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

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The financial advisory industry has experienced a wave of consolidation in recent years, primarily driven by an influx of private equity investment. Larger firms are scooping up smaller independent advisors at a rapid clip.

A new and rapidly developing factor is poised to shake up this dynamic: the rise of artificial intelligence (AI). Will AI accelerate the consolidation trend, or could it be the great equalizer that allows smaller firms to remain competitive?

Private equity fuels an M&A boom

Private equity firms flush with cash have increasingly focused on the financial advisory space. They see an attractive, fragmented industry with reliable cash flows and the potential for increased efficiencies through economies of scale, leading to an erruption of mergers and acquisitions.

According to data from Echelon Partners (discussed here), M&A activity in the RIA space in 2023 led to 321 deals and 3.9 percent year-over-year growth. Private equity investors participated in 71 percent of transactions and accumulated over $466 billion in assets.

For many smaller advisory firms, selling to a larger acquirer is an attractive succession plan and a way to offload back-office functions and secure better technology.

Some worry that continued consolidation will limit choice, and profits will take priority over client service.