Alistair Cunningham: the David and Goliath of advice acquisitions

Alistair-Cunningham-700.jpg

Axa has divested itself of its presence in the UK life and savings market. At the same time, several high profile, sizable IFAs have also sold out. Standard Life is not the only firm with deep pockets and I suspect that, while it may be the consolidator of the moment, others will follow its lead. We have also seen activity from Succession, Tilney Bestinvest and Old Mutual Wealth.

As a co-owner of a smaller, but still substantial, chartered financial planning practice, this trend is both interesting and concerning. Many of the vendors of these smaller firms have quoted “risk” as a reason for sale but this strikes me as disingenuous. A combination of money and a wish to step back is probably key here.

For the acquirer, the anticipated return comes from leverage of its “product”. In defence of sale, the vendors often state they are no more likely to use its platform but this might be a moot point for two reasons. After any earnout is paid do the ex-owners have any influence? And is platform use the ultimate aim? Investment solutions are likely to generate greater margin than platform solutions, which might explain Standard Life’s wish to leave Architas undisturbed, anticipating it can influence Elevate advisers to use Myfolio and Standard Life Wealth solutions.

We remain committed to organic growth but core to the success of our five-year plan is one acquisition. Unlike many consolidators we can be flexible over remuneration, offer roles for those owner-managers who wish to remain in the business and offer a full financial planning service without shoehorning individuals into specific solutions. We often pay a significant proportion of any consideration upfront and earnouts would not usually be more than three years. Why intelligent business owners would exchange their businesses for shares in another is unintelligible to me.

But why is it other financial services firms buying these IFAs? Consolidation in other sectors is often driven by private equity, where high gearing amplifies the profits of a company. That private equity and venture capital seem unable to compete with the prices on offer is strong evidence distribution is key. In the consolidation market one plus one can often equal three or more, as acquirers seek additional revenue streams.

This gives us a slight disadvantage. Firms looking for the highest possible sale price will rather sell to a business looking to make margin from more than just one of the following: financial planning fees, platform fees and investment fees. As we put the client at the centre of what we do, we will often maintain fee and service promises; there is no synergy in our margins from using specific investment or platforms. I would hope more clients value this approach.

The counsel given to me by one acquirer was that “you’re buying the people”. But there is a pattern with consolidators: they buy, making the owners/vendors richer, who then remember why they set-up on their own in their first place (they do not like large companies). The clients then find themselves poorly looked after, so they look elsewhere. When these events coincide with the ex-owner moving on, the consolidator then ends up paying for very little.

It is hard to see how this pattern will not be repeated and considering the current round of vendors have seven-figure sums and good personal financial plans, they may feel confident enough to retire. This leaves smaller, more nimble firms like ours with a significant opportunity.

Alistair Cunningham is financial planning director at Wingate Financial Planning