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The consolidation race: Will 2018 see more merger activity?

Acquisitions are continuing apace this year but will that trend continue or will the market slow?

As we enter 2018, advice firm consolidation shows little sign of slowing down.

Old Mutual’s acquisition of A&M Financial Services, Progeny Group’s takeover of Chestergate Financial Planning and Chase De Vere’s purchase of Medical Money Management are just a few recent examples.

This week, Sanlam became the latest to join the list, acquiring high net worth specialist advice firm Grennan Advisers.

With so much movement in the industry and many more acquisitions lined up for the coming months, Money Marketing spoke with major consolidators to see how 2018 will play out in the M&A space, and just how far the coffers will open as competition in the market increases.

Getting a head start

After the successful purchase of four new firms and £255m in combined funds under management in January, Succession Group will be looking to build on its momentum this year, having now acquired more than 50 businesses since 2014.

For acquisition-hungry AFH Group, which says it holds ambitions to become “the number one financial planning-led investment manager in the UK,” profits have jumped amid a number of recent deals. AFH recorded an 83 per cent jump in profits for the 12 months ending 31 October 2017, and has since sealed deals with Hertfordshire-based IFA Monopoly Financial Consultants for £631,000, and Chichester-based J W Wealthcare.

An M&A consultant involved in several confidential deals tells Money Marketing that within the market, valuations are remaining high as 2018 gets under way, and are far more generous than in recent years.

They say: “It’s a sellers’ market still, there are more buyers than sellers and most businesses of any reasonable quality are not having difficulty finding a buyer.
“The most challenging thing is getting comfortable with the acquirer and whether it’s a long-term home for their clients.

“That can hold small firms back from selling to consolidators, where it can be more of a one-size-fits-all approach which they don’t want to be involved in.”

While Standard Life Aberdeen’s planning and advice arm 1825 spoke last year of scaling back acquisitions in order to build out adviser numbers within its existing firms, it also purchased London-based Cumberland Place Financial Management in January this year. This brings 1825 to a total of more than £3.7bn in assets, advising over 8,500 clients.

Expert view

What are  the drivers behind the consolidation trend?

The high volume of transactions in the wealth management industry in recent years is indicative of the significant transformation that the sector is undergoing. The combination of increased regulation, changing fee structures and shifting client needs is creating financial pressures, while the rise of options such as robo-advisers and passive funds has opened up alternatives for individuals. In the aftermath of the financial crisis, new regulations have banned embedded commissions and made it necessary for firms to provide customers with a clear breakdown of fee structures. The answer for many wealth managers, from small advisory firms run by a handful of people to larger firms with billions of dollars of assets under management, has been to consolidate. In recent years, asset managers and insurers, encouraged by changes to pension laws that give individuals the opportunity to withdraw large amounts of cash, have looked to the wealth management sector as an opportunity for growth.

Christian Kent is managing director at Quayle Munro

Open to opportunity

Other providers like Aviva may not be looking to buy advice firms, but are open to picking up other providers or support services.

An Aviva spokesman says that while it would not look to replicate an acquisition on the scale of its £116m November purchase of Dublin-based provider Friends First, it is looking at “smaller bolt-on acquisitions”.

Aviva’s results show it has around £3bn in excess cash to deploy over 2018 and 2019, which it says will be used both to fund acquisitions and to pay down debt.
For Fairstone chief executive Lee Hartley, the emphasis for the rest of the year will be on fine-tuning integration operations as the firm completes eight scheduled acquisitions. In addition to those, Harley says Fairstone has “eight to 10” more deals in the pipeline that he hopes will soon be well under way in its two-year integration structure.

Of Fairstone’s integration process, which typically happens before the sale is finalised, Hartley says: “Ultimately, the speed of integration is driven by the appetite of the seller and whether we can help them drive their profits upwards and thereby increase their sale value. That, or whether there are some other things that need to be taken into consideration, such as whether a minor shareholder wants to exit early, or the company wants to complete some small acquisitions themselves which we can fund and assist with.”

