These typically cite increasing regulatory and compliance costs, retiring practice owners and attractive financial valuations as key drivers.
Examples of recent headlines include Quilter lending £25m to fuel acquisition, while Succession Wealth has appointed a director of mergers and acquisitions.
Wealth management company AFH only recently announced it would halt its acquisition activity to focus on organic growth after having made 50 deals since 2014.
Reading the stories it may seem that acquisition is the only game in town, with the IFA market becoming a place where smaller players ultimately get swallowed up by larger companies.
However, on closer inspection we do not believe this is the case and smaller independent financial advice companies continue to have an important role to play.
Key trends
Taking a closer look at the market we have identified some key trends. One is the well reported phenomenon of larger IFAs buying smaller ones. However, another trend we noticed that is much less talked about is that of advisers leaving larger companies to either start their own business or join other small companies.
Data shows that the number of advisers in small, medium and large IFA companies has remained broadly consistent over the past five years.
This means that consolidation deals are being offset by advisers leaving larger businesses to start small companies, and smaller concerns growing faster than larger companies. Let’s explore these trends in turn.
Large IFA acquisitions typically enable the practice owner to realise value in the small advice companies.
Key Points
- Many advice companies have been merging in recent years
- A large number of advisers are leaving bigger companies
- The number of small companies is growing year on year
However, most small companies have a number of advisers who are not owners, and faced with the prospect of real change they choose to move on.
Recent examples of this include 1825’s proposed takeover of Almary Green, which resulted in six advisers leaving the business.
The acquisitions of Baigrie Davies and Pearson Jones by 1825 also resulted in the loss of advisers, some of whom went on to start their own practices.
IFA growth rates
Analysis of Financial Conduct Authority data shows that the number of small companies has continued to grow year on year.
The number of companies with one adviser grew to 2,466 in 2018 from 2,013 companies in 2015. Similarly, companies with between two and five advisers increased to 2,210 companies in 2018 from 1,894 in 2015.
Companies with 50 or more advisers grew to 42 companies from 22 in the same time period. This can be because, in contrast to insurers and fund managers, it is hard to realise scale benefits within IFA practices.
For example, new client acquisition based on personal recommendations cannot be scaled up for more advisers.
Furthermore, the value of financial advice is underpinned by advisers’ client focus, which can be lost as businesses grow.
FCA figures demonstrate the profitability of smaller companies, with 97 per cent of concerns with between one and five advisers making a profit compared with 73 per cent of those with more than 50 advisers.
The figures show these smaller companies are also making more profit than their larger counterparts, with average profit as a percentage of revenue for companies with one adviser at 43 per cent, compared with minus 0.8 per cent for practices with more than 50 advisers (see graph).
The data shows a lively marketplace where small advice companies can happily coexist with larger ones. We are not the only people who think this way.
Benefits of being smaller
During a recent conversation with SimplyBiz’s joint chief executive, Neil Stevens, he was keen to sing the praises of smaller companies.
“We have long shouted about the benefits of small practices; they work and are very profitable,” he said.
“With the right support, smaller firms can have access to all the processes, tools and governance they need to run just as efficiently as bigger companies. Small practices have a very bright future ahead of them.”
In conclusion, it is critical we have a fact-based discussion around consolidation and the future of the IFA market.
It would be naïve to write off the power of the small IFA company on the basis of ageing practice owners or growing compliance requirements.
Smaller companies have much to offer, and with the right support there’s no reason why these companies should not thrive.
This is borne out in the FCA’s data on the retail intermediary market, which described small companies as remaining “a significant part of the intermediary sector” with nearly nine in 10 financial adviser and mortgage broker businesses having five or fewer adviser staff.
From our perspective, rather than focusing on IFA consolidation we should celebrate the diversity and dynamic nature of our industry. There is a role for large and small companies, for buyouts and new adviser start-ups. Different business models help create competition and choice, which is ultimately good for end customers.
Tom Dunbar is distribution director at Royal London
