Insurance companies and asset managers are looking at acquiring advice firms to allow them to secure greater levels of distribution, diversify business models and boost margins which are being increasingly squeezed in the post-RDR world, two consultancy powerhouses told FTAdviser.
Malcolm Kerr, senior financial services adviser at Ernst and Young, said pressure on margins has led to adviser numbers shrinking, but while supply is reducing demand for advice is actually increasing due to forthcoming pensions reforms and demographic changes requiring inheritance planning.
Mr Kerr added that purchases by major providers such as Old Mutual’s buyout of Intrinsic earlier this year, could also be attractive to advisers that are having to investment more in client acquisition and customers themselves, given the longevity of the relationships.
“For the IFAs acquiring customers online requires a great deal of investment, while customers are realising that they won’t all be around 20 to 30 years down the line, so the comfort of institutional ownership is a strong incentive.
“From the institution’s perspective for some its down to buying distribution, while the other model is just to buy into the advisory services industry where they see growth.”
Mr Kerr added that as many insurers lose money from shrinking annuity businesses and small business auto-enrolment becomes less attractive for asset managers in the wake of measures to cap charges, capital is being freed up to use elsewhere with diversification top of the agenda.
Speaking to FTAdviser, Andrew Power, Deloitte partner, agreed that the Retail Distribution Review has put added pressure on the margins of platforms and investment managers, and that this is less the case for well-run advisory firms.
“Those still in the market are pretty much able to charge what they were prior to RDR: it’s customer agreed remuneration as opposed to commission, but in terms of the prevailing model it’s typically 3 per cent of the initial investment plus 0.5 per cent ongoing charge.
“So as insurance companies and investment managers see themselves being squeezed, they’re looking for additional sources of revenue, and one of those is clearly a stake in advisers.”
Mr Power noted that many IFAs do not make money, although he explained they may not necessarily be seen by institutions as a financial investment but rather as a way to increase their own distribution.
However, he added: “It’s actually quite difficult to guarantee distribution, because most IFAs want to see themselves as independent and if they have too much product coming from their owner it may impact the relationship.
“IFAs that are dealing in the high net worth part of the market will continue to survive and thrive; the complexity of that target market’s choices have increased, along with their need for advice.”
He added that those advisers “likely to be challenged” are those with customers across the mass market. The majority of people will not have savings beyond Isas and corporate pensions, so they’ll only have ‘episodic’ need for financial advice, he said.
“They may be interested in coming into a corporate fold, where they may have to move towards a more salary base, rather than variable compensation base.”
In another example of a distribution-based investment into advice, Novia recently acquired a 2.5 per cent stake in advisory group Tavistock Investments, which owns the parent company of national IFA Sterling McCall, for £250,000.
Under the new agreement, Tavistock has endorsed Novia as a preferred platform, and Novia will introduce advisers to Tavistock on a selective basis.
