The words “independent advice” don’t normally conjure up images of a £3.5bn national behemoth acquiring other firms at a rate of roughly ten a year.
That’s why consolidator Bellpenny’s decision to launch an independent advice arm will come as a surprise for many. The traditional notion of independent advice seems at complete odds with the model often associated with well-funded restricted firms: purchase lots, acquire assets and run a profitable centralised investment proposition.
With scale does come the promise of efficiency though. If Bellpenny can cut the cost of delivering independent advice by building a new national brand, then fair play to it.
There are a couple of outstanding questions that deserve attention, however.
First: are there really enough scale independents for Bellpenny to buy to be able to deliver a quality service at a reasonable price? FCA data shows that while 83 per cent of firms are still independent, they only bring in 38 per cent of adviser charges. That is, while there are fewer restricted firms, they do dominate the market by size.
Those many small independent firms remaining out there face temptations from plenty of other restricted bidders, many of whom will offer lucrative rewards for keeping business with them.
Second: will independent advice make the kind of margins to keep Bellpenny’s private equity owner Oaktree Capital happy?
When I spoke to Bellpenny chief executive Nigel Stockton earlier this week, he said Oaktree were “outstanding owners and investors” and starting an independent service is “not looking to change that.”
It really depends on the price Bellpenny pays for the firms. EFG Independent Financial Advisers turned a profit of £584,000 in 2015. Without a centralised investment proposition to make margin off, how long it takes Bellpenny to make a return for Oaktree reduces to a simple formula: purchase price divided by annual profit.
Perhaps moving clients on to a centralised investment proposition is not as profitable as everyone assumes. Or perhaps Bellpenny simply ran out of suitable firms that were willing to buy in to a restricted status.
A view to a sale?
In that case, does it put the ducks in a row for a float or sale, where Bellpenny could conceivably sell off its independent and restricted businesses separately to generate more value than buying the group as a whole? That would seem to be the strategy Old Mutual is taking in its “managed separation” right now.
I asked Stockton if the plan was still to float or sell in the end, and if the independent business might be hived off if so.
He responded: “Bellpenny is a group, that’s one entity of it, and nothing has changed about Bellpenny longer term. If we build a really strong, profitable business of national advice the future is going to look after itself. We are not at that point, and that’s not going to change in the short to medium term.”
On a more cynical interpretation, does that mean Bellpenny is going to have to start charging significantly higher fees for the privilege of independence and/or to get the group to a place where it is strong enough to float?
That’s unlikely, Stockton suggests.
He says: “It doesn’t mean we are going to move all our fees around. When the deal is completed we will have to look at what we are thinking about, but my initial reaction is that clients are comfortable where they are and we need to work with them.”
Clients can find plenty to reassure them in those words.
Amid the surprise, there must also be plenty willing to tip their cap to a company willing to go out on a limb and make a bold move into the independent space when so many industry veterans are warning cost pressures have made it unviable.
Justin Cash is news editor at Money Marketing