Originally published in Financial Advisor

By Mark Hurley

One of the nuttier recent developments in the wealth management industry has been the emergence of a new-and-not-so-exclusive club: the “NMAC” or the “No Money Acquirers Club.” It includes many of the industry’s self-described “leading” firms, and you may have unwittingly already joined.

Take this little quiz and see:
1. Is your firm “big”?

2. Because you are so “big,” do you believe that the owners of smaller firms fantasize about merging their businesses into yours?

3. Are you so charming that you will be able to get these owners to do this in exchange for very little (if any) money and instead mostly stock?

4. Because you have already made one or two small acquisitions that involved little or no capital, will you be able to do many more such deals?

5. Is a big part of your growth strategy predicated on doing so?

If you answered three or more of these questions in the affirmative, Congratulations! You are a charter member of the NMAC

Yes, as absurd as all of this may sound, this semi-delusional fraternity of wealth manager firms actually exists. Their owners have talked themselves into a lather believing that they are on the verge of rolling up a big part of the industry and that they will do it with little, if any, financial capital.

A few doses of reality to consider:
First, even the largest independent wealth management firms are not “big.” Rather, they are tiny businesses and no one has ever confused them with Lazard.

Second, the owners of smaller wealth managers probably have many fantasies. However, none have anything to do with merging into a larger firm. These owners also have many options as what to do with their firms when it comes time to sell.

Third, because they have many options, any seller who does his or her homework will quickly find other wealth managers out there who are prepared to write material checks to acquire attractive firms, including smaller ones. (Heck, even the roll-ups whose business models are predicated on getting sellers to take worthless stock have the respectability to pay a portion of the purchase price in up-front cash.)

Certainly, there are more than a handful of unattractive smaller firms that no one is going to pay much for. But the M&A market for wealth managers has gotten much more efficient over the last couple of years, and if you have something of value to sell, someone will pay for it—in cash.

Fourth, a brilliant psychologist named B.F. Skinner once showed that if you give a rat a pellet once every thousand or so times that it pushes a lever, it will keep on pushing it indefinitely. So, yes, those wealth managers that already have been able to do one or two small acquisitions without any capital truly believe that they will be able to do many more such deals. But although they will keep trying, they are no more likely to succeed than B.F. Skinner’s rat.

Finally, acquisitions are a core part of many wealth managers’ growth plans. Given the demographics of the industry, this makes a lot of sense. Moreover, in the last two years there have been more deals involving wealth managers acquiring other firms than there were in the previous five. However, wealth managers who have a clue recognize that they are not going to do any attractive acquisitions of any size without a lot of financial capital.

Oh sure, all capital is expensive and its providers rather rudely expect to receive regular cash flow. Even worse, once you take outside capital, you no longer can be an absolute dictator. But many wealth managers have found ways to access acquisition capital and live with the consequences.

Meanwhile, the owners of NMAC firms are a lot like admirals in the Swiss navy: a lot of hype about being big acquirers—including boatloads of press releases and speeches on industry panels—but not much to show for it. Even though they have no gunpowder, their strategy is to hope that someone will pull up next to their boat and surrender.

And while their acquisition strategies flounder, firms with real capital are actually getting deals done. They are growing not just their assets but also their profits at a very high rate.

What is particularly ironic is that, somewhere down the road, the members of the NMAC ultimately will need a way to monetize the equity in their firms. And guess where they will likely go? To the doorsteps of those wealth managers that have real financial capital and can actually pay them (in cash). The NMAC owners are not so foolish as to trade their firms for illiquid, non-controlling stock in a small private company like a wealth manager.

All this said, one of the beauties of capitalism is that you are allowed to be delusional. It is just another one of nature’s ways of thinning the herd over time.

Mark Hurley is founder and chief executive of Fiduciary Network, a private bank specializing in the wealth management industry.