Speaking to FTAdviser In Focus, the Ascot Lloyd chief executive said the private equity-backed business benefitted from unlimited buying power, and he did not see "any reason" why its growth plans should slow down soon.
He anticipated Ascot Lloyd would do "somewhere between seven and 10 acquisitions this year and then annually thereafter", doubling its pre-tax earnings "in the next three to four years".
And while it has thus far been focusing on IFAs only, Stockton hinted the company was ready to take on a restricted business, which it would run separately from the IFA.
He said: "First of all, Ascot Lloyd is an IFA and we're totally committed to that. We're not going to change horses anytime soon, and we've made that quite clear in the past.
We are capable of moving forward with acquisitions for however long we want."Would we buy a restricted business? Absolutely. It would need to be of a good size with an excellent brand. But you know, we will look at that in the coming coming months and years. So it's not ruling anything out."
In the event of such a deal, he said: "We'd run it as a restricted business and a third pillar in our group structure.
"So we'd have a restricted column and the DFM and our independent and then that will have to run under a separate brand because Ascot Lloyd is committed to being an IFA forever."
Ascot Lloyd did 12 acquisitions in 2020 but slowed down to a handful last year, saying there were "a few things going" in the business.
The advice firm is not currently profitable, having made a loss after tax of £30.5m in 2020 as acquisition and financing costs came to bite.
But Stockton put this down to "the way the goodwill is treated".
"The net profit before tax and the tax positions of firms in the space is always a bit opaque. So it's much better to look at the cash generative nature of the business. We're throwing off the thick end of £25nm of cash at the moment," he said.
"The fact of the matter is as the business grows and grows to the position it's going to be. It will be profitable by its very nature - it can't not be - so it's just a matter of waiting for that time."
The IFA was sold to Swedish private equity investor Nordic Capital by its owner, Oaktree Capital Management, earlier this year.
Stockton said its new backer is better capitalised, giving the consolidator more fire power to do deals faster.
"Nordic is a very well funded, very well capitalised, excellent private equity house, slightly larger than Oaktree in Europe," he said, adding: "We're in a position where we are capable of moving forward with acquisitions for however long we want."
Death of the small IFA?
Small and medium sized firms will find it increasingly difficult to operate in the future, said Stockton, because they would find it hard to keep up with fast evolving and expensive technology.
However, he did not predict the death of the small IFA just yet. "It's going to take an awful long time for the death of the [small] IFA because you've got recurring revenue.
"I think it's more about what the small and medium IFAs want to do in the future and how they they want to go forward. It is extremely difficult for a small IFA to comply with all of the things the FCA, the FSCS, and where things are going...and professional indemnity insurance has made it extremely difficult for new entrants to join.
"So it's hard to see new small IFAs joining the fray."
There was no compelling reason for small firms to exit now though, as long as they can keep up with the regulatory requirements, he said.
"But the fact of the matter is that over the next five to 10 to 15 years, there will be a smaller number of larger scale businesses who can afford to invest in technology and who can afford to invest in compliance and risk resource. But if you're a small business, that's very difficult."
Stockton looks to the insurance industry as a proxy for what is going to happen in wealth management.
The insurance industry has seen a number of very large consolidators emerge, and this is already partly mirrored in wealth management with the likes of Tilney, which merged with Smith & Williamson, now rebranded to Evelyn Partners.
It's going to take an awful long time for the death of the [small] IFA because you've got recurring revenue...but it's hard to see new small IFAs joining the fray.Stockton believes there is "sufficient capital for between 150 and 300 deals a year, and that will carry on now for the next, certainly the next four to five years."
And there could be super-mergers down the line, he said. "At the moment there are so many opportunities and so many possibilities for acquisitions that the consolidators can probably carry on pretty much as they are for the next five to 10 years and then merge up together, or you could merge up together in the next three to five years and move forward."
Restricted businesses in demand
Stockton said there was no shortage of sellers and no shortage of buyers, which meant the acquisition market was dynamic.
"It's a good time to sell as well as to buy," he said. "Good time to sell because obviously your end of 2021 results are going to show your retail revenue probably a little bit higher than it is now, because of the way the equities market has performed in the last six months.
"And it's a good time to buy because there are lots of people interested in buying your business, particularly if you're a restricted business. It seems to be a more competitive market than the IFA [market] at the moment.
"The reason restricted businesses are in high demand is that there are more consolidators in the restricted space than there are in the IFA space," he said.
The annual review with no changes will get automated.He also does not agree that the market could have reached the peak of consolidation.
"I don't see that. We think there's nearer 30 consolidators in the space now. And if all of those do five deals a year that's 150 deals, and we will do, as I said, typically we will do between seven and 12 deals a year for the next three or four years. So we'll do more than that.
"I don't see the space changing materially that much and that, you know, there'll just be fewer players, and a few bigger players."
Technology investments paramount
One benefit of working with private equity firms was the big amounts of capital they had access to and the fact they were always looking to make firms more efficient, said Stockton.
But the other thing was that they would invest in technology, which he described as a major element in preparing a firm for the future.
"One of the things that we underestimate in the next five to 10 years in this sector is just how much technology is going to change the way in which business are operated and you can see it in the mortgage advice space.
"Now, it's very rare that a mortgage adviser meets a client face-to-face and they're operating in the same way as we are now with screen shares and app shares and the rest," he said.
For clients with below £300,000 in assets an automated service will be the way to go, according to Stockton. For the wealthier ones, he predicts a continued demand for face to face service.
"I am a big positive on the face-to-face financial adviser but that's not to say that that financial adviser won't be backed up by use of technology.
"The annual review with no changes, you know, will get automated."
He added: "All of our businesses are just learning and just starting that journey, but that journey is here and you know, my average age of client is 60. So most of my clients will not change channel now, they like to have face-to-face, they like the security and they love the expertise of an independent financial adviser.
"But you tell me that that's going to be the case with people who are 35 and are just embarking on their entrepreneurial careers when they've capital gathered when they're 50.
"In 10 or 15 years' time, they're going to expect a technology-led proposition with an adviser alongside of that, and that's where the industry has got to go."
It's a good time to sell as well as to buy.But being able to go on that journey takes money, which is why Stockton believes larger firms will thrive over smaller ones.
"You can see in 10 or 15 years' time, acquisitions and bigger firms will have to be moving forward because they're the ones who are going to be able to invest £5mn- £10mn on making sure that all works and is secure and is safe and cybersecurity is absolutely perfect."
carmen.reichman@ft.com
