What is a consolidator? It is often regarded as a derogatory term used to describe an acquirer whose model is driven by a desire for a quick turn on investment.
This can be to the detriment of the client, impacting negatively the service they receive and increasing the charges they have to pay.
At present, large consolidators are targeting advisory firms with a 0.5 per cent model with a view to uplifting to a 1 per cent model. However, in a sellers’ market, there comes a time when the type of companies they are trying to acquire become more difficult to find.
As a result, the multiples big consolidators need to pay have increased from around 3x to 4x in the last 12 months - in effect a price rise 25 per cent. Their business model is becoming challenged as the maths simply does not add up at these levels.
There are also signs in the market that some acquirers are distressed and facing challenges with integration, as they fail to convince clients of their approach. Is the writing on the wall for the traditional consolidators and their ‘uplift’ model?
There are echoes of the 1980s and 90s trend where life companies bought estate agencies in their droves with a view to selling life policies to their clients. As life companies delved into areas they were unfamiliar with - and didn’t fully understand - acquiring firms exited the market as hastily as they’d entered it, with many estate agencies were able to buy their businesses back again for a £1.
Axa’s well-documented forays into acquiring financial advice firms in the noughties, and subsequent withdrawal in 2013, is another case in point.
We see similar patterns emerging today as financial advice industry ‘consolidators’ - often backed by private equity and venture capital money - adopt a similar short term-ist approach in pursuit of a quick buck.
Opportunism and a lack of strategy, coupled with inexperience and a scant understanding of the market, is threatening to cause an implosion. A tendency to revert to selling - rather than offering genuine advice - is holding little sway with clients, who increasingly understand that a holistic, long-term financial plan is key to achieving their goals and who are voting with their feet.
IFA’s business owners are deterred from selling, worrying that the same will happen to them and their clients, compounding the issues of a sellers’ market still further.
So if the traditional model of buying assets, achieving economies of scale and uplifting a 0.5 per cent to a 1 per cent model is no longer working, what’s the solution?
There is another type of acquirer - one that takes a long term view and is looking to achieve growth by meeting a need for a genuine financial advice and planning. This model is not dependent on achieving uplift, but on delivering well-established, long-term financial planning built on genuine relationships with clients and their families.