Last week’s news about the Investec and Rathbones “combination” further fuelled existing conversations about consolidation in the wealth management sector. There appears to be a growing consensus that the number of firms operating in the industry is shrinking as more consolidation takes place.

The dictionary defines consolidation as the action or process of combining a number of things into a single more effective or coherent whole.

Therefore, from the talk among the industry, you would presume the number of wealth management firms is decreasing in favour of larger firms.

For wealth managers, consolidation is thought to make them “more effective” primarily due to scale. In an industry with increasing regulatory and technological pressures, having scale is considered one way to counter this.

Despite these apparent needs, thewealthnet has also covered a number of new firms already this year, most recently Cadro, a technology-driven wealth manager launched this year.

In fact, almost every week a newly launched firm gets in contact with us wanting to speak about their venture.

Without fail they are optimistic about their prospects and believe their small size is actually an asset, allowing them to be more nimble and move quickly without being weighed down by bureaucracy. Of course if they were not optimistic when launching, it would be very surprising, and probably concerning too.

This seems to contradict both the notions of consolidation and the need for scale.

My colleague Ian Orton has previously written about this topic, stating there are likely as many wealth firms now as there ever have been.

He suggested that when people refer to “consolidation” perhaps they actually mean merger & acquisition (M&A) activity, of which there has been plenty.

“The reality is that a sector can become more fragmented despite experiencing significant M&A activity,” Mr Orton writes.

“New firm formation can more than compensate for any reduction in M&A-induced capacity, for example.”

There is perhaps an argument that this M&A activity is leading to a reduction in mid-sized firms. Most appear to be merging and/or acquiring to become larger firms, while entrepreneurial employees are branching out on their own to create boutiques.

While change is not always welcome, this movement appears to be positive overall. It is creating space for innovation and new ideas, which drives the sector forward.

What it is not doing, however, is leading to “consolidation”. While there is so much opportunity in the sector, it seems unlikely this will change anytime soon.