Print this article
BEST OF 2013: Consultant Sees Further M&A In UK Wealth Market, Frets Over "Orphans"
Tom Burroughes
2 January 2014
This publication is re-issuing the best interview items of the past 12 months. Merger and acquisition activity in the UK’s fractured wealth and financial advisory sector is brisk and one figure
with a particular vantage point on the scene is Brian Spence, a consultant helping firms to make sense of what is going on. The founder of Harrison Spence Partnership, Spence, managing
partner, has witnessed seismic shifts in his 30 years’ management experience
within the financial services sector. And not all of these changes make him
happy. Some of them give him great cause for concern, such as the issue of ordinary savers no longer being able to afford financial advice. There certainly have been plenty of large-scale wealth management
deals of late, such as Julius Baer’s purchase of Bank of America Merrill Lynch’s
non-US business. Further down the size rankings, however, wealth management “consolidators”
such as Succession and Focus Financial have been busy adapting to a new UK regulatory
landscape. There is more to come. It was the opportunity afforded by changes which prompted
Spence in around 2008 to establish his consultancy to work with financial
services firms in the retail and institutional space. Today, the business helps
firms to improve profitability and adapt in the face of increasing regulation, as
well as facilitating sales, mergers and acquisitions. It also provides bespoke
and project based services across the sector. Demand for its M&A expertise has made that a focus in
the last couple of years. “I went to bed one day a consultant and woke up the next
morning to find I was an M&A broker,” Spence joked. Senior partner Alan
Marks joined the firm in 2010, bringing with him 25 years’ experience in
financial services with a focus on change management and strategic planning. However, it has taken time for this momentum to take hold
and, indeed, for the industry to wake up to the impact of increasing
regulation. Spence recounted his experience of presenting to a variety of
investment managers and other financial services firms on the implications of
the Retail Distribution Review reforms a couple of years ago. “We came away quite depressed to see that among such
high-end decision makers, no-one had a clear idea what the threats and
opportunities of RDR were,” he said. “Very few in the industry were able to envisage a future
beyond RDR. A handful of consolidating firms have taken a huge gamble and built
their acquisition models on a hope that IFAs would move away from their
ideology of independence towards a model of restricted advice. These firms have
visualised the landscape and made that a reality,” Spence said. He noted that in the case of Bellpenny and Sanlam, both
these firms are foreign-owned (US and South
Africa, respectively), showing how overseas firms see the
UK
market as ripe for consolidation. One of the risks in any M&A deal involving a “people
business” such as financial advice is buying a firm, only to see some of its
key employees defect (the Towry/Raymond James legal tussle comes to mind), so
it is important to match the right buyers to sellers of IFA firms. “Some 75 per cent of firms that are approached by
consolidators are not suitable,” he said. “Consolidators use us to source the
right businesses that suit their character.” Declining numbers The IFA industry, once counting as many as 300,000 advisors
in 1986 - spanning a range of different business models - has shrunk
dramatically to around 27,500 today. IFAs at one stage operated in some ways as a “lifestyle” or
“cottage” industry where profit was not always the main driver. Such business
models have not been able to withstand the rising tide of regulation. “The
financial advisory service is turning into a civil service business”, he said,
referring to the constant requirement for compliance, regulatory issues and
tax. “A lot of IFAs are very independently minded - that is why
they are IFAs,” he said. Many of such people became advisors in the first place
to get away from a corporate culture. Whilst for some, the right route is to sell
their business - and leave the industry or retire, others are prepared to take
a more entrepreneurial approach. “IFAs had an almost religious zeal about independence and
this has turned on a sixpence,” he said. “The more business savvy amongst them
have realised that, in effect, they were restricted anyway and probably only
used a handful of firms.” Consultancy While the market continues to be buoyant and M&A remains
to integral to Harrison Spence’s business, there are numerous other options
available to firms that want to reduce uncertainty and plan for the future - and
here diversification is key. “All IFAs need to work hard to maximise the value of their
practice for sale and no deal should be done without first thinking
creatively,” according to Spence. Looking to the future where M&A activity will inevitably
