Expert and facilitator: John Chapman, Catalyst Partners
Headlines:
- The impact of regulatory changes like the Consumer Duty, the importance of data and client relationships, integration challenges faced by consolidators, and the role of private equity firms in driving acquisitions
- The various factors influencing valuations, such as profitability, client service propositions, and advisor and client age profiles
Discussion points:
Market dynamics and key trends
The factors driving the consolidation trend in the financial advisory market, including the large market size, lack of dominant players, regulatory pressure from the FCA to reduce the number of firms, and the aging demographic of advisers.
There has been significant impact on the sector by the influx of private equity firms and consolidators into the market, creating a 'feeding frenzy' of acquisitions in recent years. However, the market has cooled down due to profitability squeezes, rising costs, and challenges in integrating acquired businesses.
Regulatory challenges and consumer duty
The market continues to be impacted by the impact of regulatory changes, particularly the Consumer Duty and the upcoming focus on client vulnerability. Acquirers are now conducting more thorough due diligence on client reviews and data retention to ensure compliance.
Many firms, including large consolidators, may struggle to demonstrate adequate record-keeping and client review processes, potentially leading to regulatory scrutiny and redress calculations.
Valuation methods and factors
There remain different valuation methods used in the industry, including recurring revenue multiples, profitability multiples, and asset under management (AUM) multiples. The group discussed factors that can influence valuations, such as data quality, regulatory issues, self-employed advisers, client service propositions, and investment propositions.
Advisory businesses must be aware of the importance of maximizing EBITDA and providing granular data on client profiles, revenue streams, and service levels to attract higher valuations.
Integration challenges and cultural fit
The group acknowledged the challenges faced by consolidators in integrating acquired businesses, particularly in terms of aligning client service propositions, charging structures, and technology platforms.
There is continued importance of cultural fit and effective communication during the integration process to avoid disrupting client relationships and adviser retention.
Acquirers must be cautions on overestimating synergies and underestimating the complexities of merging disparate systems and processes.
Key takeaways:
- Conduct thorough due diligence on client review processes and supporting data to ensure regulatory compliance and mitigate potential redress calculations
- Prepare granular data on client profiles, revenue streams, service levels, and investment propositions to attract higher valuations during the sale process
- Evaluate the fit between the acquirer's and the seller's client service propositions, charging structures, and technology platforms to facilitate smoother integration
- Prioritize cultural fit and effective communication during the integration process to maintain client relationships and advisor retention
- Realistically assess potential synergies and account for the complexities of merging systems, processes, and personnel to avoid overestimating cost savings
