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Russell Andrews, SEI

Riding the consolidation wave

Harriet O’Brien talks to Russell Andrews, global head of advice solutions at SEI’s Asset Management Distribution unit, about the effect of consolidation on the financial advice industry.

Harriet O’Brien talks to Russell Andrews, global head of advice solutions at SEI’s Asset Management Distribution unit, about the effect of consolidation on the financial advice industry.

 

What is driving the trend for consolidation in the financial advice industry?

“There are two key drivers of consolidation. First, the volume of private equity money coming into the industry, catalysing expansion through acquisition and consolidation. Second, the increased cost of business compliance (including the significant hikes in professional indemnity cover) which is forcing small to mid-sized companies to consider their options.

“Over the last few years, the advice industry has become increasingly attractive for private equity investors as it has demonstrated strong performance and financial resilience. Advice businesses also present significant opportunity for financial gains through the benefits of scalability and efficiencies that can be delivered though successful consolidations. Looking ahead, the opportunity for acquisitions is only set to grow as the population of advisers and advice business owners continues to age.”

Is consolidation devaluing the adviser?

“In many ways, successful consolidation could increase the value of advisers, but this depends on the service model. In some cases, consolidators bring with them a less personalised service model, which is a function of running a large-scaled organisation. However, for many smaller advisers, the personalised one-to-one service they provide is a key value driver.”

Is the increase of foreign firms in the UK financial advice industry a good thing?

“In our view, the location of a parent company isn’t important as long as the strategy and execution are well developed and UK-centric. This includes strong and empowered local leadership.

“However, the risk is that the UK looks like a good market to be in and foreign-owned businesses view the UK as an opportunistic bet to utilise their existing service model. This is not a sensible approach to a market entry and presents the risk that if the bet doesn’t pay off, they look for an equally quick exit strategy which could unduly impact end-clients.”

Are there now fewer advisers ‒ or a lack of advisers of a younger generation?

“While adviser numbers have decreased marginally, they have remained fairly stable over recent years. However, an emerging problem is the average age of the UK adviser population. With much of the population now in their late 50s, we could start to see some natural declines as advisers opt to go part-time or retire, a trend that could be accelerated by consolidation.

“The challenge we are facing is how to attract a younger generation of advisers. This is difficult on two fronts. First, the absolute number of advisers is important given demand, although technology is helping with this dynamic. Second, and perhaps more importantly, a younger generation of advisers can play a major role in the evolution of the business and advice model as wealth transfers between the generations. This is because no one knows how to deal with a specific customer base better than someone who is actually part of that same customer base.”

What effect is consolidation having on the customer experience?

“Consolidation could, and in fact should, lead to better customer outcomes. If approached well, consolidation should lead to lower costs and earlier entry points. Additionally, the deeper pockets of the consolidators will likely help to increase spending on client technology that is focused on delivering great customer experiences. This includes digital enhancements and the ability to offer more choice without compromising quality through lack of scale.”

Who is benefitting most?

“The immediate beneficiary of a market going through consolidation is the advice business owner looking for an exit strategy. With so much activity and competition at the moment, almost any independent firm is in the crosshairs of a consolidator, meaning the opportunity to maximise value is at an all-time high.

“Longer term, successful consolidation should benefit all stakeholders from private equity investors, all the way through to the end investor.”

What are the strategies that should be adopted?

“It’s absolutely critical that the consolidating business has a clear identity and approach that underpins the search for acquisitions and doesn’t focus simply on numbers such as firm size. There needs to be an achievable set of synergies in philosophy. An adviser firm with a strong focus on holistic planning might struggle to successfully integrate a business that considers its investment management credentials as its crown jewels.

“Equally, a strong adviser proposition to encourage fast adoption is essential. The adviser holds a lot of the cards as the end-client relationship-holder and has quite possibly been running a successful book of business for many years. This can create a reluctance to change, and this slow adoption can quickly diminish the business value that consolidation provides.

“Conversely, there is an inherent risk when being backed by a private equity firm which needs to be carefully managed. Not only will there be inevitable pressure to invest the money, which could lead to bad decision-making, but also the need to deliver a target return within a typical timeframe of five to seven years. Ultimately, any strategy needs to work with the private equity backers in a sensible and sustainable way.”

What is the outlook for the financial advice industry – and what should we looking out for?

“The outlook is very healthy. Client demand is high, resilience has been impressive, and technology is enabling advisers to do more, and potentially do it better. This in turn should lower the barriers for entry and improve wallet share, which will increase demand even further. However, the risks cannot be ignored.

“The entrance of well-resourced asset managers shouldn’t be underestimated. Equally, the significant transfer of wealth between generations may throw up surprises if traditional advice firms aren’t prepared for a different type of client. This could create an opportunity for other disruptive new entrants from other areas within financial services. Ultimately, the future of financial advice looks bright, and we’re excited to see what’s to come.”

 

 

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