What is driving the consolidation in the financial advice sector? What are the market trends? What issues should sellers consider? Giles Dunning, Stephens Scown’s head of corporate and a specialist in M&A in the financial services sector discusses the latest issues with Roderic Rennison, founder and director of Rennison Consulting Ltd, which advises buyers and sellers of financial advice firms.
Giles: You’ve been looking at the sector and size of financial advice businesses. Could the sector be described as a “cottage industry” with the majority of firms employing only a handful of advisors?
Roderic : Yes, I think the “cottage industry” description has some justification. Over 4,600 firms employ less than six advisers.
There are currently, based on the most recent statistics from the FCA (Financial Conduct Authority), approximately 5,225 firms of advisers and 27,000 advisers authorised to provide financial advice.
What makes these figures interesting, is that when you drill down, there are 2,466 firms with a single adviser, 2,210 firms with between two and five advisers, and 528 firms with between six and 50 advisers. There are less than 10 other firms in whom the remaining advisers work.
Giles: What is driving current levels of consolidation in the market?
Roderic: There are a series of interrelated factors that are driving consolidation:
- The economies of cost and scale from having fewer firms with more advisers
- The regulatory burdens which weigh disproportionately on smaller firms
- The valuations currently being paid by acquirers which has in some significant measure, been led by the volume of Private Equity monies being made available to consolidators.
One recent estimate from a corporate finance firm suggested that between 500 and 600 financial intermediary firms will sell to an acquirer over the next two to three years and most transactions will involve firms with fewer than six advisers.
Giles: So would you say it is a “seller’s market”?
Roderic: Absolutely. Directors or Partners of financial advice firms looking to exit are in a great position, with it being estimated that there are up to five buyers chasing every seller.
Giles: Does the demographics of advisors themselves play a part?
Roderic: The average age of financial advisers is over 50 and one recent survey suggested that one in five advisers would want to exit in the next five years. Another recent prediction made by St James’s Place is that 7,000 advisers will retire in the next three years.
Firms therefore need to replace retiring advisers and whilst some have set up adviser academies to address this issue, others have decided to acquire other firms to accelerate their growth requirements and to avoid having to recruit organically. This has further accelerated the process of consolidation
Giles: What are the challenges for sellers?
Roderic: You would be forgiven for thinking that it’s easy for firms wanting to sell, to do so easily and successfully but it’s more complex than that. Most small firm directors/ partners have little or no experience in selling a business, so their challenge is not so much to find a buyer but the right buyer.
In my experience, the main issues I encounter with some firms looking to sell are:
- A failure to adequately prepare and think through what their requirements are
- Poor presentation of their business
- A failure to employ the right professional advisers – and this especially applies to solicitors; I believe that it’s very important that the lawyer acting for a seller has demonstrable experience in this sector rather than being a corporate lawyer that occasionally deals with financial advisers if at all
- Overly optimistic valuation expectations which are not founded on the financial data
- A failure to think through what the directors/partners want to do after the sale has taken place.
Giles: What about the future? What is the market outlook and trends we should be looking out for?
Roderic: I see no sign of the consolidation in this sector slowing down; it is (happily!) not one that is (so far) impacted by Brexit!
What could affect the pace of consolidation is more scrutiny by the FCA on what clients are charged which could in turn impact on the margins currently enjoyed by financial advisers. Firms should in any event periodically re-assess the value for money of the services that they provide.
However, the consolidators are not standing still. The larger and more experienced ones are paying increasing attention to not just accumulating assets but how long they are likely to keep them. This is translating into more detailed analysis of client data and adjusting valuations downwards where the client base is mainly retired and in decumulation i.e. the assets are diminishing as they are spent.
Finally, the FCA have, due to pressure from several quarters, has recently issued another Paper relating to Defined Benefit (DB) transfers which amongst other things, is likely to lead to a ban on contingent charges. This, combined with the significant increase in Professional Indemnity Insurance premiums, is causing some buyers to look less favourably on those firms looking to sell who have transacted significant levels of DB transfer business.
Giles: Is everybody a winner?
Everybody can be a winner, but this only pertains when both buyers and sellers enter into a transaction with the right professional advisers, and the right attitude of mind. It’s not all about price; it’s about other important aspects too, such as what is right for the clients and staff, and also importantly what the shareholders want for themselves and their families in the short and longer term.
Roderic Rennison is founder and director of Rennison Consulting Ltd and works with both sellers and buyers of financial services firms to plan for and successfully achieve their objectives whether to realise value or enhance value www.rennisonconsulting.com