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The squeezed middle: can mid-sized firms adapt to survive?

For financial advisers, coping with change is a way of life – whether that is driven by the regulator, shifting consumer demands, technology or a combination of all three.

Since the RDR came into force in 2012, the reshaping of the sector has been particularly dramatic, and with Mifid II last year there has been further movement. The wave of consolidation in recent years demonstrates the difficulty of remaining profitable against a backdrop of regulatory change and competition from robo-advice and other technology-focused alternatives.

Many argue there will always be a place for boutique IFAs and wealth managers who provide a highly bespoke, face-to-face service, but demand for such an expensive option is already limited and likely to shrink further.

For those in what has been dubbed the “squeezed middle” of the advice sector there are several obvious options. Scale-up by acquiring other smaller firms; choose the restricted route and direct clients towards your own investment funds; or find a consolidator that is a good match for your culture. However, Money Marketing asked industry commentators whether there was another way for mid-sized firms to keep their foothold in the market.

Tavistock business development director Mark Evans says: “Where the mid-sized brokerages have the advantage over the larger ones is that we can be a bit chameleon-like, where we can change very quickly. The larger guys cannot do this.

“We can meet the market requirements and changing needs of our clients very quickly.”

Evans believes it is possible to benefit from the extra income generated by running portfolios while retaining a fully independent approach, so long as customer outcomes are the focus. While Tavistock runs a range of ETF-based funds with a capital-protected element which are open to its own customers as well as others, Evans says the firm’s advisers always look across the whole market when choosing the best investments for their clients.

He says: “We have around £4.5bn under management, but we only have around £1bn in our own funds, which gives you some idea.”

On top of this, Tavistock has launched its own Isa wrapper which is available direct-to-consumer and it has agreed a strategic partnership with the Law Society to provide financial advice to its solicitor members.

Evans argues that it is becoming increasingly difficult for mid-sized firms to remain profitable on the basis of charging advice fees alone as they shoulder the growing costs of meeting capital adequacy requirements, professional indemnity cover and industry levies.

“What you will find is that your average individual IFA will be able to service around 200 clients each.

“In a nutshell, they are spending more time servicing their clients and that decreases the amount of time they have for generating new business.

“Unless they have other strings to their bow, it is very difficult for them to increase their fee income. That’s one of the reasons you are seeing so many larger firms acquiring IFAs.”

While consolidation is inevitable given these pressures, some feel the terminology has negative connotations and are hoping to redefine the language.

For Foster Denovo, synergies in culture between the smaller and larger firms are crucial to a successful merger. Chief executive Roger Brosch says: “We describe ourselves as a facilitator rather than a consolidator. There are quite a number of consolidators out there who tend to be looking more at the numbers, assets and so on. They are quite fixed in the model that they use, so they tend to have a specific set of terms that they will offer and there is not a lot of flexibility in the deal structure.

“We have a 15-year track record in building a proposition that starts with the clients and works back through the business, rather than perhaps being focused purely on asset consolidation. We are very focused on client outcome.”

While Brosch says the process of fully assimilating a new IFA business typically takes around two years, there are no set timeframes.

He says: “We offer a very attractive home to advisers who are looking maybe to exit in the medium term but whose priority is their clients and their staff.

“We tend to acquire not for the assets but for the relationship capabilities, so we are obviously interested in the clients themselves and the relationship team.

“Often, therefore, we buy businesses as a going concern, and it facilitates a smooth exit at maximum value because it is a client-centric transition.

“Advisers respond very positively to that, whereas perhaps a consolidator has not necessarily got the strongest reputation when it comes to client proposition.”

Industry consultant Malcolm Kerr says that despite the huge business challenges facing the sector, the demand for professional advice remains greater than supply, which can only be good for firms, in the middle of the market or elsewhere.

“There are about three million clients paying ongoing fees to about 20,000 advisers,” he says. “About 80 per cent of firms have five advisers or less and I think there will continue to be consolidation in this space. But that is being driven by organisations paying premium prices for successful businesses and owners looking to generate capital – so who can blame them?

“If one looks at margins, the smaller firms tend to do better than the larger ones when it comes to delivering advice. Some vertically integrated businesses may find themselves squeezed by the FCA if advice is being subsidised by platform and fund revenues.”

But for Ascot Lloyd chief executive Nigel Stockton, scale will be key to maintaining a competitive edge over smaller players in the market.

He says: “When it comes to technology, risk controls and governance we can invest in a way smaller and local IFAs often cannot.

“Our website and mobile offering are the most obvious examples, while we have also invested significantly in digital valuations for clients and the online journey we provide. The increasing use of mobile and digital channels by clients are clear evidence of the importance of this.

“Our scale also enables us to invest in systems to manage peaks in demand, so we can provide dedicated paraplanning and administration support to advisers and clients, but we can also spread report writing across our team of 50 paraplanners if there are local peaks.

“It is our belief that, in the future there will be fewer, much larger, firms: consolidation in our sector has just begun.”


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