Advisers are getting historically low multiples of ongoing income for their businesses as acquirers become more cautious due to regulatory action, according to a consultancy involved in adviser mergers and acquisitions.
Brian Spence, founding partner of consultancy firm Harrison Spence, said there is likely to be a “sea change” in how deals are structured.
He said the issue particularly affects advice businesses with an annual adviser charge of 0.5 per cent – which recent research shows is more than a quarter of firms.
This is because acquiring firm are seen as having little room to raise charges once they buy a firm following the Financial Conduct Authority's focus on the consolidation process.
Research by Harrison Spence carried out in October found 29 per cent of firms had a 1 per cent advice charge while some charged 1.25 per cent.
Meanwhile 26 per cent of advisers charged 0.5 per cent while 22 per cent charged 0.75 per cent.
Mr Spence said these firms could find themselves being offered historically low multiples of three times recurring revenues, but with a higher proportion paid for their business up front.
He said: “A threshold has been reached prompting the industry to look at new ways of doing things.
“Even though fierce competition remains for those high quality businesses with a 0.5 per cent model, the regulator’s focus on acquiring firms charging higher fees has led them to become more cautious with their offers.
“This has created a sea change in the industry’s thinking around how deals are structured.
“While premiums can still be achieved for the right business, in other situations, the offer is lower with the trade-off in how the deal is structured.”
Earlier this month the Financial Conduct Authority published the results of its review into advice consolidation, which found a number of issues around the way these firms charge for their services.
For example, it found details of the services offered by the new firm and the level of charges were not provided to clients at the start of the new relationship.
The FCA also found that firms did not always recognise where the contract between the original firm and the client did not allow ongoing services to be provided and charges to be transferred to the acquiring firm.
Harrison Spence’s latest Adviser Views survey found most IFAs (86 per cent) believe that the value of their business is increasing and will be greater in five years.
Three-quarters (76 per cent) were confident that the value of their business will achieve a better price in just 12 months.
Mr Spence said it was good that advisers felt their business would grow in value, but said it was “naïve” to think prices would grow indefinitely.
Stephen Harper, chief executive of Attivo, said: “There are a number of factors that we look at when considering an acquisition, often the most important of these is the cultural fit between Attivo Financial Planning and the seller as our focus is to ensure we offer a comparable value for service to all clients as a minimum.