FT ADVISER 31st September 2017
Nearly every week the financial services industry hears of yet another planned merger or acquisition.
It could be a wealth manager merger, such as the talks between Rathbone Brothers and Smith & Williamson which recently came to an end without a deal.
Or it could be the purchase of an adviser network, such as Sanlam UK buying the adviser network business of Tavistock Financial from Tavistock Investments, the appetite for acquisitions has not abated.
Linda Whittle, senior associate for law firm Fladgate, comments: “Global and European merger & acquisition (M&A) trends so far this year suggest the market is seeing a smaller number of deals than during the same period in 2016, but with higher transactional values.”
Indeed, some of the deals do involve big numbers. The Sanlam UK purchase of Tavistock Financial cost £1m, and it brought 158 financial advisers, 25 staff and £1.5bn of assets under advice to Sanlam UK.
James Dingwall, founder and chief executive of Thistle Initiatives, says: “The majority of firms are now focusing on larger acquisitions instead of smaller firms.
“We also expect to see a number of the larger consolidators merge, exit or go for a listing in the next few years.”
Is the market for buying and selling in the advisory space still hot?
According to Lawrence Cook, director of marketing and business development at Thesis Asset Management, it is.
He says: “To judge by the numbers of delegates attending our annual conference choosing to attend a session on buying/selling an advisory business we can say that the market is still hot.
“Firms wanting to stay as advisers want to get bigger or at least make more money and they see greater scale as a means to achieve that.
“For that to become a reality a buyer needs to buy wisely and execute the business plan well after purchase.”
According to the Personal Finance Society, there are four main acquisition/disposal scenarios which are whetting the appetite for M&A activity in the advisory space. These are:
• Horizontal: buying a complimentary business as part of a growth strategy.
• Vertical: Consolidation through the acquisition of an actual supplier or distributor.
• Diversification: moving into a new market sector or different advice type.
• Geographical: as part of expansion plans into a new region.
Moreover, there seems to be plenty of funding available. Mr Dingwall adds: “While funding is easy, we still expect to see acquisitions.”
Small is beautiful
But while these big-ticket buys hit the headlines, a significant trend noted in the UK particularly is for smaller firms to make strategic purchases.
According to Tom Hegarty, managing director of SimplyBiz, one of the reasons small firms like to buy or sell to other smaller firms is because of the cultural fit.
He explains: “The majority of directly authorised IFA firms tend to be smaller businesses, therefore the service delivered to clients is of paramount importance when considering a sale.
“Many small firms have concerns about selling to consolidators who already have a large number of clients and [therefore] will be unable to maintain the same quality of personal touch.”
Ms Whittle adds there is evidence of consolidation among the smaller firms, and is also of the opinion this is due to strategic purchasing based on cultural fit.
She says: “Buyers [are looking] to make more targeted acquisitions, and to ensure these ‘count’ and fit into their existing offerings, allowing room for growth, rather than more speculative buys.”
Continuity is key, according to Henry Blunt, managing director of Retiring IFA, who says: “Buyers are offering continuity rather than change for no reason – for example, they’re not upping the client charge or switching to another platform for the sake of it.”
Providers and consolidators
Then there is still the question of whether large providers are seeking to buy distribution, as the financial services market saw with Old Mutual Wealth buying Intrinsic in 2014 and Standard Life setting up 1825 in 2015 with the purchase of Pearson Jones.
According to Matthew Meadows, corporate finance partner with chartered accountants Kingston Smith, traditional consolidator models have definitely left their mark on 2017.
He states: “2017 so far has not seen much of a shift away from the traditional consolidator model as the primary source of M&A transactions.
“This is because leveraging economies of scale achieved through central marketing, administration and compliance resources provides buyers with synergies, and owners with a platform to focus on growth and achievement of earn-out targets, rather than dealing with the headache of running a business.”
John Joe McGinley, founder of Glassagh Consulting, says: “I think we are seeing less desire from providers to buy firms, but distribution. By that I mean there is less need to actually buy the firm, when you can lock them into a relationship through the technology of the platform.
