Advice consolidation to ramp up in 2023

According to Steve Kenny, chief distribution officer for Square Mile, there are three main factors as to why adviser consolidation will continue: demographics, regulation and cost.

He explained: "Consider the demographics of the adviser market. Depending on which survey you look at, the average age of proprietors ranges 56 and the 60s.

"What you have is a community where, invariably, the business is their pension, so for adviser owners to extract value, there has to be a capital event that enables them to draw value from their business and allows them to retire."

Kenny also talked about the "avalanche of regulation".

He told FTAdviser: "There is so much that is coming down the pipeline. Consumer duty is the most recent one but we also have the sustainability disclosure regulations and the unravelling of other European legislation and it can be difficult to get a handle on this.

Large companies and consolidators can bring advice businesses onto the same platform and onto the same operating system.Steve Kenny, Square Mile

"The third factor is cost. Every time we talk to advisers they talk about professional indemnity insurance bills.

"There are three or four professional indemnity insurers in the market who have huge pricing power and the advisers never talk about this in any terms other than acrimonious ones."

He added that the cost of living crisis is also likely to have an effect. 

Kenny explained: "One of the things advisers are benefiting from [in 2022] is an increased demand for their services but the problem this brings that bringing in new recruits to service these clients becomes harder and harder.

"To bring on a trainee is a big onboarding cost, not to mention get them through the exams, so this also adds to the cost and difficulty facing businesses."

No signs of slowing

Merger and acquisition activity is certainly not slowing down; just a few days before Christmas, Fairstone bought Devon-based IFA Sabre Financial, adding more than £200mn in funds under management to the group.

Similarly, Kingswood announced that it has bought Berkshire-based advice firm Barry Fleming & Partners for £6.2mn.

A few days before, Verso Wealth Management announced its fifth acquisition this year, this time the purchase of IEP Financial.

It may be premature to speculate on how consolidated the UK wealth management business will become.Benjamin Reed-Hurwitz, ISS Market Intelligence

As reported by FTAdviser, Simon Redgrove, managing director of Verso, said: “This year we completed five acquisitions and we have a pipeline of further investments planned for 2023 so the next 12 months are on track to be transformational.” 

This announcement came an hour or so after Verso revealed it had also bought Heritage Independent Financial Advisers Limited.

Schroders-owned Benchmark Capital also bought a 51 per cent shareholding in Harrogate based Oculus Wealth Management, subject to regulatory approval, as reported on December 12.

This was not the only M&A news in the fourth quarter of 2022. According to IMAS corporate finance: "M&A activity across the investment sector showed no signs of slowing down in November."

In the wealth management sector, IMAS cited a batch of large acquisitions in November alone:

• Benchmark Capital bought Milton Keynes-based Advison and took a 49 per cent stake in chartered financial planning firm, Chartered Independent.
• AIM-listed Kingswood announced a trio of acquisitions: Strategic Asset Managers, Employee Benefit Solutions and JCH Investment Management for £5.1m, £5.1m and £3.5m respectively.
• Private equity-backed IFA-consolidator Progeny bought chartered financial planning practice Lewis Brownlee Financial Services
• Radiant Financial, sponsored by private equity firm Apiary Capital, acquired Dudley-based TWM.

According to Kenny, this sort of large-scale acquisition -  not just private-equity backed but also by consolidators - will continue apace as consolidators have the sort of operational efficiency to bring different brands and systems into one whole entity.

He said: "The big driver for the consolidators is operational efficiency. Adviser firms are generally run by brilliant entrepreneurs, who are strong salespeople with good customer-facing skills.

"Often, they have great business strategies, but often are very inefficient in terms of their operations and tech and systems.

"Large companies and consolidators can bring advice businesses onto the same platform and onto the same operating system, which makes it so much more efficient and cost effective."

Premature

But whether UK consumers will be best served by large, conglomerated entities is another question altogether. 

Benjamin Reed-Hurwitz, EMEA research leader at ISS Market Intelligence, commented: "Arguments supporting consolidation are well articulated, and consolidation pressures in the asset management industry typically rise amid weak market and macroeconomic conditions."

He said consumer duty could act as an additional accelerator, but added: "Questions remain whether UK investors will show a preference for these consolidated entities and whether they would be best placed to serve UK investors’ needs.

“Until this is better understood, it may be premature to speculate on how consolidated the UK wealth management business will become.”

simoney.kyriakou@ft.com