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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.