Mergers and acquisitions (M&A) are a hot topic in every sector I have written about, and financial advice is no different.
In the UK adviser market, consolidation has been going on for decades. It began with the likes of Ken Davy, who is often credited with pioneering the advice network as it is today, when he founded DBS in 1983.
These network-style businesses started to bring the independent financial advisers together into a loose confederation.
The IFAs then benefited from support in areas such as professional indemnity (PI) insurance because the network was able to bring scale to negotiations with insurers to get a better deal. Gradually, these groups of IFAs were then able to start sharing computer systems, and research and product panels.
Other founders began to join the fold. Simon Hudson started up the M&E Network in 1992. In 1999, M&E bought Interdependence Ltd — a company with a similar offering — and launched the Tenet Group.
Six thousand firms provide services in this space. It’s really easy for bad actors to hide
The St James’s Place (SJP) Group was established in 1991 by Mark Weinberg, Mike Wilson and Lord Rothschild under the name of the J Rothschild Assurance Group. It started trading in 1992 and inherited the named SJP in 2001.
Around the same time, David Harrison launched Positive Solutions, which was a pseudo-network based on an IT platform.
Back around the early 2000s Scottish Equitable (now Aegon) bought several IFAs and brought them together, eventually rebranding them as Origen. It also bought Positive Solutions.
The Retail Distribution Review made it easier to be a scale player, which prompted consolidation in the early 2010s. But the idea was that, when the market reshaped itself, the opportunity for M&A would diminish.
Since then, Mifid II, Priips [Packaged Retail and Insurance-based Investment Products], and the General Data Protection Regulation have all been brought in. This has kept demand going and, in recent years, activity has really ramped up.
The IFA market differs from other markets in that it is not dominated by three or four large players.
Good, well-run, low-risk adviser firms often see massive hikes in their fees, year on year
In the energy market there are the ‘big four’ companies that hold around a 55% market share. In grocery, the picture is much the same. Tesco alone holds about 30% of the UK market. But things are changing.
In both examples, customer choice is actively encouraged and, gradually, the large businesses are losing their stranglehold on these markets.
In financial advice the opposite looks to be happening. Estimates suggest there are still around 5,000 advice firms with about 27,000 advisers left in the market today.
The deal will bring around £2.5bn of assets under advice to M&G, as well as relationships with around 180 advisers acting on behalf of more than 10,000 individual clients.
We’re seeing big US private equity funds buying up UK advisory businesses
However, the rise in activity is mainly made up of a higher volume of smaller transactions, with consolidators picking up a steady stream of SME firms.
There are multiple reasons why activity has increased, but many believe it to be an inevitable consequence of a profession dominated by small firms and ageing advisers.
In a recent report, Platforum lists the main drivers of M&A activity in the advice market as:
The growing regulatory costs and burdens of running advice businesses
An increase in advisers affected by PI cover issues from defined benefit (DB) transfers
Challenges in achieving organic growth through recruitment and training
A steady stream of retiring advisers who have undertaken little to no succession planning
High business valuations for advice firms, bolstered by generally strong market performance
Private equity firms’ growing interest in backing larger consolidators and vertically integrated firms.
A big reason advisers are selling their businesses at this juncture is because there is increased margin pressure and cost scrutiny.
Square Mile chief distribution officer Steve Kenny warns the demographics in the IFA marketplace, which have been “written about since time immemorial”, are now “coming to roost”.
Advisers often cite the burden of regulatory costs as one of the biggest barriers to their business.
The Financial Conduct Authority recently confirmed advisers will pay a total amount of £82.3m fees for the 2021/22 financial year.
Regulation is not the only burden. The two other costs are PI insurance and Financial Services Compensation Scheme (FSCS) levies. At the start of this year, the FSCS forecast the 2021/22 levy would be £1.04bn — a 48% increase on the previous period.
Niche players will continue as lifestyle IFAs — and then there’ll be the big boys
Then in May, the lifeboat revised it down by £206m, which still represented a significant increase of £133m compared to the 2020/21 levy. In September the FCA unveiled plans to reduce the FSCS levy over the next decade.
