When it comes to investing in and growing the advice market, the cash injections needed have typically come from providers. Over the years this has taken the form of man from the Pru-style direct salesforces, the provider stakes held in networks, or the outright purchase of distribution businesses by life companies and fund groups.
But increasingly deals are being bankrolled not just by providers, but by private equity firms. These firms have been quietly buying up stakes in distribution in recent years and are often linked to the big deals of the day, our recent story about the sale of Axa Wealth being one such example.
And their reach extends well beyond the advice sector – from platform technology providers to back-office software firms, from annuity providers to mortgage lenders.
Yet relatively little is known about these money men who are controlling great swathes of the financial services industry. Private equity investors are fast becoming the power behind the throne in a changing landscape. But as their influence grows, so too does the need to make sense of their objectives, and establish whether these conflict with the motives of those handing over control of their life’s work.
The attraction for private equity firms is clear. Being part of a group which aims to build the next Hargreaves Lansdown or St James’s Place is an attractive proposition for investors.
Nor is private equity investment a one-sided deal. Money flowing into the advice profession is not to be sniffed at a time when the pressure is on to deliver value in a high-cost environment.
It may be that private equity is the key to unlocking innovation, and can pave the way for the future growth of the advice market.
But advice firms, or any other firms for that matter, have to seriously consider what it is they are giving up when they enter into these kind of deals. Advisers are an entrepreneurial bunch, and will have founded their businesses on their desire to help clients achieve their financial planning goals. Will this spirit survive against the backdrop of a relentless drive for returns and the ultimate sale or float?
For some advice firms considering succession planning and potential exit strategies, private equity may be a way to achieve the desired scale in a set timeframe. But firms should be clear on the terms and what they are giving up. A pact with the Devil never makes sense in hindsight.