Tim Sargisson: Are we seeing a shift away from consolidation?

Every advice firm needs to demonstrate a genuine client-centric proposition at the heart of the business, writes Tim Sargisson, and any that merely pay lip-service to the idea will soon find themselves short of new blood

It was good to read the recent comments from SimplyBiz CEO Neil Stevens in Professional Adviser, describing the business as “the antidote to consolidation”. As he said: “We have shouted about the benefits of small partnerships – they work and are very profitable. Some of the best-quality businesses have been the small ones. We are incredibly passionate about making sure small firms can thrive.”

And thriving they are. Last month the Financial Conduct Authority issued Data Bulletin 13, whose latest set of trends showed total pre-tax profits for financial adviser businesses were up 23% from £569m in 2016 to £698m in 2017. Revenues were up 21% in 2017, with total revenue earned by financial advisers of £4.5bn, up £0.8bn in 2017.

Overall, 96% of financial adviser firms made a profit on ordinary activities before tax for 2017. Firms with between six and 50 advisers showed the highest average turnover per adviser – at £171,284 – with the highest average pre-tax profit of £358,454 per firm.

The role of the consolidator is clear because it allows a vendor to attach a value to their business and to sell at a fair price. Clearly, we have seen a lot of activity in terms of horizontal acquisition, where a firm buys a complimentary business as part of a growth strategy.

In this respect, it can be argued that Neil’s comments are hard to understand. After all, consolidation is surely a force for good? Not so, argue numbers of advisers I talk to. Their concern is the conflict they see running through these businesses, which can leave the client trailing in the wake in terms of the needs of the consolidator and the vendor.

As one consultant who works on advice firm mergers put it: “The consolidators with private equity backing need funds under management faster to enable them to meet their targets for either an initial public offering or a trade sale.”

It appears that advisers who have spent a career building up a business are proving less likely to sell to a consolidator if they are not convinced that, following a sale, their client’s financial needs will be fully supported.

RDR has undoubtedly helped profitability in small and medium-sized firms. The process of client segmentation forced firms to focus on profitable clients and the need to build a service around those clients to be successful – in short, fewer clients but deeper relationships.

These clients are not simply names on a database – and clients want to work with advisers who provide space for human interaction. As SimplyBiz’s Tom Hegarty noted in 2017: “The majority of directly authorised IFA firms tend to be smaller businesses, therefore the service delivered to clients is of paramount importance when considering a sale. Many small firms have concerns about selling to consolidators who already have many clients and therefore will be unable to maintain the same quality of personal touch.”

For her part, Linda Whittle, a senior associate for law firm Fladgate, points to increasing consolidation among the smaller firms. She is of the opinion this is due to strategic purchasing based on cultural fit and, while the larger consolidators provide attractive exit options for many firms, there are younger advisers seeking to buy out their retiring colleagues.

Cultural Fit 

PFS chief executive Keith Richards recently said that one of the reasons small firms like to buy or sell to other smaller firms is because of the cultural fit. The continued certainty of client service, proposition and business performance they can offer make them a very attractive option.

Improved profitability can quickly unravel in the light of soaring recruitment costs, regulatory levies, PII premiums and so on. Then there is the constant need to balance the management of risk – particularly investment risk – as well as  governance and oversight, with the resources available to the business.

Investment risk matters because it is ever-present and we know that, when that goes wrong, it has the potential to bring down the whole enterprise. Against this tapestry of concerns, consolidation will continue.

The fact, however, remains that firms need to demonstrate a genuine client-centric proposition at the heart of the business – and that the firm is not simply paying lip-service to the notion. Advisers’ enthusiasm to move to the larger national or network will quickly evaporate if this is not evident and we would do well to remember this if we want to continue to attract advisers to our proposition.

Published on 17th July 2018