Written by Ian Partington, CEO, Third Financial
Consolidation has been a notable feature of the wealth management and financial advice industries over the last decade, and the signs are it is not going to stop anytime soon.
We’ve seen plenty of examples of financial advice consolidators intent on buying up smaller competitors – Foster Denovo, Kingswood, Ascot Lloyd, AFH, and Fairstone being among the best-known.
Regulation, changing demographics and rising costs are three key areas driving merger & acquisition (M&A) activity. Alongside new regulation like the Consumer Duty, professional indemnity insurance bills are on the rise, and the adviser industry is aging. These factors may encourage some advisers to sell. And with the recent IMF announcement that the UK is to be the only major economy to shrink in 2023, fees are likely to come under pressure as UK markets tread water, and would-be prospects tighten their belts.
Yet growth ambitions – rather than rising costs and increased regulation – can also motivate acquirees.
Private equity – a dirty word?
There’s an out-of-date cynicism around private equity firms, who back many consolidators, operating in an industry like wealth management that is characterised by personal and long-term relationships. But consolidation is a normal and needed part of any industry. It establishes economies of scale that drive down costs and make the advice sector a stronger industry. This could even lead to a narrowing of the advice gap, giving more people access to financial advice.
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 financial advice firms operating on up to 20 different investment platforms, each requiring their own logins and endless dual keying. This means that a parent company with a modern, simplified technology offering – who can assist with any required migration – can be very attractive.
Perhaps 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 last June by Amber River, a ‘buy and build’ firm with nearly £8 billion in assets under advice across its portfolio of businesses. Rather than being rebranded, Leodis is the regional hub for Amber River in Yorkshire. In other words, Leodis’ leadership are using the deal to fund expansion and serve more people and communities in their region, rather than with a view to selling their book and stepping away.
Better technology, better opportunities
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 that acquisitions will continue. But with high interest rates meaning that 2022 was the end of the cheap money era, acquisitions will be focused on sustainable profitability, and how to get the most out of acquired firms. In essence, firms will be looking more intently at automation of manual processes, to make sure that their businesses can be scalable.
The great wealth transfer, in which an estimated £300 billion will be passed down in the UK over the next decade, is another reason that firms are looking to simplify their operating models and future-proof their technology stacks. This allows new acquisitions to be onboarded seamlessly and means new colleagues and clients – especially the next generation – are retained. M&A activity should be seen as a force for good, driving up standards when it comes to technology – an area in which the adviser segment lags behind other financial services. 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?
Uncertainty is most definitely all around us, whether it comes from the great wealth transfer or the rising age of advisers, and with macroeconomic issues, clients need their advisers more than ever. For financial advisers, simplifying their processes and technology is key. By focusing on removing manual processes and long-winded administrative tasks, financial advisers will gain back time to do their job and help their clients. And if these firms simplify now, they will be ahead of the game, ready and able to scale quickly tomorrow and drive the industry into the new age.
