In recent years, the wealth management industry has changed dramatically with a new wave of consolidation as firms look to sell due to tougher regulations driving up compliance costs and heavier management demands.

In recent years, the landscape of the wealth management industry has changed dramatically via consolidation as a need for economies of scale amid rising compliance costs make deals attractive. While European banks have in some cases sold trust and asset management arms to protect margins, smaller firms have merged to absorb the burden of increased regulation costs.

According to a report released by London-based consultancy Scorpio Partnership, mergers and acquisitions reached "fever pitch" levels in 2013, with the price of deals topping $8 billion and almost $760 million in client assets traded. The report found that more than 60 transactions occurred last year. But prices fetched have come down as times have got tougher: purchase prices have come to an average of 1.22 per cent of managed assets, way down from 3.7 per cent in 2008.

Notable deals recently included Morgan Stanley selling part of its international wealth management business to Credit Suisse and Union Bancaire Privee acquiring international private banking units from Lloyds Banking Group. Credit Suisse sold its Clariden Leu (Europe) business to Switzerland's Falcon Private Bank.

At the smaller end of the scale, in the past year there have been a flurry of mergers and acquisitions in the wealth management industry due to the increased demands of new regulation.

IFAs across the board have been faced with burgeoning compliance costs, and many have decided to exit the sector rather than deal with the demand of new qualifications and regulatory structures, driven by the increased demands of the Retail Distribution Review, Kevin Ronaldson, chief executive of UK wealth manager Bellpenny, told this publication in a recent interview.

"Consolidation in the industry is being driven by regulatory change and is a combination of a whole number of factors, including advisors that feel it is easier to sell up as they feel they can't operate profitably with the new regulations," said Ronaldson.

Founded in October 2012, Reading-based Bellpenny has now completed 15 acquisitions, and currently has assets under administration of £1.2 billion ($1.97 billion) and around 14,500 clients.

Recent acquisitions include Actuarial & Investment Services, a North West London advisor with £75 million of funds under management, and The Hammond Consultancy in Birmingham, an IFA with £112 million of funds under management.

"There is no one set type of firm we are looking for, but they have to have the same philosophy and approach, with the focus being on the client," said Ronaldson.

"When we make a new acquisition, we usually ask the principals to stay on for three to six months to help introduce them to Bellpenny. We like to see how they interact with their clients and build on the good financial planning advice in order that they can engage with us in a positive way so that they can support the transition and integration of these clients into the Bellpenny way of doing things," said Ronaldson.

RDR

The Financial Conduct Authority's predecessor, The Financial Services Authority, brought in the RDR on 31 December 2012 in order to improve professionalism in the financial sector and increase transparency so that clients would be able to make more informed decisions about purchasing investment products. Under the new regulation, financial advisors have had to switch to upfront fees, are banned from earning commission on the sale of financial products, and are also required to gain higher professional qualifications.

As a result of these changes, many firms that have been unable to adapt are looking to sell because they cannot cope with the added burden of the new rules.

Ronaldson said that the RDR had been the catalyst for the formation of Bellpenny and, 12 months on from its introduction, the reverberations continue to be seen across the UK advice sector.

"Many IFAs nearing retirement have also decided to exit the industry rather than deal with the increased demands of regulation. For some in their 50s and 60s it has become impossible for them to maintain their level of service whilst studying for the newly required qualifications and putting new business structures in place," said Ronaldson.

Ronaldson said that as advisors were now having to charge client fees, many have found they are unable to deliver the service that they are proposing to charge for.

"Some advisors may not be able to provide their clients with the proposition they said they would because they are being asked to provide face-to-face advice, which they were perhaps not always giving to their clients, and as a result are suddenly finding they are unable to do it profitably," said Ronaldson.

Integration process

One of the challenges firms face as a result of the consolidation process is ensuring that clients continue to receive continued personal service and advice during a changeover. Ronaldson was keen to point out that the consolidation of firms by Bellpenny had not affected the relationship between clients due to the integration process.

"We have a very smooth integration process which is run by a dedicated team that manages the handover and transfer of clients from the IFA to Bellpenny. We involve the IFA firm and communicate with them regularly, particularly at the stage of the handover. Our attrition rate is also remarkably low, and so far, the number of clients that have moved away is around 1.5 per cent," he said.

The future
The pace of consolidation looks set to continue in 2014 as firms seek to adjust to the new regulatory landscape. Already this year, IFA consolidator AFH Financial Group has bought the assets of Stoke-based independent advisory firm SR Wealth Management in a deal worth around £200,000 in its seventh acquisition since the implementation of the RDR, while Towry is accelerating its acquisition programme with plans to acquire a further 10 firms this year.

Ronaldson said the industry as a whole will see increased consolidation and acquisitions in 2014 and confirmed that Bellpenny was currently talking to several firms.

"We are planning to make a further 15 acquisitions this year, repeating the number we did in 2013. Our plan is to grow through acquisition and I don't think it will decline; the market will be similar to last year, but what I do think is that a number of firms will find it potentially more difficult to provide a service to their clients and as a result they will realise they have to do something different," said Ronaldson.

Despite the problems many small firms are facing, Ronaldson still believes it is possible for them to survive following the RDR.

"Any market needs a good mix and type of approach, models and ways of doing things. I certainly think that small high quality IFAs can exist alongside bigger businesses. However, I think it is more difficult for some to continue under the RDR because it just means the way they did business before has to change and that does not suit everybody. Small firms can definitely survive, but like any business out there they have to make sure they do it in the right way," said Ronaldson.

"They need to communicate with their clients in a more technology driven way than they have in the past focusing on their strengths and downsizing the number of clients they look after if necessary," he added.