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Swallowed up: Consolidators under fire over client churn

The FCA has called into question the way consolidator firms approach suitability amid accusations clients are being hit with unnecessary charges and moved into inappropriate investments in the drive to gather assets.

Money Marketing revealed last week that the regulator has asked consolidators to provide information on how they treat clients gained through acquisitions, and whether these investors are automatically shifted into a centralised investment proposition once deals have completed.

It is thought the exercise, which at this stage is about information gathering rather than enforcement, has been prompted by whistleblowing from within the consolidation sector itself.

There have also been claims that some clients have been charged 3 per cent to be moved into a CIP post-acquisition, a cost that has then been dressed up as an advice charge. Other claims levelled at consolidators include ramping up existing client charges to take a bigger margin and so pay for the cost of the acquisition.

As the race to acquire advice firms heats up, is the FCA scrutiny of this part of the market warranted? Could consolidators have been unfairly maligned and misunderstood? Or has the prolific nature of consolidator businesses to date left clients in a worse position than before?

The case against

In its information request, the FCA is understood to have asked consolidator firms for their business plans for next year, as well as whether clients have been automatically transferred to a CIP, which includes platforms, discretionary fund management services and distributor-influenced funds.

The regulator also wants to know whether suitability checks have been carried out before clients’ assets are transferred, and whether these checks are robust enough.

The exercise has put the consolidator business model under the spotlight, with many in industry circles suggesting the FCA is right to delve into this sector.

One senior industry source, who wishes to remain anonymous, says the driving force behind advice acquisitions is securing client assets onto a particular platform or investment range.

The source says: “Fundamentally pretty much all of them are looking to make money out of investment management, whether it’s a fund or a DFM or whatever the case may be. Regardless of what anyone says, the advice part is generally a sprat to catch a mackerel. Firms are about capturing assets. It is difficult to grow organically, and advisers are far more successful than anyone else when it comes to getting clients. So the acquisition of advice businesses is largely to do with how a consolidator gathers assets. That is everyone’s end game.”

Investment consultancy Gbi2 managing director Graham Bentley agrees and believes the FCA’s move to examine consolidators is “certainly warranted and probably overdue”. He says: “Acquisition of business is about increasing revenues. That is all firms do it for. I can’t imagine there is a bunch of altruistic consolidators out there who are only doing this because they realise clients would be better off.

“It is asset gathering full stop. I find it hard to believe everybody who is acquired is moving to a place that is better than where they were.”

Bentley also questions whether appropriate suitability reviews are always being done by the adviser selling up.

He says: “The underlying adviser will have to go through a ‘re-suitability’ process and I wonder how deep that is, depending on one’s desperation to get the business sold and get the money.”

But EY senior adviser Malcolm Kerr argues consolidators may be more concerned with using a CIP or a particular platform to reduce costs and to make sure new clients benefit from consistent outcomes.

Kerr says: “For existing clients of acquired firms the long-term ambition might be to replicate this model as soon as possible. But inherent in this ambition would be the requirement to ensure such transfers provide clear benefits to each client. All consolidators would be aware of the need to place strict controls around transfers and document the reasons very thoroughly.”

He adds: “With consolidation in the sector gathering pace, it’s not surprising the FCA wants to take a good look at what’s happening. It would be very disappointing if their review reveals inadequate governance or a lack of evidence that client outcomes were clearly improved as a result of the transfers.”

Question of suitability

One major concern that has rep-eatedly been flagged to Money Marketing is whether clients are  effectively being churned into CIPs without proper consideration of whether the transfer is suitable for the client.

It has been claimed one major consolidator moved an entire client book into a CIP and then charged clients 3 per cent for the transfer.

There are also claims margins have been inflated after an acquisition has been completed with no discernible client benefit.

One source says: “Some of them brag quite openly about how much money they make on different parts of the value chain. Apart from price, when choosing one platform, or multi manager, or DFM over ano-ther the difference can be quite nebulous and people can make up reasons to justify it. It is difficult to prove whether anything is right, wrong or indifferent in some of these cases. The general rule that tends to be followed is a lot of this will come down to cost. If it is costing clients any more money, you have got to have a really strong case to justify that.”

The source says in some cases it is the pace at which assets are moved into a CIP that is worrying, and while sometimes this is done on an advised case-by-case basis, there are occasions when it is done in bulk.

