M&A activity has recently stepped up in the asset management sector, including the mega-merger of Standard Life Aberdeen PLC (LON:SLA) which completed last week.
The industry is under regulatory pressure from the Financial Conduct Authority, which published its long-awaited final report on the fund management industry in June.
It said the announcement was being put out in response to press speculation about a deal.
The paper said Rathbones was in discussion with its smaller rival about an all-share tie-up.
"While there may be wider benefits from these two businesses coming together given that they do much more than just asset management, the ability to build greater scale has to be seen as a key opportunity as active managers look to take the fight back to the passive giants".
The merger with Smith & Williamson would add accountancy and tax services to the execution-only offering the firm announced it would launch earlier this year.
Market sources believe S&W - which is owned mostly by its employees - would be valued at £500m to £600m under the terms of the deal.
"We retain our HOLD recommendation but raise our price target [for Rathbones] to 2700p from 2300p to reflect the potential synergies".
Smith and Williamson is, according to FTAdviser's sister paper the Financial Times, the eighth largest accountancy firm in the United Kingdom, and also has a wealth management division.
Rathbones has a market capitalisation of £1.4bn.