprietary products and services creates an unfamiliar dynamic for the acquired firms. This cultural clash can lead to a decline in employee morale, decreased productivity, and even an exodus of talent.
Cultural misalignment also impacts clients. They may have chosen a consulting firm based on the compatibility of values and work ethic. When a merger disrupts this synergy, clients may question their continued engagement with the firm.
- Dilution of expertise
Consulting firms often pride themselves on their niche expertise and specialized knowledge. When firms consolidate, there is a risk of diluting this expertise. The newly formed entity may become a “jack-of-all-trades but a master of none.” Consultants who were once subject matter experts in their specific areas may now find themselves working on projects far outside their comfort zone.
This dilution of expertise can have dire consequences for clients who rely on consulting firms for their deep knowledge and insight. They may receive advice and solutions that lack the depth and nuance that they once enjoyed, ultimately diminishing the value of the consulting relationship.
- Client confusion
Mergers and acquisitions can be perplexing for clients. When a consulting firm they have worked with for years suddenly merges with another, clients may find themselves navigating an uncertain landscape. The profitability of these acquisitions will be dependent upon the ability to leverage new revenue streams through proprietary products and services, something many of the acquired firms’ clients were never presented with in the past. Questions about how the merger will affect objectivity, project timelines, billing structures, and the availability of key consultants often follow.
Clients may feel caught in the crossfire of competition between consulting firms. The newly formed entity may prioritize its own interests to monetize the relationship over those of its clients, leading to conflicts of interest and a lack of transparency. This can erode trust and leave clients feeling like they are walking through a host of potential pitfalls. This can also create liability for retirement plan clients, as there has been an increase in fiduciary breach lawsuits alleging self-dealing and conflicts of interest with advisory firms engaged in recommending proprietary investment products.
- Integration challenges
The process of integrating two consulting firms is complex and fraught with challenges. It involves aligning technology and systems, merging databases, harmonizing project management processes, and reconciling financial systems, among other tasks. These integration efforts are often time-consuming and resource-intensive, diverting valuable resources from effectively serving clients.
The distractions caused by integration can lead to project delays, miscommunications, and operational inefficiency. Consultants may struggle to access the information and tools they need to deliver quality work, further jeopardizing client relationships. In some cases, clients may become unwilling participants in the integration process, forced to adapt to new systems and processes that may disrupt their own operations.
- Talent drain
A key asset for consulting firms is their people. Consultants bring their knowledge, experience, and relationships with clients to the table. Many of these top consultants may feel uncomfortable recommending that retired participants roll over their accounts from an institutional retirement plan to a retail IRA with the advisory firm. Others may reject the notion of cross-selling proprietary investment products over independent, objective investment recommendations. During a merger, the new demands of the acquiring firm, with uncertainty and instability, can trigger an exodus of top talent. Consultants who are uncomfortable with the changes or see limited career opportunities in the new organization may seek employment elsewhere.
This talent drain can be detrimental to both the acquiring and acquired firms. The loss of experienced consultants can weaken capabilities and hinder the ability to deliver on client commitments. Clients may also lose trust in a firm that appears to be hemorrhaging talent.
To successfully navigate the minefield of acquisitions and consolidations, advisory clients should consider the cultural integration of an acquired firm and pay meticulous attention to the motives of the acquiring organization. Many of these mergers have diluted the distinction between broker advisors and independent advisors, moving to arrangements fraught with higher fees, conflicts of interest, and the potential for increased liability for clients. Given the recently settled and outstanding litigation related to cross-selling, it seems imprudent for advisory clients to engage in practices that may increase liability.
Innovest is different. We are committed to serving as a steward to our clients – advocating on their behalf and always delivering objective, conflict-free advice. We have not engaged in the distribution of proprietary investment products or advisor managed accounts, nor will we. We see these practices as being in direct conflict with our commitment to serving the best interests of our clients.
Rick Rodgers, AIFA®, is a principal and consultant at Innovest Portfolio Solutions. He is a member of Innovest’s Retirement Plan Practice Group, a specialized team that identifies best practices and implements process improvements to maximize efficiency for our retirement plan clients. He is also responsible for new business development in Innovest’s retirement plan practice.
Frank Cornett, CFP®, is a vice president, consultant, and a member of the education, due diligence team, investment committee, and capital markets group. Frank provides consulting services to Innovest’s high net worth and retirement plan clients. Innovest’s education team prioritizes educating plan participants to understand the nuances of their retirement plans and simplify financial planning concepts.
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Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.