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Sean Page, Locke Lord

Adoption of new technology supports strong valuations for financial advisory firms, but poses significant future risk too


By Sean Page, Partner at Locke Lord – Technology was already an essential tool for the UK’s financial advisory community, but the pandemic has forced advisers to further embrace such innovation as a central way to interact with clients. This in turn has meant firms’ compliance functions have had to get up to speed quickly in order to support the front office. 

This adaptation has enabled the industry to perform strongly through 2020 ensuring that traditional relationship driven advisory models have remained relevant and able to service clients’ demands through this unique period of time. 

However, the introduction, at speed, of new technology and ways of working does carry additional risk for advisory firms. Firms need to be conscious of these risks and resolve upon how they can mitigate them urgently given it seems highly likely that we will retain much of these new processes and ways of doing business as the pandemic recedes. Getting this right now will be crucial when it comes to any business looking to go through a sale process in the medium term.

2020 saw plenty of dealmaking activity in the sector. We saw Birmingham-based financial planner, Independent Wealth Planners, make 10 acquisitions in 12 months. This momentum has continued to the first quarter of 2021 with recent deals including Tilney S&W buying HFS Milbourne, while Royal London acquired Wealth Wizards from Liverpool Victoria. Far from slowing consolidation down, the pandemic appears to have increased the rate of M&A across the sector, with more expected as we return to ‘normal’ market conditions later in the year. 

The key themes driving consolidation remain the same, being regulatory pressure and the rising costs of compliance, which tend to hit smaller advisory firm disproportionally. When combined with forecast (but not yet realised) changes to the personal tax regime in the UK, these pressures have encouraged owner-managed firms to look to sell their businesses to larger competitors, which are arguably better able to withstand the headwinds of the market at this time.

Deal drivers and consideration structures remain focused on securing the services of talented advisers post-completion, together with being able to successfully transition the client book and assets under management over to the purchasing entity. Understanding client origination, and how future recurring revenue streams will be maintained, are usually core to any price multiple calculation.

We are increasingly seeing purchasers wanting to understand how a target firm is using technology to its advantage in servicing its clients, even more so since the pandemic took hold. We’ve all got used to ‘meeting’ with clients and prospective clients over video conferencing facilities and online platforms. As we’ve all got used to using this tech, it’s played a pivotal role in supporting new business growth for advisers. And it will continue to do so in the future, even as we return to face-to-face meetings and other ways to originate new business. 

But there’s an undoubted risk to embedding this technology too. One which has the power to impact upon valuations. For example, a recent survey of financial firms by the technology compliance group Smarsh, revealed that just 22% of firms using conferencing tools had established retention and oversight programs for the resulting communications content.

With any transaction in the professional advisory sector, the key asset is the client book and the ability of the target firm to deliver it to the purchaser. Where advisers are no longer able to hold face-to-face meetings, or having clients going forward wanting to continue virtual meetings, many advisers with less sophisticated technology and heavily paper-based systems may run the risk of not having up to date engagement documentation with long-standing clients which means that they will likely be excluded from any estimate of future revenue. This type of lack of paperwork could impact a company’s valuation or cause regulatory challenges for any potential purchaser which, if serious enough, could put it off the deal.

In 2020 we witnessed a very quick, and necessary, transition to virtual meetings, with client records and documentation increasingly being digitised. Given the pace of this change, firms need to ensure that their systems and processes have kept pace. Those with the best technology, fully embedded in their compliance framework, will be the most attractive in a sector landscape which will see further consolidation in 2021.

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