The rise of the adviser consolidator has been somewhat breathtaking to behold this past decade, and so far during 2020, the trend shows little sign of slowing.
Barely a week went by last year without a deal of some sort being announced, whether it is a one-man band IFA being bought up by a larger company, or the takeover of a sizeable business with regional hubs.
The reasons advisers are selling are many and varied, but they include the ongoing burden of increasing regulation, competition from new forms of advice, and simple demographics.
Perhaps in some cases it is driven by a fear that prices will not be so buoyant in the future.
With the average age of an adviser in the UK (55) providing a favourable long-term trend as they approach retirement, consolidators have been a key means of allowing IFAs to retire and realise value in businesses they have worked to build up over many years.
The shift back to the distributor-led model in the past few years has been another key factor, as other sectors within financial services eye more direct ways of promoting and selling their own products.
To some, all appears healthy in the consolidator space, with plenty of cash being spent and no shortage of press releases announcing deals being done.
Prices quoted ‘illusory’
However, if you dig under the surface, a very different picture emerges.
Valuations being quoted are often far higher than those actually being paid by consolidators.
Consolidators – who aim to buy adviser businesses and bang them together with others to create much larger organisations – are often backed by private equity and buy up companies with a combination of shares and cash up front.
Much noise is made about the multiple businesses are going for – anecdotally we have heard deals done on 15 times earnings at the most extreme end.
However, what is quoted and what is paid can vary dramatically.
Key Points
- Many companies are being bought by consolidators
- Not all of the consolidation models work for adviser businesses
- Some consolidators are allowing advisers skin in the game
Nearly all deals being done are at multiples far below those being mentioned initially. Paying cash for a business is also a rarity.
In reality, transactions nearly always involve some form of payment via shares in the acquirer.
Of course, plenty of transactions in many industries have similar terms and conditions, and many other industries have gone through consolidation.
It can be healthy for many industries, but it is a specific issue for relationship-based organisations.
Consolidation works by streamlining a business into the existing one as seamlessly as possible.
However, this is easier said than done when you have an industry that largely works on the relationships advisers have built up with clients.
The founder and owner of the business is essentially an entrepreneur, and when you cut them out it can impact everything from client relationships to profitability.
Any good financial adviser will tell you that the relationships they have with their clients are pivotal to their success. And, as such, if an adviser leaves a business having sold to a consolidator, there is a very material risk that the clients will leave as well.
This is especially true if consolidator models do not place these clients – the key assets of any adviser business – at their heart.
If they are trying to create a cookie-cutter solution where clients are bought and sold like a commodity and then shoehorned into a new advice process, then it is doomed to fail.
The problems occur if it is a one-man band being acquired and get even more nuanced if a larger business is taken over.
When you have a company that retains several of its advisers when its owner sells up, there is a big risk of disenfranchising the second and third-tier members of the business because their own career paths are suddenly altered significantly.
For example, if an adviser owner has 10 staff working at his business and sells it, he may well get the exit he desires, but the people coming up below him suddenly see their own prospects for advancement change, and, in all likelihood, vanish.
This situation can lead to more departures, meaning the business the consolidator bought has altered significantly.
A lot of consolidators are therefore fooling themselves that this approach will work, regardless of how much due diligence they have carried out.
It is interesting to note that the above model is not the one pursued by one of the most well-known advisers in the UK.
Some consolidators are adapting and leave advisers with skin in the game.
Often overlooked by consolidators, this is fundamental to the success of any business, as it ensures that adviser owners remain entirely focused on their businesses.
Given they are key to generating profitability, keeping them incentivised in this way is a far more sensible means of building a long-term, client-first business.
The future for consolidation
How does this play out? Some consolidators may well thrive if they can convince clients that the solutions they are offering after any takeover are suitable.
But with the amounts of money being thrown at buying up distribution there are some standout risks.
For consolidators backed by private equity, for example, there is likely to be a point where the investment the backer has made into building up books of business needs to be realised.
If it cannot be because the model has failed to assimilate clients into specific solutions – or has seen clients leave and seek advice elsewhere – then a sale may not be possible.
That is when many consolidators may find private equity money can vanish as quickly as it appeared.
In such a scenario, there may come a point where the consolidators themselves struggle to find an exit, and maybe we will end up with a consolidators’ consolidator.
What could very well still be missing from such a model is a focus on the outcome for clients. That only comes from maintaining and nurturing adviser-client relationships.
Simon Goldthorpe is chairman of Beaufort Group
