Three main trends are impacting the M&A market in the IFA and wealth management industry, says Marcus Harrison, M&A executive at corporate finance specialists Shaw & Co.
The first of the three trends is consolidation. Harrison refers to a number of factors contributing to the attractiveness of the advice industry for investment.
“Independent firms tend to be small and focused on individual regions, so buy-and-build strategies allow access to new markets; the industry operates on a recurring revenue model, with minimal ‘churn’ from a loyal client base; and intellectual capital and regulatory requirements provide high barriers to entry,” he said.
Harrison also points out that a key factor driving increasing levels of consolidation is the number of IFAs planning to retire and who are likely to be considering a business sale as part of their retirement plan. But this may not be a simple and straightforward matter.
He explains: “It’s worth noting that selling a business can be a challenging and stressful proposition. Smaller IFAs are often unacquainted with the art of M&A and can soon find themselves outmatched by the wealth of expert advisers and the M&A experience that can be brought to the negotiating table by larger consolidators. Therefore, it is vital for prospective sellers to have an experienced adviser to support them through the process.
“Furthermore, in a fragmented industry such as this, where employee numbers are small and the owner-manager is personally responsible for a large proportion of the financial performance of the business, there are clear implications for the timeframe of an exit. An earnout structure is common, meaning that only a portion of proceeds are received on completion and that an exit will need to be planned well in advance.”
Regulatory change
The second trend is continuing regulatory change, as Harrison observes: “The industry is facing increasing regulatory pressure, forcing smaller businesses to exit the market and increasing the barriers to entry for new firms.
“This clearly offers excellent opportunities for larger players to consolidate and increase their market share, while benefitting from reduced rates on professional indemnity insurance and other economies of scale.”
He added: “A number of major regulatory changes are on the horizon, driven by a range of factors, including continuing fallout from the UK’s exit from the European Union, the rise of technology and the increasing focus on consumer protection.
“The impact of the FCA’s future regulatory framework and consumer duty will also come into force this year, pivoting to an outcomes-focused delivery of services and requiring firms to both deliver good outcomes for retail customers and to demonstrate that they are meeting these obligations. For many IFAs, the expanding regulatory burden is likely to make a company sale to a consolidator an increasingly appealing option.”
Technology
Harrison also states that technology is a key trend.
“The rise of technology is transforming the wealth-management industry, creating new opportunities for businesses that are able to adapt to the changing landscape, ” he said. “This is leading to increased M&A activity, as businesses seek to acquire new capabilities and technologies.
“Businesses which can develop and implement robo-advice platforms are able to benefit from a number of advantages over traditional IFAs, such as lower fees, greater convenience and access to a wider range of investment products.”
