An acquisition strategy based on buyouts of smaller IFA practices which make up the bulk of the advice market but that “fly beneath the radar of larger wealth managers” is likely to boost adviser numbers and earnings without enhancing risk, analysts at WH Ireland have said.
An analyst note on consolidator Tavistock Partners, which earlier this year acquired national IFA Sterling McCall, upgrades the firm to a “speculative buy” on forecasts that it will see revenue surge by close to 400 per cent in the next two years.
The note says the “real beauty” of the Tavistock model is its ability to grow adviser numbers in a “relatively low risk and earnings enhancing” way, citing the focus on “smaller IFA firms” though a model which guarantees the owners a multiple of assets under management on exit.
According to WH Ireland, there are currently more than 10,500 financial advisory firms regulated by the FCA in the UK with 95 per cent having less than 10 advisors and 99 per cent having less than 20.
In particular analysts point to a strategic alliance with Novia, signed in September, which saw the platform operator become the latest provider to take a stake in an advice firm as part of a deal to selectively “introduce” advisers to Tavistock for potential buyout.
The retiring self-employed principal, typically receiving 67 per cent of gross revenue generated, will be replaced with employed staff where the cost is fixed and proportionately much less at closer to 33 per cent of gross revenue, WH Ireland notes.
Final payment will be based on a “higher multiple” of recurring revenue within the centralised investment proposition, where margins are increased by the provision of an in-house discretionary fund management service through the Blacksquare business acquired alongside Sterling McCall.
Assets will “rise quickly” from a current £400m, the note predicts, and the migration of existing portfolios into the firm’s own discretionary fund management service will yield additional “margin upside”.
As a consequence, Tavistock’s total revenue is expected to climb 388 per cent from its current £1.7m to £8.3m in 2016. The note also forecasts adjusted pre-tax profit to grow from a current loss of £450,000 to £1.1m in the next two years.
donia.o’loughlin@ft.com
