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Consolidator review one year on: Have IFA acquisitions changed?

A year after the FCA reviewed advice firm consolidators, big players are continuing to buy up financial planning businesses with little further protest from the regulator.

AFH, for example, started 2018 with a bang, announcing that it has acquired the assets of Hertfordshire advice firm Monopoly Financial Consultants in a £600,000-plus deal. It caps a busy six months for the group, which saw it make eight further acquisitions.

But it’s not the only consolidator doing deals. In the past two months alone, Fairstone has bought Glasgow-based Professional Partners, and Succession has brought two new IFAs into its fold.

This gives every impression of a sector enjoying robust growth. Yet just 12 months ago, the FCA put the sector on notice, saying that none of the six businesses it assessed could show consistently that clients’ needs were being suitably considered.

The report said: “We found that, while firms focused on the commercial benefits, they did not focus enough on how clients were impacted by the acquisition. Where firms had clearly considered potential disadvantages to clients and designed their practices to mitigate these, this approach was not consistent across all the aspects we assessed.”

While the regulator found no evidence of bad outcomes, it did suggest there might be potential detriment for clients. This was not isolated. The regulator had raised concerns at the end of 2015 on the quality of suitability checks and whether acquired clients were being shoehorned into centralised investment propositions.

However, since then, the regulator has issued no fines, and made no public censure of any of the consolidators. It also appears to have no plans for further investigation. The consolidator market, for its part, shows no sign of having been affected by the FCA report, but that doesn’t mean it isn’t changing.

Firms committed to independence, who do not have a restrictive offering and do not enforce a higher fee structure post-transaction are clearly in the winning camp

The consolidator market remains buoyant, says Nigel Stockton, chief executive of Bellpenny – which was involved in the review and recently merged with Ascot Lloyd – largely because increased regulation continues to make consolidation a necessity. He says: “The RDR made it easier to be a scale player, which prompted consolidation, but with the idea that when the market reshaped itself the opportunity would diminish. Since then, we have had Mifid II, Priips, and the General Data Protection Regulation, which has kept demand going.”

Succession investment committee chair Ian Shipway says groups who would not have considered selling in the past are looking at the investment needed in information technology and regulatory infrastructure, and concluding that a consolidator offers the best option.

Changing the face of deals

Most consolidators and brokers report that the demand is growing. Deal broker Gunner & Co managing director Louise Jeffreys says: “The market is very buoyant at the moment, and competition is high for quality business available to buy, leading at times to higher valuations and longer timeframes for return on investments.”

Shipway agrees the acquisition pipeline is as healthy as it has ever been. Other participants suggest  deals that would have commanded six to seven times earnings are now commanding  nine to 10 times earnings. There are good prices on offer for the right sort of business and consultants continue to predict that the number of intermediaries may shrink by as much as 40 per cent.

There have been changes to acquisitions since the FCA review, but most appear to have been prompted by organic changes in the market. The types of deals have changed. Consolidators report that the quality of the businesses with which they are engaging has improved. They are engaging with more chartered firms, for example. They are also dealing with larger firms. This leads to some inevitable changes in the ways deals are being done, and the criteria advisers set for the consolidator.

Fairstone chief executive Lee Hartley says: “We have definitely seen a heightened level of awareness from sellers about the non-financial aspects of a proposed deal. Principals of IFA and wealth management firms are now looking more closely at what happens after the transaction. Understandably they want full transparency over what will happen to their advice and investment proposition, how will staff be affected and crucially what changes clients will experience.”

Jeffreys says: “Some buyers are preferring to make more share purchases now, which allows them to take on the full business and take a longer, more considered approach to client transitioning… From what I have seen, the practice of ‘batch novating’ – moving all clients into the buying company in one go, without their explicit permission – is becoming rarer. Many are opting for a split exchange and completion, with the period in between focused on getting individual client permissions. The final consideration paid for the business is then based on which clients have given explicit consent.”

Capital and Trust chief executive Patrick Isaacs says he is also seeing significantly more “share deals” after the FCA supervision report requiring individual client signature for “trade and asset deals”.

Nigel Stockton

Courting the right culture

At the same time, Stockton says cultural fit is being considered more and more. “Consolidators and advisers have learnt over the last five years that it is not just knitting together a bunch of advisers. Consolidators have got better at saying what they want, as have advisers.”

Isaacs says before hooking up with a consolidator, advisers will consider the client proposition, its performance, cost, and whether the buyer is restricted or independent. They will consider the length of the earn- out term and the caveats affecting the payment of the earn-out instalments. They will often consider their staff and whether they keep or lose their employment.

For the time being, most deals – Jeffreys estimates more than 80 per cent – are retirements and while the sellers are often willing to do what they need to ensure their clients are on-boarded effectively, many are not joining the new business.

She adds: “The idea of becoming an employee, with set working hours, holidays days and targets is rarely attractive. I often have clients saying they’d like to work on, however, when they realise that wouldn’t be on their terms, especially when it comes to target hitting, the idea soon disappears. That said, teams and support staff can often stay in place in the buying business – good advisers and paraplanners in particular are hard to get hold of, so certain buyers use acquisitions as a method to also grow their team.”

This may change over time with a handful of businesses with younger, ambitious owners, looking to align their businesses with larger entities to fuel growth and improve economies of scale.

In particular, having a good investment proposition in place is an increasingly important factor for advisers selling out whether they intend to remain in the business or not.

Hartley says: “Firms that are committed to independence, who do not have a restrictive offering and who do not enforce a higher fee structure post-transaction are clearly in the winning camp.”

Ascot Lloyd and Bellpenny agree merger deal

He believes some of his competitors are still not using this model and there is risk there.

Shipway also believes flexibility is important within the investment proposition. “We have an investment matrix that allows the people who come to find a solution that broadly matches what they are already doing. We don’t insist that people use one or the other.”

For Hartley, investment propositions are still problematic for some consolidators: “A single platform, single discretionary fund manager and limited investment choice still seems to be a common theme elsewhere in the market. I’d advise any prospective seller to look closely at the wider proposition when deciding who represents the best fit for their advisers, clients and staff.”

Most see a buoyant 2018 ahead, with a decent pipeline of deals. However, Isaacs says there are some issues that could derail the consolidator market: “We are braced for a likely correction in the FTSE and we have yet to see the effects of Brexit. There are significant regulatory issues to overcome, namely Mifid II, GDPR, a fourth Money Laundering Directive and Priips key information documents.

“There are revised FCA guidelines surrounding defined benefit transfers, not to mention the Insurance Distribution Directive, Financial Advice Market Review and the Criminal Offences Act detailing new tax offences.”

But, importantly, consolidators don’t seem to be feeling the hot breath of the regulator on their necks. Stockton is clear that consolidation of the industry is still in line with the regulator’s goals; it would rather manage a smaller number of entities, because they are easier to monitor.

He adds: “When the consolidator industry started, inevitably, the regulator had questions, but we have no outstanding issues with the regulator and have a co-operative relationship.”

The consolidator market is changing, maturing and becoming more professional. However, this seems to have had relatively little to do with the regulatory review and more to do with the fact that consolidators are dealing with a more professional type of adviser, who is subjecting their post-acquisition processes to greater scrutiny.

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