Expert: John Chapman, Director, Catalyst Partners Facilitator: Martyn Laverick, Director, Catalyst Partners
Headlines:
- Impact of Consumer Duty on M&A - Consumer Duty is requiring more due diligence on cultural fit, proposition alignment and data readiness during the M&A process, extending timelines for deals to complete.
- Charging model convergence - Ongoing advice charging models are standardising around either flat fee based on assets, tiered charging segmented by services provided or ad valorem charges based on assets under management to enable integration.
- Increasing data requirements - Acquirers need more client data to evidence Consumer Duty obligations which smaller firms struggle with, requiring earlier engagement.
- Deal pricing adjustments - Lower growth forecasts, cost increases and charging model changes are reducing deal multiples amid heightened downside risks around retention.
Discussion:
The discussion covered the impact of the Consumer Duty on M&A in the financial advice sector, including key topics like service propositions, charging structures, data requirements, deal valuations and timescales. The main points were:
Consumer Duty requires acquirers to have a clear service and charging model to integrate acquired firms, leading to more focus on cultural fit, proposition alignment and data capture during due diligence. This extends deal timelines.
Ongoing charging models are converging around either a flat fee structure based on assets, or tiered by client segment. This affects deal pricing if the target firm structure differs.
Data requirements are increasing to evidence Consumer Duty obligations on an ongoing basis. Many smaller firms struggle here so acquirers are engaging earlier to assess data readiness.
Deal pricing is being impacted by lower income forecasts, higher costs and the need to align charging structures. There is increased downside risk around client retention and adviser retention post deal which acquirers are reflecting in lower multiples.
Timelines to integrate acquired firms into the acquirer model are extending to 2-3 years in some cases, especially for migrating existing clients onto new charging structures. Regulator engagement is required on integration plans pre-deal.
The pool of potential acquirer firms is shrinking as private equity owners look to exit. Industry consolidation via mergers of consolidators is increasingly likely as gearing levels rise.
Key takeaways:
- Review your client service proposition and charging structure to assess Consumer Duty readiness and cultural fit for potential acquirers
- Implement processes to capture, monitor and report on Consumer Duty data points like outcomes, costs and client characteristics
- Model the impact on your business valuation of migrating clients to lower charging structures under different acquisition scenarios
- Develop a detailed data pack on our clients including attributes like assets, demographics, product holdings and advice interactions to share during due diligence
- Engage with potential acquirers early to evaluate alignment on Consumer Duty obligations and service delivery
