Your IndustryFeb 27 2020

Adviser M&A activity is on the rise

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Adviser M&A activity is on the rise

IFA businesses also represent an ongoing income stream so the value of the recurring business held by IFAs is very valuable to consolidators and firms looking to grow within the industry. 

Some firms control good levels of assets under management (AUM). Being able to control higher levels of AUM following an acquisition is another reason why there is a lot of value in firms.

Sustained regulatory scrutiny, against a backdrop of a decade of regulatory change, has increased the cost of running an advice business Abhijit Rawal, KPMG

But the economics of advice businesses face pressures on many fronts.

Abhijit Rawal, head of strategy for wealth management at KPMG, says increased pricing transparency and though still in early stages, growth of digital-first propositions, are pressuring revenue margins. 

He adds: “The need to invest in digital capabilities is also adding to firms’ costs. Sustained regulatory scrutiny, against a backdrop of a decade of regulatory change, has increased the cost of running an advice business. 

“This has manifested itself in increased compliance costs, increased FSCS levy and increased cost of professional indemnity (PI) cover.  

“Regulation on top of revenue and other cost pressures acts as a catalyst for M&A activity as scale becomes ever more important to succeed.” 

Supply and demand dynamics are working in advisers' favour as there are too few advisers for the number of people that need and look for financial advice in the UK. 

Scott Stevens, director of adviser recruitment and acquisition at Quilter Financial Planning says: “When it comes to M&A we know advisers are an aging population, with many looking to exit and so want to, merge with, or be acquired by, another firm so their clients are well catered for.”

When it comes to regulation, rules like Mifid II have added considerable complexity to client reporting, particularly around changes to investment portfolios.

Stuart Dyer, chairman of consultancy firm Soprano Mergers & Acquisitions says: “The regulatory landscape is becoming more difficult for the small -medium IFAs, alongside the factors driving consolidation, such as demographics, ageing population of principal/owners of IFA businesses.” 

“We have also had a long bull market run and business valuations are quite high, so it is not surprising to think that it is not a bad time to exit. We are also seeing there’s quite a demand for good quality IFA business."

Buyers and sellers

Buyers of advice businesses include larger established financial institutions that are mostly vertically integrated or seeking vertical integration. 

Increasingly private equity backed organisations are also bulking up and buying advice businesses. 

Mr Rawal says: “We also see a lot of interest and activity with mid-size and larger advice firms which are national in nature as they bring the promise of a large deal with increased scale and associated efficiencies. 

“Then of course, small adviser firms where the advisers are nearing retirement or seeking retirement are looking to sell too.”

Alan Marks, managing director of Harrison Spence says: “The buyers also vary from local firms with a younger management team who are looking to grow and maintain the personal touch that the existing adviser has given through to very large national consolidators who offer a more corporate approach to a purchase.

We also see a lot of interest and activity with mid-size and larger advice firms which are national in nature - Abhijit Rawal, KPMG

"There are still more acquirers than sellers which has meant an increase in prices being paid.

"However, any business with a history of “higher risk” sales such as defined benefit (DB) transfers are definitely being purchased as asset and goodwill purchases rather than equity purchases."

Mr Stevens says he is seeing a lot of sole traders looking at their retirement plans because being a sole trader brings additional risks around capacity and key person dependence.

In particular there are worries about what happens to their clients and business if they are unable to work for a sustained period if something happens to them. 

Mr Stevens adds: “However, we have a very diverse network so we are seeing sellers range from sole traders to large limited companies and the drivers are the same: ageing business principal population, increased regulatory and supervisory requirements.”

Such is the value that is seen in the advisory sector, that companies like Quilter are prepared to lend money to advisers who are looking to make acquisitions.

Mr Stevens says: “At Quilter we do not lend our money to just any adviser.

"These advisers and firms have been part of our network for a significant period of time and so we know the businesses we are making loans to really well.  

“Any funding provided by Quilter is on the basis of the successor having appropriate competence, capability and capacity to successfully acquire some additional clients.

"All funding is based on a robust assessment criteria.”

The company also provides support in other areas, such as a free valuation. Connecting sellers with buyers and providing access to third party legal support.

Compliance

All potential buyers and sellers receive an assessment from a supervisory and compliance perspective. 

All sales are subjected to a detailed review of the key risks before they can proceed.

This looks at a number of factors including the number of clients, the retiree’s proposition, the buyer's proposition.

Mr Stevens says: “It is a difficult landscape for financial advice at the moment. Between increasing regulation and challenges around getting and keeping insurance it means operating a financial advice business is constantly met by headwinds. 

“This means advisers really need to think about what risks are embedded in their businesses and how they might mitigate these.

"It also means prospective purchasers are really focusing on historical advice and potential risks from a customer outcome perspective. 

“This makes businesses with the best quality and advice standards much more attractive when they are looking to exit.”

Mr Marks adds: "Problems with PI is encouraging many to look at selling as they are unable to trade without this cover, in addition many advisers are happy to give up on all the other parts of the business and concentrate on advising and let a new owner have the other worries."