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.
- 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.