The levy pays for compensation to customers as a result of failed firms, as well as for FSCS’s running costs. On top of that, the FSCS raises a supplementary levy when funds are needed to cover any additional compensation costs since the original forecast levy.
Compensation costs for 2020/21 were higher than originally forecast. This was largely due to pay-outs for collapsed mini-bond provider London Capital & Finance (LCF), and increases in the costs of ‘return of funds’ cases and pension advice compensation.
A freedom of information request put in by Money Marketing to the FCA in October last year discovered PI insurance premiums have increased by 20% annually since 2017 for advice firms with DB permissions. The average premium per firm went from £20,828 in 2018 to £25,086 in 2019.
“Good, well-run, low-risk adviser firms often see massive hikes in their fees year on year,” argues Altus director of wealth Simon Bussy. “The poorly run, high-risk firms — the polluters — do not pay; the costs fall on the good guys.”
One could “rightly argue” that dramatically increasing levies each year are a “sign of regulatory failure”, he says.
Tear it all out
He suggests the whole system needs a “complete root and branch overhaul”, as the current model is undoubtedly unsustainable for both firms and consumers.
Then there is the cost of recruiting staff.
“I’m hearing anecdotally that the cost of paraplanners has gone up by a great deal,” says Tyndall Investment Management head of partnerships James Sullivan.
This is because paraplanners are in short supply and the nationals are allegedly trying to hire them away from other advisers by pushing up salaries.
Managing money with advisory-only permissions is administratively heavy. Consolidating one’s business is an easy solution
How an IFA runs its investment process is also important.
“There are still a large number who don’t have discretionary permissions,” says Sullivan. “Managing money with advisory-only permissions is administratively heavy. And consolidating one’s business is an easy solution to that because you’re passing across your investment process to the consolidator.”
A possible cure for this would be for an adviser to team up with an investment manager to avoid merging — a so-called “antidote to consolidation”, suggests Sullivan.
The potential threat of robos is another bugbear for advisers, which has caused some to exit the market. “The market is not as big as it once was because of robo advice,” Sullivan suggests.
Of course, the robo advice resurgence offers a huge opportunity for advisers to capitalise and create a blended offering, using technology to do a lot of the heavy lifting but making human interaction accessible.
But for those advisers approaching the end of their working life, or for those who simply do not want to join the tech bandwagon, getting out and selling could prove the best strategy.
The so-called adviser generation gap is another reason an adviser might look to sell, especially if they have no tangible succession plan.
SJP has effectively centralised the advice process. It has one common advice system
The average age of a financial adviser in the UK is in the mid-fifties, and this has been the case for a while, according to advisergap.com.
Research commissioned by Octopus Investments in 2019 found 29% of financial advisers said they would retire within the next five years. And 58% said they planned to retire within the next 10 years. That means that, at the time the research was commissioned, around 15,000 advisers planned to leave the profession soon.
The advice profession struggles to get young people in, and Kenny suggests this is down to a “raft of factors”. But, he outlines, the main one is that bringing any form of junior into the business is a cost drag until they start to deliver.
Then there is the increase in interest from private equity investors, which has also been ramping up in the platform market.
Around 90% of advice firms have fewer than five advisers and nearly 50% are sole traders, where the business owner is also the single adviser.
So there is a “strong case” for bringing together smaller advisers into larger practices to drive economies of scale, says Benchmark Capital managing director of wealth Ed Dymott.
The move from Carlyle was reportedly part of plans to lead a fresh round of consolidation in the sector to form a wealth manager of even greater scale — a rumour that has since been repeated.
Despite the challenges of the pandemic, the IFA market appears to have remained an attractive proposition for these investors.
There are estimated to be 20 IFA consolidators operating in the UK market, and a significant proportion are now backed by private equity houses.
“We’re seeing big US private equity funds buying up UK advisory businesses to get their pound of flesh,” says Sullivan. “Competition among the buyers is ferocious.”