They add: “The incentives that advisers get as part of any deal is also an important factor. Some advisers get share options and the argument is they are incentivised to grow the business. But certainly in the early days the consolidators made reference to more money being paid based on the volume of assets moved across, which you just can’t do.”

At Money Marketing’s 30th anni-versary dinner last month, several guests pointed to the problem of the past where the same assets were being passed from provider to provider. At the time, The Ideas Lab director Robert Reid pointed out the rise of the consolidators meant this issue had reared its head once more.

He said: “At the moment some of the prices being paid for firms are just lunacy. Consolidators are just steadily churning people…only this time it’s the platforms that are the centre of it. They haven’t learnt – they’ve just moved the game to a slightly different place.”

Speaking after the news last week, Reid adds: “Consolidators are not exempt from suitability. They have to take the same care and attention that anyone would have to take. Just because assets are on a platform, it doesn’t mean to say they should be.

“There is a lack of understanding at the corporate level that suitability is not an option, it is a regulatory requirement. Anyone that picks up new assets should be extremely careful.”

Bentley argues the scrutiny of consolidators reignites questions about whether clients should be meeting the costs of platforms and CIPs at all.

He says: “The position clients find themselves in is [that], without necessarily their agreement, their adviser suddenly belongs to someone else. There has always been an issue with the whole platform charging structure, in that the client is asked to pay 50 to 60 basis points to be on a platform where they are not using the benefits they are being charged for. Effectively what they are doing is buying an adviser’s back- office system.

“In acquisition cases, that problem is exacerbated as the deal may trigger a move to another platform or CIP. So how do you explain to someone that one system is better or worse for them, when in fact it was never intended for them in the first place?”

The defence

Money Marketing asked five major consolidators – Succession, Bellpenny, AFH Financial Group, Perspective and Attivo – to respond to the FCA request for information, address the claims made against the business model and provide high-level details about how they approach suitability with acquired clients. Only one of them, Bellpenny, chose to provide comment, the rest declining to do so.

Bellpenny chief executive Nigel Stockton says: “We don’t force people to do things they don’t want to, and we don’t force them into CIPs. If the best advice is to keep them with the current provider, that’s what we do.

“There’s been a lot of nonsense talked about aggregators forcing clients into things; that’s absolutely not the case. It really annoys me when people believe that, because the only way the business grows and gets momentum of its own is if we look after our clients.”

He adds: “There is such a lot of misunderstanding about what we’re about, with advisers thinking we’re going to be extremely aggressive. But our goals are the same as their goals – we want to give fantastic investment advice.”

Expert view: Abraham Okusanya

This line of inquiry from the FCA is long overdue. The regulator has had a lot of other things on its plate recently, not least pension freedoms, but in the meantime over the past few years the number of consolidators in the advice space has been growing considerably. There is a real risk that acquired clients are being moved onto the consolidator’s platform or centralised investment proposition without due regard to the best interest of the clients.

There is often an inherent bias towards the consolidator’s own products/platforms, and that may not always be in the best interest of the client. Even if the products are not completely unsuitable, they often offer little or no additional benefits to clients, yet clients are put through the ordeal of unnecessary churning.

It is great the FCA is also looking at firms’ business plans, because many of these consolidator models are neither profitable nor sustainable in the longer term. But the FCA needs to look at the financials as well: that is, the source of funding, profitability and shareholder expectations in terms of return on capital. Invariably, these things play a huge role in the culture and the suitability standards within the organisation.

With many clients facing what is possibly a 30-year retirement, or perhaps even longer, there is a real danger that if the models are not sustainable those acquired clients will end up being passed from one consolidator to another.

In terms of next steps, the regulator should definitely extend its work beyond consolidators to any business acquiring advice firms, such as fund groups. Vertical integration is all the rage right now, with providers and asset managers looking to find ways to regain control of distribution.

Thanks to the RDR and the upcoming sunset clause deadline, it has become harder for asset managers and providers to influence advisers’ product choice. So buying up advice firms is a way for asset managers and providers to try to regain that distribution.

Abraham Okusanya is founder and director at research consultancy Finalytiq

A snapshot of consolidator models

Succession: Total assets under management of £10.5bn as at October. Advice firms join as members with a view to full acquisition after they have adopted Succession’s systems and processes. Firm hopes to make 50 acquisitions by the end of 2017.

