Wealth management: Lots of deals, but are there still lots of opportunities?
With so many deals in the wealth management sector, business owners and private equity investors are asking themselves:
· Are there still attractive IFA targets out there we can buy and create value in?
· How do we create value in an IFA business we have acquired?
· What value can we realise from our investment, and by when?
In this article we’ll share what you need to know and what you need to look out for.
The UK financial advice market
The UK financial advice market is fragmented – there are still more than 5,000 financial adviser firms – but with (by one estimate) more than 30 consolidators, have all the good platforms been bought now, and is there too much competition for the best bolt-ons?
The wealth management market has been buoyant, despite macro tailwinds and high multiples, as the underlying growth drivers remain strong (ageing/wealthy population needing advice, the “advice gap” – not enough advisers to meet demand, advisers’ control of client relationships, digital transformation means hybrid model can now work).
The ongoing wave of consolidation in financial advice will continue to create new firms in the future, as advisers become unhappy and leave to set up their own firms (despite so much M&A, the total number of advice firms is flat over the last five years).
Are there still attractive targets out there we can buy and create value in?
The market is still busy and competitive, so triaging opportunities quickly is important. High multiples, and large (upwards) adjustments to EBITDA, mean the deal team and CDD house need to get deep into the detail to find out what the key value drivers are.
Here are some things to consider when looking at an IFA investment;
· Management; Stable and competent senior management team with proven capabilities to support the vision that’s being invested in, and a proper succession plan.
· Culture; The firm culture has to be strong & distinct, to attract and retain advisers (and clients of course, but they are typically very sticky to an adviser, so advisers are the ones you need to keep happy). It needs to defend and enhance the firm’s differentiators, convince advisers to stay and persuade new advisers to join.
· Compliance; The firm’s regulatory compliance culture and record must be very good – no one wants post-deal surprises from previously hidden unsuitable advice or DB pension problems. Having a strong compliance function with good governance across the firm is non-negotiable.
· Good advice and excellent client service; The firm’s focus on and success at delivering good advice and excellent client service is less tangible but can be evidenced by a focus on financial planning (underpinned by products and wrappers, close client relationships, and better client outcomes – rather than just selling product). A deep understanding and analysis of the existing client base (e.g. high net worth individuals (HNWIs), high street, corporates/their staff, entrepreneurs) helps understand the client total addressable market (TAM) and target growth plan.
· Adviser headroom; Capacity for taking on new clients is a combination of how much time they have (new tech to improve efficiency is important post-deal), organisational structure, and also their willingness to do so. How much capacity do advisers have, and how much can be added post-deal, and does this underpin the future business plan?
· Tech; Financial advisers often have surprisingly limited front & back-office tech, what they have can vary between different suppliers, and the tech roadmap is generally under-developed. Digital transformation is over-used as a reason to invest, but in IFAs it usually means a good opportunity to reduce costs and extend reach as the business scales, particularly creating more adviser capacity.
· M&A targets & plan; To underpin a potential future M&A growth strategy, there must be an integrated and proven growth process that has been effective and efficient for previous M&A and hires. Given the firm’s culture, the business plan (including M&A strategy), the technology, and the profile of the typical acquisition; how many M&A targets are there in the market (and who are the likely competitors to acquire)?
· The business plan; This needs to reflect enough costs to acquire, integrate, and grow M&A targets (usually in a central services hub). It needs to be realistic as to how long it takes to do things with clients, (e.g. if the plan is to move acquired clients on to the firm’s in-house DFM, then that will take significant time) and contain risk mitigation plans to retain advisers (and their clients) during a period of change.
How do we create value in an IFA business we have acquired?
Organic growth is hard in the financial advice market (because client referrals is such an important source of new clients), so M&A is the classic growth strategy. Other ways you can create value are to unlock more adviser capacity, and to capture more client revenue by adding to your value proposition.
Here are some ways we’ve seen investors create value;
· Client revenue; Advisers typically capture more client revenue (typically 20-30 bps) by setting up an in-house DFM proposition [JB3] and moving acquired clients on to their DFM if they already have one. Some advisers are also thinking about building their own in-house investment platform using outsourced tech – this is still at an early stage, and feels difficult, expensive, and risky.
· Adviser efficiency; Presuming advisers want to take on more clients (some don’t!), then they need to find more time to service them. More use of better tech (e.g. full integrated, API-led, STP) combined with appropriate “lower cost” paraplanner support can increase adviser efficiency – this can be as basic as work allocation, email templates/automation, or as complex as automating the bulk of the admin work to assemble the information to do a client’s annual review, use of outsourced suppliers etc. Better use of modern tech should reduce cost-to/time-to-serve and give better data and also a better understanding of the client, with more client facing time.
· Client referrals; Advisers typically win new clients through word of mouth rather than search, but often do not have a formal client referral programme – this can be relatively quick to introduce but changing advisers’ mindsets (not wanting to ask for referrals) can take longer.
· Central services hub; Building out the firm’s central services hub can also take tasks off advisers, batching them and being done by paraplanner and administrator teams. Good advisers want to stay close to clients and their “own” paraplanner, so this must be done in a way that does not damage client service nor disengage advisers.
· Adviser succession plan; A good pipeline of the advisers of tomorrow not only gives a succession plan, but also as each adviser/client relationship matures helps supports the longer-term move from adviser as hunter gatherer to adviser client manager. Client managers are paid less, so this helps EBITDA margin.
What value can we realise from our investment, and by when?
There are now some good examples of successful exits, whether secondary deals to PE, to trade buyers, or to other consolidators. So our worry about who would buy all these consolidators has reduced somewhat, but you still need to make sure your financial advice firm is differentiated in bidders’ minds.
· Re-diligence; Doing re-diligence some way ahead of formal sellside CDD – looking again at what made the business attractive on the way in, and what’s changed since then – helps the investment team and corporate finance articulate why this financial adviser firm is more attractive than the other consolidators.
· Profitability; There is a thesis that most big financial advice firms lose money as growth is hard and expensive. Your value creation work should disprove this and mean that the business is significantly more profitable, and the operating model supports future growth. That needs to be clearly explained in the business plan (and the hopefully easy-to-use financial model).
· Technology and integration; Every financial advice firm is different, so a consolidator may well end up with many platforms, several cashflow modelling tools, different risk models, and various practice management tech. Integrating all of this effectively is complex and difficult, but needs to be done along the way, while integrating the acquired businesses and running the firm. The tech needs to be as integrated as possible, balancing “best of breed” vs. wanting as few systems to manage as possible.
There is much more we can say about financial advisers in particular and wealth management more broadly – so we’ll stop here. Please contact Simon or Solomon to find out how we can help you.
Simon Hemsley, PartnerEmail Simon
Solomon Ishack, Senior ConsultantEmail Solomon