But the story runs deeper than that. Many of the products run by the boutiques were sub-scale when acquired by AssetCo, or concentrated in areas such as UK equities or global equities where demand is either muted for the asset class or where well established incumbents have large funds.
And while consolidation is itself a cure for the problem of sub-scale funds as funds can be merged, time seems to have caught up with AssetCo, as they were not able to create the scale prior to markets turning against them.
Paying the piper
The second complication is that many of the consolidators in the advice market raised at least some of the capital to buy up firms by taking on debt.
And again, in the era of loose monetary policy, the calculation was intuitive, with rising asset prices meaning the AUM of firms could reasonably be expected to rise by more than the cost of repaying the interest on the debt.
But rising rates create a double whammy, with the cost of refinancing the debt rising at the same time as the revenue streams are declining.
And the key here is that just as mortgage holders are presently worried about the costs when their refinancing rolls around – an impact that is spread over many years as each individual is different – so the same scenario faces the consolidators, with a steady stream of refinancing negotiations facing the companies in the years ahead.
While macro events determine the performance of most asset classes over short-time periods, the decade that may become known to history as the quantitative easing era extended the normal business cycle.
But such cycles always reassert themselves and force those whose business models were built on the basis of the “old normal” to adjust to the brave new world, and there will likely be casualties along the way.
David Thorpe is investment editor of FTAdviser
