The Future of M&A: Will AI Fuel More Consolidation or Level the Playing Field?

An executive summary on Kitces.com, summarizing an article by Bob Veres, noted: “Firms seeking acquisitions may talk up their values prior to the sale, but the reality is that at a firm that is rapidly acquiring other businesses – particularly when funded by private equity ownership – the focus is often on the growth of assets and profitability, no matter what the core values are purported to be. ”

The AI factor

The rapid advancements in AI could be both a centralizing and decentralizing force.

AI favors scale. Larger advisory firms have the resources to invest millions into building robust AI capabilities to automate portfolio management, financial planning, compliance, and other core functions. Smaller firms can’t afford to develop the same caliber of tools in-house. This practical reality could drive more small firms into the arms of larger acquirers.

AI algorithms benefit from more extensive data sets. The mega advisory firms created by consolidation have massive client rosters. More clients means more data to train machine learning models, potentially giving them a significant edge.

On the flip side, AI will also increasingly be offered “as-a-service” by third-party vendors, allowing independent firms to efficiently access powerful tools without building them internally.

Developments like enhanced voice AI could allow advisors to automate more client-facing functions while still retaining a feeling of intimacy, helping independents to punch above their weight. Firms like Hume are developing an empathetic voice interface that understands and emulates tones of voice and word emphasis to optimize human-AI interaction.

As AI improves efficiency and streamlines operations, it could reduce the cost advantages that larger firms enjoy. With lower overhead, smaller firms may feel less pressure to sell.

Potential client benefits and risks

For clients, there are potential benefits and drawbacks to these trends. Continued consolidation could leave some clients feeling like small fish lost in an ever-expanding financial conglomerate. The personalized service and unique character of independent advisors could diminish.

AI advancements could also lead to better client service and investment outcomes as firms harness the technology to offer more proactive and data-driven advice. Automated compliance and oversight driven by AI could better protect consumers.

The impact of fee pressure on advisory firm valuations

As AI continues to transform the financial advisory landscape and put pressure on traditional AUM-based fees, what will be the impact on

advisory firms’ valuations and the ongoing trend of industry consolidation?

If firms generate less revenue per dollar of AUM, that will translate into lower profit margins and multiples paid by acquirers. If AI enables clients to get comparable services at lower costs, then advisors’ businesses are inherently worth less.

While fee pressure is undoubtedly a factor, it’s not the only one that drives valuations and M&A activity in the advisory space.

Efficiencies and economies of scale

One key driver of the current M&A boom is the pursuit of economies of scale. Larger firms can spread costs across a broader asset base, invest in better technology, and offer a wider range of services. In an environment of fee pressure, these scale advantages become even more critical.

Firms that can effectively leverage AI to streamline operations, automate processes, and serve clients more efficiently will be better positioned to maintain margins even with lower fees. Acquirers highly value operational efficiency.

Fee pressure from AI could accelerate consolidation as firms seek to build the scale necessary to invest in the technology and absorb lower per-client revenues. Smaller firms may find it difficult to afford the AI capabilities clients expect, driving them to seek mergers with larger, better-capitalized firms.

Revenue quality and diversification

Acquirers place a premium on firms with stable, recurring revenue streams. While AUM-based fees continue to be under pressure, firms that successfully diversify their revenue with planning fees, retainers, or other models will be more attractive targets. Regardless of their fee model, firms with a proven track record of client retention and growth will also command higher multiples.

Firms that can effectively harness AI to offer highly personalized, high-touch service at scale may be able to attract a wider base of previously underserved clients.

The human element

Firms that can balance AI efficiency with human empathy and judgment may be the most resilient in the face of fee pressure. The ability to form deep client relationships, navigate complex situations, and provide bespoke advice is hard to replicate with algorithms alone.

The stickiness of client relationships is an asset that justifies higher valuations.

Firms that are slow to adapt to the AI revolution, remain overdependent on AUM fees or fail to differentiate their service model may find it harder to attract buyers or command top valuations.

Uncertain future

It’s difficult to predict precisely how these competing forces will play out. Consolidation will likely continue in the near term. In the long term, the democratization of AI could slow this trend and perhaps even reverse it if more clients seek out independent advisors who provide a personal touch enhanced by the power of AI.

Staying on the cutting edge of technology while retaining their unique identities and client-centric cultures will be critical for independent RIAs to remain viable.

Dan coaches evidence-based financial advisors on how to convert more prospects into clients. His digital marketing firm is a leading provider of SEO, website design, branding, content marketing, and video production services to financial advisors worldwide.

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