Standard Life Aberdeen-owned advice business 1825 has just acquired another IFA, further extending its coverage in the UK, but the market is questioning the future of the firm under its recently merged parent.
The restricted business acquired its fifth advice firm last week – Bristol-based Fraser Heath – which officially established a south-west hub for 1825. Money Marketing understands letters to Fraser Heath clients did not say the firm will no longer be independent, however.
After the latest acquisition completes, 1825 will have more than 70 financial planners advising around 8,500 clients on around £3.7bn of their assets.
However, there is speculation as to where 1825 fits within the newly formed Standard Life Aberdeen business, particularly as fresh reports emerge it is considering selling its corporate pensions book to Lloyds Banking Group’s Scottish Widows.
Money Marketing sat down with recently appointed 1825 chief executive Julie Scott and a number of experts close to the firm to understand where the business is headed under her watch.
Business as usual?
Scott, formally chief operating officer at 1825, took over as chief executive from Steve Murray last month. Murray is now chairman of the business as well as taking on the new role of commercial and strategy managing director for Standard Life.
Speaking to Money Marketing following the Fraser Heath acquisition, Scott says the change in leadership does not signal a change in direction for 1825 and it will continue its “two-pronged” strategy of acquisitions and organic growth.
On launching, 1825 set out its plan to establish a number of regional advice hubs and laid out a target of reaching 150 advisers.
Its acquisitions to date mean it has coverage in south-west England with Fraser Heath, northern England with Pearson Jones, the Glasgow region with Munro Partnership, London with Baigrie Davies, and north-west England with Jones Sheridan.
A deal with Norwich advice firm Almary Green fell through following an initial announcement that the firms had agreed a tie-up.
Scott says the business has not set itself a deadline for announcing further deals but says it has a “healthy pipeline”.
She says: “We have got businesses that are coming through their transition so it is a priority for me that that continues. We have also got a strong and healthy pipeline of businesses that we are having conversations with about acquiring and we have the 1825 academy up and running.”
We have a strong and healthy pipeline of businesses that we are having conversations with
The transition process for firms can take more than 15 months from when the deal is first signed. Scott explains there is usually a three-month timeframe between signing and the acquisition completing before starting on a process that 1825 calls “continuity and stabilisation”.
She says: “It is really only after completion that we start to get to know each other and we learn about how that business really works. We spend some time really learning what the practices are within that business – what they do and what they do really well.”
That process can take anywhere between six and 12 months. After that the acquired firm will take on 1825’s centralised investment proposition and advisers and paraplanners are trained on that system. Then the business goes through rebranding where they will stop trading or advertising as their previous name and will become known as a regional 1825 business.
1825 does not track the proportion of clients that go into its centralised investment proposition, which is a policy Scott says she and Murray are aligned on.
She says: “There is no key performance indicator. That would send really mixed messages. We know other [businesses] incentivise people to move or they differentiate what someone pays, we have no differentiation at all.”
Indeed, Scott is clear there is no incentive for 1825 advisers to do anything that is not in the client’s best interest.
She says: “If it is right for the client to remain with the investments they have got and top them up that is what will happen and if it is right for the client to move into the 1825 model portfolios, then the planner would have to justify why that is in the client’s interest.”
She adds: “A lot of clients don’t move in because there could be penalties for them if they were to come out of their existing investment.”
The thorough acquisition and subsequent integration process has reportedly led to challenges for 1825 and the firms it is considering acquiring or that are going through the post-acquisition process.
Sources close to the business say 1825 has spoken to many different targets but has found it difficult to find suitable businesses to acquire with some looking “good on paper” but actually carrying risk a consolidator would not be prepared to take on. Conversely, there is a view the due diligence process is over-internalised and over-engineered and the business has processes that are off-putting for advisers.
A number of advisers have left firms acquired by 1825 either before the acquisition completed or shortly after.
A total of six advisers left Almary Green between March 2016, when Standard Life agreed terms for an acquisition, and November 2016, when Standard Life and Almary Green said they had “mutually agreed” to end discussions at the eleventh hour.
Anything that helps promote financial planning and helps ensure consistency of advice delivery for the end user is, in my view, good news. If you look at some of the high-calibre businesses 1825 has acquired, such as Baigrie Davies, then financial planning and the promotion of it appears to be at the heart of what 1825 is trying to do. In an ideal world it would be a fully independent offering but I am confident that these firms wouldn’t have signed up if client outcomes were not at the heart of the business.
A Standard Life Aberdeen spokeswoman says, overall, 87 people have joined 1825’s acquired businesses, 51 people have left and eight people have retired.
However, Scott is not concerned about advisers leaving the business, saying it is an expected part of acquiring and integrating firms.
1825 says it has more than 250 staff, of which 200 are spread across its regional offices and the rest are in support functions. There are currently 20 staff in the 1825 academy.
As well as advisers, paraplanners and administrators, the business employs a strategy and commercial team that looks after acquisitions, an academy team that oversees training, and a transitions team that helps the advice firms integrate into 1825. There is also a “proposition” team, a marketing team and the leadership team.