“The key desire is an exit strategy, which is why the flight to many to big national advisory firms such as St James’s Place is attractive, as these help the process through practice buy-out and member consolidation.”
There has been plenty of consolidator action, with AFH particularly on a spending spree earlier this year, picking up some financial planning firms, while in August, Succession Group acquired four more firms for a total consideration of £20.6m, adding more than £520m in assets under management.
At the time, Paul Morrish, corporate director for Succession, commented: “We are a proven and trusted acquirer, with a track record of successfully transitioning IFA firms, optimising their capital value and helping them become sale-ready.”
The box-out from Imas Corporate Finance gives an indication of just how much activity there has been in the first three months of 2017 alone. More, surely, is to come.
Mr Cook adds the trend for consolidators to pick up financial planning firms is still strong in 2017.
“Despite some variable comments in the market, there doesn’t appear to be a slowdown in smaller IFA firms being drawn to the larger consolidators,” he says.
But why are advisers still selling, especially if the high multiples we saw in the first couple of years since the Retail Distribution Review took effect have started to come down?
Retirement is still one of the main reasons why some owners of smaller firms desire to sell, especially if they are sole traders or employ just a few staff.
Mark Stokes, former managing director of Chambers Group, and now proposition and marketing director for Succession, comments: “50 per cent of advisers are considering leaving the market in the next five years.
“The main sell-side drivers are increased regulation and the cost of technology. Increasingly, IFA businesses, such as the Chambers Group, have come to recognise the advantages of being part of a larger firm.”
Mr McGinley opines: “As many advisers reach an age when they wish to retire, and despite providing years of advice for their clients, they find their future income generator is the business which they may struggle to sell at the price they require – or more likely, desire.”
Keith Richards, chief executive of the Personal Finance Society, says: “The average age of a financial adviser is 48 years and it is estimated almost 30 per cent of smaller business owners and sole traders are looking to sell up within the next two years.”
According to Mr Richards, a lot of advisers are looking to sell because they are coming up to retirement and they are looking for younger advisers to buy them out.
“While the larger consolidators prove attractive exit options for many firms, there are younger advisers seeking to buy out their retiring colleagues.
“The continued certainty of client service, proposition and business performance they can offer make them a very attractive option,” he explains.
Mr Stokes agrees that succession planning may be a “key driver” for many IFA business owners to consider a sale, adding: “Owners may consider the consolidation option if they find the day-to-day management of their firm is running away from them, either due to regulation, technology, administration or proposition limitations.”
When it comes to passing on the baton to another adviser, Mr Richards says: “Many see this as a better outcome for their clients as it allows them to enter a period of phased retirement, ensuring standards are maintained, and enabling them to realise an agreed value over a period of years, and often at a greater multiple than a single one-off sum.”
However, he adds there are not as many younger advisers coming into the market who are looking to acquire, so more needs to be done to attract new talent into the sector.
But not everyone wants to see their firm dissolve into another one. This is why some business owners are now thinking of creating an internal succession plan so that, when they retire, their business can thrive in the hands of a skilled and known successor.
Barry Neilson, director of business development at Nucleus, explains: “Succession planning and exit strategy has become an increasingly hot topic over the last few years, especially as the financial planning landscape has changed significantly.
“One major emerging trend is around the internal acquisition of the business owner’s shares by the younger advisers.
“Adviser owners put their heart and soul into their businesses and it would appear many have concerns regarding the impact that an external sale would have on their clients, many of whom they will enjoy close and long-standing relationships with, as well as their staff.”
According to Mr Neilson, the perceived advantages of an internal succession are less client disruption, more of a guarantee of client service continuation and the choice of who takes over, so they can pick someone that they know and trust and can help train them to lead the business.
He says that while nurturing an internal succession path “may take time and effort”, he believes “it is likely to be the strategy that most successfully continues the purpose and ethos of the business”.