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Consolidate to accumulate

After a period of relative inertia, consolidation among IFAs has started to gather pace. Retail fund distributor The Money Portal, parent of Willis Owen, HCF, the Isa and With-Profits Bond Shops and Bates Investment Services, is set to embark on an acquisition spree that could see it snap up nine firms within 12 months.

Whether it achieves this target remains to be seen but, for the first time in more than a year, it will not be the only major broker firm on the acquisition trail. Torquil Clark, previously thought to be among the less well-off firms, says it has a £10m war chest with which to buy IFA companies with turnover topping £500,000 a year.

Its approach will be very different from TMP&#39s, however, as Torquil intends to spend three years – perhaps longer – finding the right firms.

TMP head of communications Kerry Nelson says: “It will be interesting to see what companies are left in the pot in three years&#39 time considering the aggressive consolidation going on. There is always a limited window of opportunity to get the good firms and the best deals.”

Why are acquisitions suddenly taking off? Nelson believes the main drivers are regulation and depolarisation which have caused firms to consider where they are heading in the new environment. But she does not believe this flurry of activity will last long. With a “very small number” of quality companies in the market, she says it will be a sprint to strike the best deals before demand outstrips supply.

But while TMP&#39s end game is to become a “distribution super-tanker” with an advice arm – which so far comprises Bates – Torquil is looking purely to acquire IFA firms. It believes that, with depolarisation set to hand power to the bancassurers further down the market, IFAs will have to increasingly seek niche and high-net-worth clients who require more than a tied adviser can offer.

If this does happen, the result could be a radical change in the way that IFA firms charge for their services. Currently, many companies are reliant on up-front fees which have served them well in the past when demand among clients for new products was strong. But the bear market effectively killed much of this business and the gains that the markets have made in the past year have yet to filter down to sales, suffocating the main revenue streams of a great many firms.

Only those that have already switched to a renewal commission-based model have managed to ride out the past four years with any degree of comfort.

According to Hargreaves Lansdown, it is these cost pressures which are driving the wave of consolidation as firms look for ways to finance the switch to an ongoing fee model.

The end result, it believes, will be a market with a handful of monolithic IFA firms and a number of niche players, a situation it says should lead to better service for clients as resources and back-office systems improve.

Nevertheless, HL warns that creating giant IFA firms is a potential minefield if not approached with extreme caution.

Head of research Mark Dampier says: “You need a large group to offer a broad range of services, in the same way that HL is both an execution-only and advice-based firm. But there is a danger of having subsidiaries all over the place without a single corporate and management culture. How can you cut costs when you are running lots of offices? I would prefer everything under one roof.”

A more pressing concern in the immediate sense for firms looking to acquire businesses is the difficulties inherent in striking a deal. One of the major problems, according to sources who have been involved in such negotiations, is that the owners of the targeted firms, having spent years building them up, often wildly overestimate their true worth.

This is not usually a negotiating ploy – the owners&#39 intransigence regularly scuppers potential deals before they have got off the ground. Even past this stage, however, there are any number of pitfalls that can capsize acquisitions.

TMP found this out last year when, having signed a heads of agreement to acquire David Aaron Partnership, it had to end discussions after unearthing a number of problems it was unable to resolve.

Worse was to follow for DAP, however, as TMP subsequently hired six of its 13 advisers to launch Bates&#39 first regional office in Milton Keynes, leaving DAP with just seven advisers.

A similar situation is unlikely to happen again but there are consequences for the industry if firms such as TMP succeed in their ambitions. Chelsea Financial Services, which is believed to be a potential target for TMP, says it is important that buying groups are in the acquisition market for the right reasons.

Managing director Darius McDermott says: “Groups need to be careful that they are not buying firms for the sake of it. There must be synergies and cost advantages and inevitably some groups will manage this better than others. But consolidation would be good for the industry as the bigger groups can negotiate better prices.”

In some cases, the subsidiary firms will also have access to better research resources and systems which can only benefit their clients. Consolidation still has a long way to go but within a year, the IFA market may have changed shape in a way that few could have predicted before the turn of the new century.

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