Those advisers choosing to remain independent are building something of a competitive moat around themselves
Kenny adds: “Private equity monies are coming in and seeing an industry that is disparate, and that has an ageing population — many of whom are looking for an exit plan.”
Many advisers that Platforum spoke to for a recent report expressed concern about the influx of private equity involvement and its impact on the sector.
Private equity firms typically hold their interests for around three to five years, attempting to make returns when a company floats or is sold on again.
Therefore, they have a reputation for prioritising short-term gains over long-term strategy.
Pros and cons
Bearing all these considerations in mind, the question is: to consolidate or not to consolidate? Done right, it can be of huge benefit to both the acquired advisers and their clients.
For a business owner looking to retire, the advantages are clear — they get an easy exit strategy and a nice bit (or lot) of money for retirement.
For a business owner looking to remain on in the company, there are also advantages. They may enjoy the day-to-day giving of advice aspect, but the regulatory compliance and paperwork may be less favourable.
Being part of a bigger entity can take away the regulatory burden (and costs) and allow the adviser to do what they enjoy.
The most important thing for advice firms to focus on is having an efficient, consistent, valuable and transferable ongoing service proposition
Building economies of scale can help reduce costs for individual advisers, and for the overall business.
Private equity houses have realised that if they start clumping companies together, they can “optimise them to quite a significant degree”, suggests Kenny. “If you put in one administration system and go to one investment proposition, suddenly your economies of scale start to kick in.”
In theory, this is true. If it is done properly, it can be of huge benefit to the advisers involved.
One company positively namechecked a few times in my interviews for this feature was SJP.
“It has effectively centralised the advice process. It has one common advice system,” says Kenny.
“The investment proposition is discretionary. SJP advisers all utilise the same fund proposition, and they use the same investment platform,” he adds.
“So SJP is taking a slice out of every part of the chain and making it cheaper.”
The market is not as big as it once was because of robo advice
Could now be the perfect time to sell an advice business? Many in the market believe premiums are at the top of the curve.
Anecdotally, most advisers receive one or two letters a week offering to buy their business. It is no doubt a seller’s market, with the valuation on advisory firms as rich as it has ever been. But, still, advisers may be wise to hold off from selling.
“Those advisers who are not consolidating, but instead choosing to remain independent, are building something of a competitive moat around themselves,” says Sullivan. “They remain truly independent; they are not tied or quasi-tied. More power to those guys.”
Playing the medium-to-long game could pay off. After all, consolidation is not always good. There is a danger that it could take away an independent adviser’s autonomy.
There have been instances in which an adviser has been promised the business will remain ‘independent’ but, when it has actually been bought, the acquirer realised keeping different IFAs independent didn’t make sense economically.
A way to mitigate this is to make sure the culture of the seller fits with the culture of the purchaser. This is one of the key factors you see in all of the consolidation stories Money Marketing writes.
Niche players will continue as lifestyle IFAs and make that conscious decision — and then there’ll be the big boys
When Saltus bought Fish Financial in early September, Fish managing director Ian Colley said: “It quickly became clear that the core values of the two businesses were completely aligned and, given that we retain a strong desire to continue to grow, it was obvious that an alliance of some sort would deliver us the outcomes we were looking for.”
On the other side of the coin, for the acquirer, buying an advisory firm can be a challenge.
As a buyer, a company needs to ensure the people stay. Clients form deep relationships with their advisers and, more often than not, they become friends. Therefore, if the business owner leaves, clients will often follow.
One way to help get people to stay is by thinking about whether consolidation is actually good for clients.
Dynamic Planner proposition director Chris Jones suggests ‘ownership’ of clients may be an important contractual part of the agreement, but it is a phrase that clients themselves would probably find unacceptable.
Long-term recurring income can only be secured by the client valuing the service provided, and he warns that should remain consistent and uninterrupted throughout the process.
