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Intrinsic chief: The end of the consolidation trend

Talk of consolidation has been rampant for the past year and there is no question it has made a dramatic impact on how the industry looks today. But I think we are now approaching the end of this round of amalgamation.

Looking at the Financial Times’ list of the top 100 advice firms and focusing solely on the standalones, you can see how the market has changed over the years.

In 2012, there were eight firms with more than 500 advisers, 20 with between 100 and 500 advisers, and the remainder with less than 100 advisers. Last year, there were five firms with more than 500 advisers – over a third less – and 15 with between 100 and 500 advisers, a quarter less. This consolidation is down to a number of factors, but a massive driver has been increasing cost pressures.

Such pressures come from myriad places, including regulatory fees, professional indemnity insurance and business compliance, whether that be from outsourcing, hiring more staff, or advisers having to reduce their revenue-producing hours to focus on it.

These pressures are not going anywhere. In fact, they are only getting more burdensome. Just this year, we have seen substantial tightening in PI insurance as concerns around pension transfers have increased and Financial Ombudsman Service limits have risen. In this kind of environment, firms have needed one of two things to survive: scale, to put in efficient processes to ensure they keep up with all the regulatory changes; or to be small enough to nimbly navigate the shifting waters.

So the pinch was most felt by medium-sized firms, who struggled to quickly change processes and saw the need to band together and reduce costs per head.

Thankfully, from a client perspective, the shifts in the advice market are unlikely to have had a huge impact. In my last article, I highlighted how, to clients, there are really only two kinds of advice firms: a national brand name or a regional boutique. Both have their place and it really depends on what kind of experience is required.

Those regional boutiques are represented in the long tail of smaller advice firms that have persisted throughout the market changes. Those businesses will continue to be resilient.

With the medium-sized businesses shrinking rapidly from the market, we are nearing the end of this round of consolidation. However, that is not to say the market will remain in a stable form. I believe we are simply at the end of the first half of a decade of disruption.

The second half will see the market change again as technology embeds, and that comes with fresh challenges for firms across the spectrum.

Indeed, the latest Heath Report estimates 7,000 advisers will exit the industry in the next five years, and technology could well serve to accelerate that already-rapid rate.

In this next chapter of disruption then, who will prosper? Will we continue to see a polarisation between the very large firms and the far smaller regional players, or will technology enable the emergence of a new breed of medium-sized outfit? I will look at this in my next column.

Andy Thompson is chief executive of Intrinsic


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