David Shelton: Where craft beer and wealth management collide

In many markets there is a continuing debate about the structure of the relevant sector, and the merits of large and small enterprises. Typical issues centre on which are the most profitable, when all the small firms will disappear, the market power of the larger businesses, and so on. The advice market is no exception, with supporters of both sides presenting cogent and compelling arguments.

So what are the latest views in the advice market? Current opinion and evidence seems to favour the consolidation lobby – but only just. There is a trend toward larger scale firms but also a significant number of start-ups. The role of venture capitalists and the growing interest of product providers fuels the debate and sustains the pace of merger, acquisition and change.

For the 90 per cent of firms in the advice market classified as ‘small’ or ‘medium’ in size, the question is: will this trend continue until a few firms dominate or does this run in cycles until the tide turns?

It is often helpful to seek clues from other sectors, and the brewing industry provides interesting guidance. Currently, there are more breweries per head in the UK than in any other country, which is remarkable given the dominance of the ‘big six’ in the 1970s.

The market is still concentrated in the hands of larger firms providing mass-produced brands for wider consumption, but the more special-ist ale markets show a strong trend toward smaller and localised businesses. In fact, some of the large firms are beginning to acquire their smaller rivals as a defensive measure, just as they did in the 1970s. There is clearly a cycle that looks as if either the large or small have won the battle but, given time, always tips in the other direction.

You can see the parallels and recall previous times in the advice market when larger firms actively pursued smaller businesses, followed by periods of low interest and divestment. However, the comparison may be closer than it first appears. Small firms tend to innovate and lead change, such as the current trend in brewing linked to craft beers, which are very different to traditional ale and mass-produced lager. Indeed, it is the successful craft brewers in the US and UK that are now being targeted by their larger rivals.

The advice market version of ‘craft’ is the successful and growing wealth management sector, which has expanded over the past 10 years to meet a particular gap in the market. This sector is heavily populated by smaller firms, typically up to 10, maybe 15, advisers and, as we know, offers a very tailored and different product to the rest of the market. It is, of course, the sector being targeted by the consolidators, just as the large drinks firms are targeting craft brewers.

So what should smaller advice firms do about this? It looks like one of those rare ‘win-win’ situations where individual businesses can make their own choice. As is often the case, the answer lies in the fundamental reason you are in business. Why do some firms see selling to a larger business as a natural outcome, while others want to protect their product and clients to their dying day? This dilemma is current in the drinks market, with craft brewers exhibiting both extremes of the above.

Difficult decisions 

Some are happy to sell and take what comes as being part of a larger business, while others will not even discuss the issue. Neither side is right or wrong but it demonstrates the difficult decisions to be made.

For those seeking to maximise business value and sell out by a certain date, there is much to be optimistic about. As long as the business is in good shape, there should be plenty of potential buyers and at least a few that will look after your clients to the standard you have set. Make no mistake, many large firms will wish to acquire the ‘craft’ skills embodied in your business.

For those in the opposite camp, the demand for the advice market equivalent of craft beer and for firms that will evolve and innovate will continue to rise. Selling the business to future generations to perpetuate the product is an equally valid option if the requisite long-term succession planning is in place.

However, the parallels end when we consider the broad government stance to the two products – beer and advice. The message is clear enough: beer and all similar products are bad and consumption should be cut, while financial advice and all its derivatives are good and you simply cannot have too much of it. That will help, rather than hinder, the market and sustain the range of opportunities and choices for all firms, particularly those that are innovative, fleet of foot and have clear direction and principles.

David Shelton is a consultant at Stoke Bishop Associates