“While the market is full of talk about private equity, EBITDA and securitisation, the most important thing for advice firms to focus on is to have an efficient, consistent, valuable and transferable ongoing service proposition.”
It is clear that, in deals of this nature, trust must flow both ways. The adviser has to trust that the acquiring company will keep to its word, and the acquirer must trust that the adviser will not abandon the business at the first opportunity.
Looking to the future, Platforum believes it is the ‘middle ground’ that will continue to disappear. “Niche players will continue as lifestyle IFAs and make that conscious decision — and then there’ll be the big boys,” said one independent consultant the group spoke to for its report.
The gap between large nationals and intentionally small advice boutiques will continue to widen, predicts Platforum, although wholesale consolidation of the adviser market is unlikely.
Research by NextWealth and Benchmark suggests that around 5,200 advisers will seek to exit within the next five years — that is around 20% of the market.
The poorly run, high-risk firms — the polluters — do not pay; the costs fall on the good guys
Many business owners are looking at succession options, including the possibility of selling their business.
However, Dymott argues that, while the numbers suggest this trend may continue, there are “few quality firms” available looking for an exit through sale.
He sees a growing demand for other forms of exit, such as passing ownership to staff through forms of employee ownership trusts, which can be a highly efficient structure, and protects the interests of clients and employees.
As discussed, though, if advisers do go down the consolidation route, it is vital that the deal is done right. Because the value in an advisory business is the people. If the people leave, what is left?
The FCA has made it clear it thinks there are too many small advice businesses.
After an extensive review of IFA consolidation in 2017, the regulator decided against intervening because consolidation activity was still in line with its interests.
In a blatant pro-consolidation statement recently, Debbie Gupta, director of the FCA’s consumer investments division, said the advice market was “dominated by lots and lots of small firms”.
In an Inside FCA podcast, Gupta spoke about areas of concern the regulator had identified in the consumer investment market.
She warned that the sheer number of firms “makes it really difficult for people like you and me to navigate” the sector.
“Six thousand firms and over 27,000 individuals provide services in this space to help us understand where we might invest and how we might invest, and provide advice to consumers,” she said, adding: “It’s really easy for bad actors to hide.”
Many large firms only offer restricted advice. Their advisers are told what they can and can’t offer clients
IFA Neil Liversidge, who is founder of West Riding Personal Financial Solutions, rebuked the statement.
In an open letter to the FCA he wrote, “I totally dispute what passes for your ‘logic’,” before proceeding to list reasons why smaller firms should not be discounted.
For example, he argued: “Many large firms only offer restricted advice. Their advisers are told what they can and can’t offer clients.”
Some of the industry commentators I spoke to expressed concern that the regulator may allow consolidation to continue, even to the detriment of clients, in order to narrow the market.
Meet the consolidators
Estimates suggests there are around 20 consolidators operating in the UK IFA market. However, while some shout about their ambitions, others remain quiet.
Also, some do not like to be referred to as ‘consolidators’ (although the clue is always in the speed at which they acquire businesses).
These two factors make it difficult to quantify them.
Here are some of the big ones:
In 2021, AFH Wealth Management received a £225m takeover offer from US private equity investor Cortina Bidco (Bidco). Shareholder Slater Investments refused the bid and it was revised to £231.6m. It was approved by the FCA in May.
AFH has been one of the most acquisitive businesses in the UK advice market in recent years. It secured 16 purchases in 2018 and spent around £30m on the seven deals it sealed in the 2019 financial year alone.
Near the end of 2019, however, it decided to put a pause on acquisitions in favour of organic growth and a chance to bed in existing deals.
Perhaps equally acquisitive is Fairstone. In October, it announced the purchase of Chadney Bulgin to accelerate its growth strategy for 2021. This followed the acquisition of West Yorkshire-based Utopia Financial Planning in July.
Fairstone takes a minority stake in firms whose owners do not want to sell immediately. This is the start of a phased pre-acquisition process that takes place over two years.
The idea is Fairstone provides regulatory, technical and operational support to a firm, enabling it to grow organically and become more profitable.
