The consolidation trend in the UK financial adviser market is tailing off. The headlines might suggest otherwise, but our hunch is that the pace of new deals is slowing.

Our thinking can be boiled down to carrot and stick.

1. If they haven’t bitten yet, they aren’t interested in that carrot

Financial advice business owners that have not sold yet are probably going to stick with it for a while yet. The prices being paid are well known. We’ve all read headlines, we’ve chatted about the multiples and owners of quality financial advice businesses have been actively courted over the past few years.

If they haven’t bitten yet, they aren’t interested in that carrot, or at least not yet.

2. If they made it through the past few years, they’ve got the grit to continue 

Running a financial advice business (or any business) has not been easy these past few years. Let’s list the well known and well-reported reasons that running a financial planning business has been getting more complicated:

  • PI premium and excess hikes. On average, financial advice businesses have seen PI premiums jump 21% over the 2 years to December 2020. For mid-size firms with £100k to £500k, the jump was a whopping 41%.
  • Regulatory disruption: The number one business challenge facing financial advisers (according to our Financial Advice Business Benchmarks report) is regulatory disruption. Twas forever thus. If you’ve managed RDR, pension freedoms, MiFID II, SMCR, &c, you are probably pretty well set up to deal with Consumer Duty, more MiFID rules and whatever else the FCA will throw at you.
  • Transfer of risk: The RDR has been a boon for financial advice businesses. It helped push forward changes that meant financial advice firms could create and realise embedded value through recurring revenue that is extremely sticky. On the flip side, it, along with digital transformation, has lead to a transfer of risk to financial advice businesses. Remember the days when an application form was posted to the provider and the provider bore the risk of entering all that information correctly and executing the trades. Advisers do that now. That’s a good thing but it means more risk sits with advice firms.
  • Digital transformation: Customer expectations are set by the likes of Google, Apple and Amazon. They expect tech to work and they expect access to information to be immediate and easy. This requires investment and tech know-how. Off the shelf adviser tech leaves most of us wanting. Financial advice firms need expertise and resource to deliver that experience.
  • Covid: The pandemic forced people to re-think their life choices. This encouraged some business owners to sell. Other challenges include the requirement on heads of businesses to look after the mental health and wellbeing of staff and clients and to transition to managing a remote or hybrid workforce.

Carrot and stick

If the carrots and the sticks of the past few years haven’t been enough to convince a business owner to sell, they aren’t looking to sell – or at least not yet.

This is why we argue that the pace of consolidation will and is already slowing. There are deals in the pipeline and those will continue to be announced in the press. But the slowdown is becoming evident. In our Financial Advice Business Benchmarks study, only 5% of respondents said they plan to sell the firm, down from 19% in 2020.

All of this raises the obvious question: What will PE backed consolidators do with money they promised to deploy on behalf of PE backers? There is clear pressure to deploy that capital. PE firms don’t like to sit on cash for long – in some cases this can result in penalties paid to investors,

We also think this change will focus attention on other revenue and profit growth engines within large financial advice businesses.

What do you think? Has the carrot been sufficient enough to root out firms willing to sell? Will we see the pipeline for acquisition dry up and if so, how will PE backed consolidators respond? We have strong views on this and, as always, we’re interested to hear from you.

 

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