WHAT CONSULTANTS SAY: A Look Back At M&A In Wealth Management

Fred Hansson IMAS Partner 12 March 2014

WHAT CONSULTANTS SAY: A Look Back At M&A In Wealth Management

This article is by Fred Hansson, a partner at IMAS. He examines the latest developments in mergers and acquisitions in wealth management, and the lessons to be drawn from them.

This publication has approached a range of highly respected consultants operating in the wealth management sector to give their views about a range of challenges and opportunities for the industry in different parts of the world. A number of articles will be released in these pages in the coming weeks and we hope readers find them stimulating. The articles have been sought by this publication and also by Bruce Weatherill, of Weatherill Consulting, and also chairman of ClearView Financial Media, publisher of this news service. This article is by Fred Hansson, a partner at IMAS. Fred has some 20 years’ experience of corporate finance having specialised in European Mergers & Acquisitions and Equity Capital Markets throughout his career. Prior to joining IMAS, Fred worked for JP Morgan Cazenove, Handelsbanken Investment Banking and Kaupthing Singer & Friedlander. To view the item by Aite Group, click here.

2013 saw an increase in M&A activity across the financial services sector in the UK and the wealth management industry (including investment managers and financial advisers) had its fair share of it. The number of announced M&A transactions with a value in excess of £5 million rose by 54 per cent and we estimate that the aggregate value of the deals grew to £4.9 billion, almost double the amount of last year.

The increased deal activity was partly driven by the divestments from banking groups which are reviewing their strategies in retail investment advisory and asset management in pursuit of more focused business models. Examples include Lloyds Banking Group’s gradual reduction of their 52 per cent stake in St James’s Place and The Co-operative Banking Group’s sale of its life insurance and asset management businesses to Royal London.

However, while larger diversified financial institutions are streamlining their operations, some investment managers are contemplating adding advisory services to build more vertically integrated models as a means to grow their AuM and create stronger bonds with their clients.

Having your own financial planning capability also has the advantage of reducing client attrition risk for investment managers, who rely largely on IFAs for their distribution. In the name of RDR, they could easily become victims of financial advisors’ objective selection processes if being primarily based on investment performance metrics.

Many IFAs welcome this development. They may have found it increasingly difficult to charge their clients enough to cover their rising costs of providing financial advice and prefer building recurring income streams together with an investment manager to create stability of earnings and capital value. In addition, synergies are often achievable in the investment suitability assessments and client relationship management between the investment managers and IFAs.

Why not more?
If this seems logical, why have we not seen more of it? Perhaps investment managers and financial advisors are still very different cultures to marry, one being centred on fiduciary duties and the other being very focused on the front-office. It also forces the investment managers to face new and unfamiliar risks that are inherent in retail financial advisory relating to potential liabilities lurking in previous advice. Perhaps more importantly, DFMs do not want to be seen to be aggressively wading into the financial advisors’ territory and become competitors of IFAs from whom they still receive new business.

If revenue synergies are the prime driver for vertical integration, cost synergies are often the motivation for consolidation. In recent months, two of the largest deals in the UK asset management industry for over three years have been announced: Aberdeen Asset Management’s acquisition of Scottish Widows Investment Partnership for up to £650 million and Bank of Montreal Financial Group making an indicative offer to acquire F&C Asset Management Plc for a total cash payment of £708 million.

No doubt there are other strategic considerations for these large deals to take place. But it highlights the importance of the availability of funding in creating growth. Our research shows that, last year, 60 per cent of all entities in the sector (classified as being involved in all forms of investment management or advisory activities) that grew to an estimated value of £100 million or above have external owners (sourced via the stock market, private equity funds or from overseas parents).

So, will these growing businesses, which can tap into a pool of capital when attractive opportunities arise, be the winners and start reshaping the wealth management industry as we know it? The answer may partly be in whether clients’ trust will be better preserved by the SMEs whose owners are typically active in the business and often have plenty of client interaction.

But that overlooks other important factors, such as technology and brand. Not only could the availability of capital be a determining factor for the success in M&A, it may also provide an edge for investments in systems, delivery and marketing, all of which are key drivers for growth and value. An interesting example of this is Permira’s investment in Bestinvest, potentially creating the platform for both business acquisitions and a model fit for the 21st century, catering for everything from online direct-to-consumer solutions to bespoke face-to-face services. Will a new Hargreaves Lansdown emerge from it?

That brings me to the subject of distribution, such a vital component for success in investment management and the allure of which was evident in many M&A deals. A bank’s or advisor’s captive client base or an investment manager’s access to high net worth investors provide compelling benefits for a combination of forces as witnessed by Handelsbanken’s acquisition of Heartwood Wealth and Standard Life’s acquisition of Newton’s private client business. But, perhaps the most striking example of this last year was Russell Investments entry into the distribution market via the acquisition of On-Line Partnership, an IFA network.

With a strong stock market behind them, wealth managers have enjoyed good conditions for growth in recent years and become more attractive propositions for acquirers. Positive stock market developments fuel the acquirers’ confidence and help capital raisings. I am not inclined to predict the future but, if the first month of this year is anything to go by, there are plenty of reasons to be optimistic about the potential for further M&A activity for the rest of the year.

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