slow, Harrison Spence Partnership has expanded rapidly in recent months in
order to bring the focus back to its core consultancy capability. The firm has taken on four associate partners, with competencies
to guide firms on how to improve their businesses in shape to meet the
challenges posed by RDR and other regulation. These are marketing expert,
Martin Fox, who has worked in financial services marketing throughout his
career, including as a marketing director for two leading companies; Ralph
Pettengell, a chartered financial planner with 30 years’ experience of growing
IFA firms and buying and selling businesses, and also a member of the Association of
Taxation Technicians, and Clayton Witter, who has
expertise in strategic planning and business development, sales and marketing,
most recently as managing director for a consumer products brand, who is also a
qualified executive coach and Myers Briggs practitioner. “Some of the
opportunities in our industry are as great now as they’ve ever been – for the
right financial firm, working with the right model,” Spence said. “There is no
single way forward that is right for everybody and the path to success varies
greatly between firms – depending on their scale, skills, target clients and
starting proposition. With our associate partners, we are well placed to help
firms develop a strong and sustainable business.” Strategic partnerships Firms have increasingly been seeking strategic partners as
business conditions have changed. Many IFAs are approaching retirement age and
acutely aware of needing to secure a good price for their business in order to
retire in comfort, whether that’s five, ten or even twenty years away. “Among
advisors today, 75 per cent of them will look for a larger ‘umbrella’ firm to
partner with,” Spence continued. In its simplest form, no capital is paid up front. Instead,
the IFA enters into an agreement to sell his or her practice for a fixed
multiple at the end of a two or three-year period. This route is often well
worth exploring, as it allows IFAs to continue working and usually leads to higher
sale prices, giving some certainty about their future financial position. However, strategic partnerships are complicated by the fact
that, traditionally, such partnerships have been conditional on the IFA moving
assets onto the consolidator’s platform, or into their investment proposition,
Spence said. However, Harrison Spence Partnership’s experience is that
this incentive to transfer assets, is something the FCA is cracking down on,
viewing it as an inducement, which encourages churning, he continued. “The strategic partner will have to come up with a solution
to the successful buying up of funds,” he said, suggesting one solution might
be that acquirers and strategic partners will have to pay a percentage of total
funds under management rather than a multiple of funds into their investment
proposition. In other words, agree a formula which includes all investments,
not just their own. Small firms as
consolidators Spence’s view is that over time, the landscape will look
as it did about 40 years ago with a few big companies dominating the market but
with the vast proportion of the UK
working population disenfranchised due to the prohibitive cost of advice. “The big companies that run retail money will be the large
investment houses, and consolidators,” he said. However, while he believes in what can often seem like a
playing field tilted in favour of large national firms, the RDR is creating
massive opportunities for strong business of all sizes. Ambitious small and
medium-sized practices have the opportunity to grow backed by several
attractive sources of funding offered by VC firms. “Most involve being
open-minded about their investment proposition, but without compromising their
independence or reducing their freedom of manoeuvre,” Spence said. “There are real opportunities for people who are
entrepreneurial, switched on and who want to pick up 'orphan clients',” he
said, pointing to opportunities in the "life" business and mortgages – areas which
are commission rather than fees driven. He also mentioned the rise of online
solutions, telephone-based advice as well as other channels where some of the
costs are taken out, including online advisory and discretionary fund managers
like Nutmeg. Discretionary fund
managers One specific section of the industry where Mr Spence
believes that firms have not fully understood the threat to their business of
large consolidators are discretionary wealth managers that rely on IFAs for a
lot of their custom: “Consolidators out there pose a huge threat to erase
discretionary fund managers who are dependent on the IFA sector. Far too many
DFMs see what they are doing as just renting client money for a period of time,
but that is not good enough,” he said, “If consolidators buy whole groups of
IFAs, their IFA funds are likely to haemorrhage.” Harrison Spence is going to stay busy.