In its first results statement, covering the 16-month period ending 31 December 2016, 1825 reported administrative expenses of £8.1m. This was against total revenue of £1.1m and a loss for the year of £5.5m. At the time of that report, 1825 had 94 staff. The performance of acquired businesses has been variable since coming into the 1825 fold, which one M&A expert predicts relates to the “institutional approach to risk management”.
We are part of a parent that should ultimately be a stronger business
In its latest accounts – for the 12 months ending 31 December 2016 – Pearson Jones reported a £3m loss compared with a profit of more than £392,000 the prior year. The statement says the result reflects a “period of transition” for the company. The business was the first to be acquired by 1825, in February 2015.
Munro Partnership reported a profit after tax of £327,565 for the nine months ended 31 December 2016, according to Companies House documents. Its results compare that period to a full 12-month reporting period ending 31 March 2016, when profits were £516,338.
The accounts statement says the business incurred additional expenses after its acquisition by 1825 which are in order to “grow the business”. Munro Partnership was acquired in March 2016.
Jones Sheridan, which was acquired on 1 November 2016, says because of its ongoing negotiations with 1825 throughout the year it did not make its own acquisitions, which led to turnover staying static at £2.5m. Its 2016 accounts, for the period ending 31 December 2016, say the company’s cost base increased “significantly” throughout the year because of additional staff and office costs to “accommodate the planned future growth in the company”.
In Baigrie Davies’ 2016 accounts – which cover the 16-month period to 31 December the business reported a loss of £122,503. In its previous statement, which covered the 12 months to 31 August 2015, the business reported a loss of £142,184. Baigrie Davies was acquired by 1825 in April 2016.
A future elsewhere?
Questions about 1825’s future stem from where the business fits within the merged Standard Life Aberdeen business. The £11bn merger, which was approved by shareholders in June and completed in August, created an investment giant with three separate platforms, and assets under management of approximately £660bn.
Speaking to Money Marketing in August, Murray was certain of Standard Life Aberdeen’s commitment to 1825.
He said: “When [Standard Life Aberdeen co-chief executives Keith Skeoch and Martin Gilbert] talk about the broader dynamics in the market and the democratisation of wealth they played back to me their belief in the need for advice. We see the merger as a net positive. We are part of a parent that will do interesting things and should ultimately be a stronger business.”
However, with new reports that Scottish Widows is circling to buy Standard Life Aberdeen’s corporate pensions book, market sources have questioned whether the investment management-focused parent company will want to keep its advice arm. Earlier this month, Money Marketing sister title Corporate Adviser reported that “advanced” discussions are ongoing between Scottish Widows and Standard Life. In June speculation emerged that Standard Life could be buying Scottish Widows but it now appears there is a potential deal where Widows is the buyer, not the seller.
If that was to happen, market sources say there is a question mark around what the business would decide to do with 1825. There are a number of potential options, for example, selling the firm or floating on the London Stock Exchange’s AIM market.
Some sources say having a distribution arm makes sense for Standard Life Aberdeen but are unsure if building it by buying and merging together a number of separate businesses is the best approach.
Expert view: Fraser Heath assets are loose change to Standard Life Aberdeen
Clive Waller, research director, CWC
So, Standard Life’s 1825 has acquired another IFA firm, Fraser Heath. Its managing director, Jim Collier, will metamorphose from IFA, which he has been since 1987 (when IFAs came into being) to managing director of the south-west regional office of 1825. Let’s hope it goes better than the attempted Almary Green acquisition. I confess, I find 1825’s strategy a little reminiscent of the turn of the century when Scottish Equitable was buying up IFAs as fast as it could raid the corporate ATM. That business assured me it had a strategy. I’m still waiting.
Don’t get me wrong, CWC has been clear since 2012 that there would be a significant drift to vertically integrated businesses with restricted models. Why? Well, that’s easy. There is more profit in manufacture than advice; a restricted business has a proposition focusing on target clients with appropriate products and services, relieving it of the cost of researching and making available a raft of unwanted products and IT functionality. Finally, a restricted proposition doesn’t suffer the high cost of not just one overly complex platform, but having to use two or three. It runs on the plumbing it needs and nothing more.
We are seeing good advice firms being hoovered up by life companies, asset managers, discretionary fund managers, platforms and aggregators. Most or all of these will become part of restricted businesses. This will leave a rump of very small businesses, one- or two-man advice firms, most of which will not attract buyers, and excellent financial planning firms that truly value independence and that will continue to offer a brilliant service to discerning clients.
My question for 1825 is this: Why does a firm with revenues of nearly £19bn (yes, revenues), buy advice firms with relatively tiny assets? Fraser Heath is actually a nice-sized firm for an IFA with healthy assets under management of £325m. But that’s hardly even loose change to Standard Life Aberdeen.
1825 will be a fully vertically integrated firm, a subsidiary of a life co/asset manager, with all the processes, systems, rules and bureaucracy that comes with being an institution, plus benefits of scale, to be sure.
It won’t and can’t look or operate like an IFA. Will the advisers and employees in an IFA business adapt to an institutional world? I have my doubts.