Bellpenny: Assets under advice of £3.5bn as at July. Launched in October 2012 and backed by investment management firm Oaktree. Former Countrywide director Nigel Stockton took over as chief executive in September, saying the business would be targeting “fewer but larger” deals.

AFH Financial Group: Assets under advice of about £2bn as at October. Model is based on a capped earnout over two years with initial sum set at about 50 per cent of the advice firm’s anticipated total value. Raised £750,000 though a share placing in May to fund future acquisitions. Listed on Aim in June 2014.

Perspective Financial Group: Made a post-tax loss of £493,383 in 2014. In January 2014 executive chairman Paul Hogarth put a £2m cash injection into the business after it agreed to defer payments owed to five acquired advice firms. No up-to-date figures available for assets under advice.

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Comments

There are 7 comments at the moment, we would love to hear your opinion too.

  1. About time.

    “to make sure new clients benefit from consistent outcomes”

    What the SJPocracy call “inconsistent outcomes” we used to call “bespoke advice”.

  2. One wonders why the FCA isn’t also investigating the very similar practices of advisor firms upon becoming agents of SJP. As tied agents, they can no longer continue to advise on non-SJP investments and pension plans, so their unless they churn them they lose them.

  3. We recently lost a client to one of these consolidators, £500k portfolio with a DFM, who recieved instructions from the ‘consolidator’ to liquidate the portfolio. Client incurred £25k capital gain and then was charged 3% for the advice/churn.
    Client ended up invested in a model portfolio and the DFM could have built the same portfolio without CGT or advice/churn fee.
    Well done FCA …don’t forget to call at SJP

  4. We have never understood purchasing (consolidation) why any business would pay and take the liability of another advice business. Also there not good value, as many of the clients will not engage, cost and risks of aliening the new clients to our process and investment strategies is to high. If they remain where they are already invested the cost of servicing each client individually would again increase our risk and cost. We have spent many years building our business reputation and we felt this was to dangerous and costly an area to consider.

    It is a very different matter when increased costs are incurred by a client if they have sort your advice, requested a change, had the costs fully explained and agreed fully understanding the new agreement. This is what happens when clients engage with a new adviser on a one to one bases themselves. Both parties understand fully the risks, cost and agreed potential outcome.

    Block switches and a advice will always result in many poor outcomes for consumers. The only way would be to complete a one to one review in full with a each new client, revisit their attitude to risk, goals, information on record, agree the previous advice and products meets their stated objectives. If this is to be undertaken the cost paid for these consolidations is not commercially viable, only with the top twenty percent of clients purchased in most cases. This means the remaining eighty percent are most likely as client non viable, costly and a liability.

    The final and biggest disadvantage being the client never requested the change, which will always infuriate them as they feel like a commodity that can be bought and sold.

  5. Alf Hart ~ Surely the actions of the consolidator and the consequences that you cite warrant a formal complaint which would be all but impossible to defend. And charging for it as well merely compounds the malfeasance. It must be against all the rules to switch a client’s investments without first explaining exactly why the firm proposes doing so and seeking the client’s explicit agreement. That’s mandatory even for a simple fund switch within an existing portfolio.

  6. Julien,
    The first we knew of the client leaving our services was a letter from the DFM stating they had received a letter of authority from another company. We rang the client who ignored our calls, we followed it up with a letter to but client ignored us. The DFM told us off record , they were instructed to liquidate the portfolio by the new adviser etc, the DFM explained the CGT but the new adviser (part of a consolidator ) instructed DFM to proceed. DFM didn’t have permission to contact client

  7. FSA FG12/16 (from 2012) provides the definitive compliance guidance on suitability of ‘replacement’ business, particularly cost comparison between the new and the old, including helpful ‘good practice’ and ‘bad practice’ examples. Just in case the message needs reinforcing, there are five previous FSA papers on transfer or replacement business with much the same conclusions. For what it is worth, my experience of a wide range of firms, including some consolidators (both restricted and ‘independent’), is that consolidators were both legally well advised and extremely aware of FSA FG12/16 (and the earlier guidance) and had developed processes based on the ‘good practice’ examples whereas smaller firms were not and had not.

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