Expert: Lucy Grier and Dan Fairweather, Benchmark Capital Facilitator: Svenja Keller, Founder & Director, SK Inspire
Headlines:
- The adviser acquisition market is still buoyant but changing
- Private Equity has dominated the acquisition market, but higher interest rates, Consumer Duty, and the wider political backdrop have slowed down interest in the UK advice market
- Those companies (PE or otherwise) with a focus on financial services continue to trade and have a higher chance of creating synergies and efficiencies for the acquired businesses
Context:
On average, larger advice firms are less profitable than smaller firms, which could lead to greater activity in the smaller advice firm part of the sector.
Larger firms often incorporate financial planning into their proposition as a loss leader to make clients more ‘sticky’; they would be satisfied with breaking even. It is therefore more difficult to spin out just the planning part of the business.
Businesses with a clear growth plan are favoured over lifestyle businesses, even if growth investments might impact the EBITDA.
Due to the complex nature of the acquisition market, working with a broker can be very useful to ensure a deal is stable and delivers not only on price but on cultural fit and various other factors important to both parties.
Finding the right deal structure is important:
There are many different deal structures available, and it is possible to acquire a client book or shares in the advice company. There was a mixed opinion on MBOs, some have seen more recently, others less. Employee-ownership trusts were also discussed: They can be difficult to implement, but they can also be very rewarding for everyone involved if they work. Which option is more suitable depends on the acquirer’s as well as the seller’s goals. The acquirer will look at a number of factors, including quality of clients, quality of staff and advisers and their attitude to the deal, cultural fit, processes, proposition, regulatory risks, and use of technology (see other Headline Findings).
Sellers will also have objectives for the sale of their business, and these can go beyond the monetary reward, for example ensuring that clients are looked after and staff are kept on after the deal. It can take time to find the right buyer, and working with the acquirer over a period of time to get to a desirable outcome was recommended.
People are an important part of the deal:
Quality advisers and staff, as well as a cultural fit, will add value to a deal, as they drive strong client relationships. It is important to ensure advisers and other key personnel are on board with an upcoming deal as staff leaving can reduce the agreed value.
Acquirers prefer employed advisers due to concerns over IR35 and, crucially, the ownership of the client relationship. A company with predominantly self-employed advisers will be valued less (sometimes the revenue in relation to self-employed advisers is excluded); and it is also likely that self-employed advisers have to sign an agreement and / or convert to an employed status after the acquisition. This can cause friction, which needs to be addressed early.
A good proposition fit will attract higher values:
Acquirers are looking for a good proposition fit. This includes the investment proposition, the charging model and the type of clients the advice firm deals with. In this context, they are considering how they can add value to and create synergies with the advice business.
It can be difficult to bring clients onto a new investment proposition, as a switch is not going to be suitable for every client. There is a risk that some clients stay on the previous investment proposition, and this could mean that the valuation of the advice business is solely based on the advice fees, not on the investment management fees separately charged.
In general, buyers will favour high-net-worth clients over smaller clients, although there is an understanding that most advice firms have a tail of smaller clients. This is not necessarily a value-reducing factor, as long as there is an efficient process in place to manage these clients.
Good processes bring efficiency and lower the risk:
Acquirers will naturally favour an efficient business, and part of that is good access to data. This is not only helpful from a client management and marketing perspective; it also helps with regulatory reporting and adherence to the regulatory framework.
Smart use of technology is key in achieving both efficient processes and accurate data.
Acquirers will also look at the implementation of Consumer Duty in more detail, and DB transfers. For the latter, different strategies were discussed to manage the risk and not jeopardise the deal. File checks, run-off cover, and bulk notification to the PI insurer were mentioned.
Some acquirers spot-check files, others check every DB transfer case, depending on the buyer and the number of DB transfers the seller has advised upon. DB transfers are not necessarily a deal-breaker, in particular if they were conducted at a high standard and as part of an overall financial plan.
A number of requests and concerns were directed at the FCA during the roundtable discussion:
- Data was requested for the impact of Consumer Duty on margins, as this will ultimately impact the acquisition market too
- Concerns were raised about the influence of Private Equity investors on the advice market; it was felt that their drive for profit was not always aligned with a focus on consumer outcomes
- Questions were raised about the impact of Consumer Duty on the tail of smaller clients, who have often been clients for many years and are now in decumulation, which means their asset base is reducing over time
- Some advisers wonder whether consumer duty is making it even more difficult to service smaller clients, which would mean the advice gap widens further. One suggestion was to re-consider the MiFID requirement for an annual review
Key takeaways:
- It might not always be possible to evidence value-for-money on a year-on-year basis for these clients, as complexity is increasing (with funds in drawdown), but assets are reducing. However, over a long period of time, value-for-money can easily be evidenced
- If review frequencies are widened for less complex clients, this could allow advisers to provide a reduced service to those individuals, and still deliver good value-for-money
