M&A activity in the adviser industry, and broader UK wealth management, continues at pace, driven by regulation, an ageing demographic and increasing professional indemnity insurance costs.
IFA businesses also represent an ongoing income stream so the value of the recurring business held by IFAs is very valuable to consolidators and firms looking to grow within the industry.
Some firms control good levels of assets under management (AUM). Being able to control higher levels of AUM following an acquisition is another reason why there is a lot of value in firms.
But the economics of advice businesses face pressures on many fronts.
Abhijit Rawal, head of strategy for wealth management at KPMG, says increased pricing transparency and though still in early stages, growth of digital-first propositions, are pressuring revenue margins.
He adds: “The need to invest in digital capabilities is also adding to firms’ costs. Sustained regulatory scrutiny, against a backdrop of a decade of regulatory change, has increased the cost of running an advice business.
“This has manifested itself in increased compliance costs, increased FSCS levy and increased cost of professional indemnity (PI) cover.
“Regulation on top of revenue and other cost pressures acts as a catalyst for M&A activity as scale becomes ever more important to succeed.”
Supply and demand dynamics are working in advisers’ favour as there are too few advisers for the number of people that need and look for financial advice in the UK.
Scott Stevens, director of adviser recruitment and acquisition at Quilter Financial Planning says: “When it comes to M&A we know advisers are an aging population, with many looking to exit and so want to, merge with, or be acquired by, another firm so their clients are well catered for.”
When it comes to regulation, rules like Mifid II have added considerable complexity to client reporting, particularly around changes to investment portfolios.
Stuart Dyer, chairman of consultancy firm Soprano Mergers & Acquisitions says: “The regulatory landscape is becoming more difficult for the small -medium IFAs, alongside the factors driving consolidation, such as demographics, ageing population of principal/owners of IFA businesses.”
“We have also had a long bull market run and business valuations are quite high, so it is not surprising to think that it is not a bad time to exit. We are also seeing there’s quite a demand for good quality IFA business.”
Buyers and sellers
Buyers of advice businesses include larger established financial institutions that are mostly vertically integrated or seeking vertical integration.
Increasingly private equity backed organisations are also bulking up and buying advice businesses.
Mr Rawal says: “We also see a lot of interest and activity with mid-size and larger advice firms which are national in nature as they bring the promise of a large deal with increased scale and associated efficiencies.