Third Financial featured in today's edition of Money Marketing, with Group CEO, Ian Partington, sharing his thoughts and predictions around the topic of consolidation. Read the article here
It seems barely a week goes by without the announcement of one advice or wealth management firm acquiring another.
This means “more consolidation” has become a popular reply to questions about which forces will shape these sectors in the coming years.
We see many examples of financial advice consolidators intent on buying up smaller competitors – Foster Denovo, Kingswood, Ascot Lloyd, AFH and Fairstone being among the best-known.
An increased regulatory burden, high professional indemnity premiums and an ageing adviser pool are usually cited as reasons for firms putting themselves up for sale.
Fees are likely to come under further pressure in 2023 as markets tread water amid the new normal of higher interest rates and would-be prospects tighten their belts in preparation for recession.
Yet growth ambitions – rather than rising costs – can also motivate acquirees.
Many consolidators are backed by private equity firms and an out-of-date notion persists that there is something sinister about them operating in an industry characterised by deeply personal, long-term relationships that sometimes span generations. We don’t see it that way.
Consolidation is a normal part of any industry. It helps to establish economies of scale that drive down the cost of the service, making it more affordable for the end-client. For advice, this means closing the advice gap.
Firms joining or being bought by a larger competitor are also likely to benefit from a wider resource pool and a more streamlined operating model. We have seen examples of advice firms operating on up to 20 different investment platforms, each requiring their own logins and endless dual keying. This means a parent company with a modern, simplified technology offering, who will assist with any required migration, can be very attractive.
I would also suggest that merger and acquisition (M&A) activity, rather than “consolidation” is a better label for what we are seeing.
An example is 1988-founded Leodis Wealth, which was purchased in June by Amber River (previously Socium Group), a “buy-and-build” firm with nearly £8bn in assets under advice across its portfolio of businesses.
Rather than being absorbed, Leodis now acts as the Yorkshire regional hub for Amber River. In other words, Leodis’ leadership is using the deal to fund expansion and serve more people and communities in its region, rather than with a view to selling its book and stepping away.
M&A activity has by no means decimated the thriving scene of small advice businesses in the UK.
FCA data shows the number of advice firms in the UK stood at 5,118 in 2021. Of these, 89% had five advisers or fewer, with 47% – or 2,423 – being one (wo)man bands.
Given the financial firepower available to private equity-backed acquirers, and the number of small advice firms likely – sooner or later – to come to market, it seems certain acquisitions will continue.
Yet rising interest rates mean the 14-year era of cheap money is coming to an end. I predict this will lead to the new groups becoming more focused than ever on sustainable profitability – and they will be looking at how to get the most out of the firms that have already been acquired.
This will manifest as these firms looking more intently at automation, and the streamlining of business processes, with a view to making their businesses ever more scalable.
Firms looking to scale need to simplify their operating models and future-proof their technology stacks, meaning new acquisitions are onboarded seamlessly and new colleagues and clients – especially the next generation – are retained.
The adviser segment lags other financial services on the technology front, so these transactions should be seen as a benevolent force in a fragmented industry, driving up standards.
For clients, having their adviser acquired can undoubtedly be unnerving. What better way to win over these clients than with a drastic improvement to the system they use to view their portfolio and engage with their adviser?
The fact is the sector is likely to face a challenging 2023, with a cost-of-living crisis that is increasing drawdowns and impacting client sentiment, as well as inflation leading to higher costs in many areas.
Amid uncertainty, the best course of action is for firms to focus on what they can control: reducing their long-term administrative burden, leaving more time to focus on clients, who will be relying on their advisers for sound advice more than ever.
Ian Partington is Group Chief Executive Officer at Third Financial