Fairstone recently added £160m in assets after completing the acquisition of Glaswegian advice firm Professional Partners which was in its “downstream buy-out” integration process before it was fully acquired. It followed the group’s September purchases of Glasgow and London-based Chartermarque, and Milton Keynes and Bracknell-based adviser Hammett & Petch. This brought the total number of firms acquired by Fairstone to eight last year.

Hartley says: “Largely we are fishing in a different pond from other acquirers – the firms that we are looking to work with aren’t looking to sell today, they are looking to sell in two to three years’ time and the principals are not looking to retire. Our model is built around capital plus ongoing income proposition, so anyone looking to exit immediately doesn’t fit our process. We are looking for firms that want to grow and we are looking for a progressive firm, and generally slightly younger business owners.”

The consolidation process within Fairstone also gives advisers room to negotiate their position, clientele and the way they conduct their work, Hartley says.

Planned and ready

Old Mutual Wealth Private Client Advisers director Dominic Rose says its acquisition strategy for the year will mirror that of the past two years.

Rose says: “We are already in talks with several [businesses] that we believe fit our criteria. These businesses vary, but we tend to look for client books from retiring advisers. This means clients can be handed over on a face-to-face basis, and we can have a steady transition period. We also consider businesses near our Birmingham and Cheshire offices, as well as firms near our existing offices of London, Shipley, Newton Abbott and Carlisle. Finally, we need to consider the makeup of clients the adviser has and we remain best placed to assist clients who have in excess of £300,000 of investable assets.”

Rose says Old Mutual will continue to look for businesses that fit its model, whereas other consolidators may reassess their expectations continuously throughout the year.

partridgeAdviser view

Georgina Partridge
Partner, Plutus Wealth Management

There has certainly been a noticeable increase in activity over the past year or two in this area. As a small firm we get many enquiries from consolidators, as well as brokers in the market, each with their own story to tell.
There is space in the advice market for large networks and consolidators as well as small firms, and the FCA is looking for positive client outcomes which can be provided by both small and large firms.

He says: “Often firms looking to sell are in discussions with multiple parties, but throughout the process we tend to find that a ‘natural fit’ emerges and it becomes quite clear if it is an acquisition for us or someone else. Mifid II and GDPR are both causing business owners to think about how much time and resource they have to spend on regulation and what this means for their bottom line.”

Bellpenny continues to actively hunt for new firms after merging with national advice business Ascot Lloyd last year.

Chief executive Nigel Stockton says: “The merger has already proven highly successful, generating strong growth momentum in only a few months. We are a highly profitable and fast-growing business, underpinned by a great team.”
Stockton says consolidators will need to stick to their own focuses amid strong competition for advice firms.

There are still plenty of targets up for grabs. Saunderson House, for example, the national IFA owned by the same parent as platform James Hay, is currently up for sale. Market watchers tell Money Marketing that the likes of Sanlam, Smith & Williamson, Rathbones, Tilney, and LGT Vestra are all potential suitors. The latter three said they would not comment on speculation. Old Mutual, also considered a strong frontrunner for the acquisition, says: “Firms looking to sell often approach us directly as we have a proven track record when it comes to acquisitions.”

A consultant speaking with Money Marketing calculates that there are now more than 40 active acquirers in the market, which should see an interesting market dynamic emerge for the rest of the year.

They say: “With that sort of number, there are likely to be appropriate markets for a seller. Acquisitions and sales can be like icebergs – the surface is the acquisition, but the integration is often a larger part which constitutes the success or failure of the deal.”

Is your firm fit for sale? Leading experts will debate how advisers can make the most of consolidation opportunities at the Money Marketing Interactive conference on 3 May. Advisers can get a free ticket, visit http://mmi.moneymarketing.co.uk/ for details.

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