Acquirers in the financial advice market are increasingly looking at consolidation not aggregation, a report has found.
NextWealth’s consolidators and aggregators report found mergers and acquisitions are continuing to drive change in the advice market.
It also highlighted several factors driving this change including mounting costs of doing business (particularly regulatory costs), pressure on the ongoing advice charges and the rising cost of borrowing.
Heather Hopkins, founder and managing director of NextWealth, said mounting pressure on firms to boost revenue and profit has led more firms to look to consolidate assets to in-house investment solutions and in some cases platform/custody solutions.
She added: “This is leading to the death of the aggregators model, meaning it’s less likely that acquired firms will continue to use their previous investment and platform solutions.”
Although M&A activity has slowed since the start of 2024, NextWealth believes there are a significant number of deals waiting to be announced in the next few months.
Hopkins said: “Since the beginning of 2021 there have been more than 300 announced deals. While the pace of acquisition increased from 2022 to 2023, it was not as substantial as previous years.
“However, many major acquirers told us they have healthy acquisition pipelines with a number of deals under way.
"Fresh PE investment in some acquirers is also a vote of confidence in the model. From what we’ve learned from our latest research, our estimates suggest the pace of consolidation will remain about even with 2023.”
Challenges for acquiring firms
According to the report, integration is one of the most cited areas of friction for acquirers, with data migration being particularly challenging due to no common data structures.
Hopkins believed good clean data would be an important factor for businesses looking to sell.
“Some firms are employing technology specialists to data mine the systems before new processes and operating structures are shared with advisers and operations staff. This can result in friction and, in a number of cases, additional cost and a lengthening of the whole process. Additionally, training advisers to properly use systems adds additional costs and time,” Hopkins added.
NextWealth also found regulation is serving as a catalyst for consolidation but is also a risk for acquiring firms with consumer duty contributing to the rise in firms looking to sell.
Hopkins pointed out buyers are increasingly conscious of the impact of acquisition on the end client.
She said: “The impact of consumer duty is only beginning to be felt. The recent news that SJP was setting aside £426mn for potential client refunds for clients that complain about not receiving on-going advice has been a stark reminder to consolidators of the risk in their books.”
This comes after Louise Jeffreys, managing director of Gunner & Co said regulation was “unquestionably” causing more advisers to retire and sell their business
She said: “With the implementation of consumer duty, many smaller firms are saying they don’t have the resources, or the time, to not only run their business and look after their clients but also to produce the additional documents the FCA wants them to and to have everything documented the way the regulator wants.”