Succession Wealth has more than 17,000 clients as 552 new clients joined the books in 2020. The company says it has grown both organically and through the acquisition of more than 55 “profitable and well-positioned” advisory firms.
In January, it said it would be on the lookout for “strategic acquisitions” in 2021 to enhance its scale and future growth potential.
It has “significant” financial backing from Inflexion Private Equity and Ares Management Corp.
Private equity giant Carlyle bought Harwood Wealth Management in December 2019 for £90.7m. The Aim-listed financial planner will sell its entire share capital to Hurst Point Topco Limited – a company indirectly controlled by funds managed by Carlyle.
Harwood acquired nine advice firms in the first half of 2018, which contributed £310m in assets under advice.
In February 2020, it dropped its bid to take over IFA Frenkel Topping.
In July, Perspective Financial Group completed the acquisition of four IFA firms – Prolific Financial Services, Evolve Financial Management, Bowman Financial Planning and Quantum Portfolio Management – bringing its total assets under management (AUM) to £3.6bn.
The four acquisitions add 600 clients and £350m in AUM, bringing Perspective’s total to 23,000 clients and £3.6bn in AUM.
Radiant launched in November 2020 with backing from Apiary Capital. CWB, PPS and ReSource Mortgages formed the basis of the group. It launched with £800m in AUM and 20 advisers. Its chairman, Peter Mann, is ex vice-chairman of Old Mutual and chief executive of Skandia.
Radiant says it wants to grow both organically and through the acquisition of IFA businesses. It claims to be different from other consolidators in that its “ambitious” growth strategy will be based primarily on finding companies with a shared “culture of creativity, innovation, integrity and collaboration”.
Kingswood has 16 regional network offices across the UK, with 64 client-facing adviser colleagues and AUA/AUM of £4.5bn from around 8,000 active clients.
In its half-year report for 2021, it said an “extensive pipeline” of potential UK M&A opportunities was under evaluation, with nine transactions currently under exclusive due diligence. This included opportunities in “key preferred markets” across the UK.
In June, the group carved out a deal to buy Admiral Wealth Management for a cash consideration of £4m, payable over a two-year period.
The Saltus Group bought Fish Financial in September. It told Money Marketing it was now on the lookout for further financial advisers to buy.
A spokesperson confirmed the company was talking to “a small handful” of IFAs, but its “door is always open”.
Saltus was established as an investment management business in 2004 and launched Saltus Financial Planning in 2015. It employs more than 90 people and manages around £2bn in assets.
Deals in other financial services markets
The IFA market is not the only financial services sector in which M&A has been rife.
The insurance arena has experienced a lot of activity lately. In 2021 alone:
Arthur J Gallagher bought Inflexion-backed Bollington Wilson Group for around £200m
PIB Group undertook a secondary private equity deal, with funds managed by Apax Partners, acquiring the business from Carlyle. The deal values PIB at more than £1bn
Motor insurer Markerstudy took a £200m investment in a deal led by Pollen Street Capital
Global Risk Partners acquired Birmingham-based commercial broker Newstead Group
Via its healthcare hub, Premier Choice Healthcare, Global Risk Partners also acquired a book of healthcare business from SJA International
PIB Group acquired construction specialist UK & Ireland Insurance Services
Finch – part of Ethos – acquired Compass network member Headley Group
Finch’s ultimate parent, Ardonagh, separately acquired PI specialist and Lloyd’s broker Hera Indemnity
US firm Assured Partners acquired Scottish broker Borland Insurance
Heath, Crawford & Foster acquired both ABA Insurance Services and Bradshaw Bennett
Specialist Risk Group announced it had acquired building and construction specialist GB Underwriting
Newcastle-based Generation Underwriting Management was acquired by Arden UW, part of Willis & Company
Loss adjuster Woodgate & Clark announced it had acquired Manchester-based Quadra Claims Services
The platforms sector, too, has had its fair share of deals. See AJ Bell founder Andy Bell’s piece.