Analysis: Advice M&A continues apace as FCA review looms

With consolidation on the rise and the Financial Conduct Authority’s (FCA) review upcoming, Professional Adviser delves into the current mergers & acquisitions (M&A) market.

The regulator recently confirmed it would be reviewing consolidation in advice, with both buyers and sellers set to come under scrutiny. Questions will be asked around whether firms are “wearing the Consumer Duty hat” at all stages, including deal structure, deal signing and implementation.

Speaking to Professional Adviser, FCA head of department for advisers, wealth and pensions Nick Hulme said that its review into consolidation in financial advice was spurred by industry concerns rather than from within the regulator.

Considering Consumer Duty

The FCA’s consolidation review could lead to a shift in how the M&A market works, with more targeted acquisitions taking place under fewer buyers.

“You’re going to have buyers who are fewer in number, but better equipped to make acquisitions because they are increasingly clearer about their objectives and requirements,” said Catalyst Partners partner Roderic Rennison. “You’re also going to find intermediaries who – if they want to sell their businesses, as opposed to a management buyout (MBO), a buy in and employee ownership or family succession – are increasingly clearer about their objectives and requirements.”

Effective integration is expected to be a focal point for the FCA.

“The FCA is saying to acquirers, okay, you may have acquired 12 businesses already, or you may have acquired 22 or 52, but how can you demonstrate to us that you’ve got enough resources in place to effectively integrate them,” Rennison said.

Consumer Duty, brought in on 31 July 2023, has already caused some buyers to have to re-examine their propositions, including their integration processes. This comes as the FCA has focused in on ongoing advice charges.

“This in turn has led to some acquirers either slowing down the pace of their acquisitions or pausing for a period to ensure that they are confident their systems and controls are robust and will withstand regulatory scrutiny,” Rennison said.

The deal expert predicted that, with acquirers now having got to grips with Consumer Duty changes, many will be able to “be more active” in 2025, alongside those that haven’t put on the brakes.

Even as the regulator zooms in on advice deals and Consumer Duty more broadly, M&A activity within financial advice has continued apace.

Not put off by FCA interest, the days before this year’s 30 October Autumn Budget saw a spurt of deal activity, as advice firm owners raced to push through business sales before feared capital gains tax changes.

To date in 2024, PA‘s acquisition tracker includes more than 40 deals in total. Many deals were by big consolidator players such as Perspective and Fairstone, but the picture is mixed. In cases, businesses took minority stakes or smaller firms made local deals.

During 2022 activity in the buoyant advice firm acquisition market doubled, according to a NextWealth report.  The number of deals increased from 54 in 2021 to 101 in 2022 and more than £26bn in assets under management (AUM) bought during 2021 while the total assets snapped up in 2022 stood at more than £48bn. Figures have yet to be confirmed for 2023.

Deal activity has in recent years been hotting up.

“After probably a slower period over the past couple of years, it’s really picking back up,” DC Advisory CEO Tim Morris told PA.

DC Advisory advised advice firm LIFT on its recent sale to Brooks Macdonald. Other transactions DC Advisory has been involved in include Aegon UK’s transfer of Nationwide’s financial planning service earlier this year and Ludlow Wealth Management’s sale to Mattioli Woods in 2021.

Looking to the LIFT deal, Morris said the sale was an example where “the right home for that business was a listed consolidator”.

“The key to IFA transactions is cultural fit, because they are assets under management (AUM) driven in terms of what’s driving value, where synergies come from the people,” he said.

Brooks Macdonald has acquired three planning firms so far this year, alongside LIFT, the firm snapped up Lucas Fettes Financial Planning and CST Wealth Management.

In other recent deal swoops by larger firms, Foster Denovo acquired Leicestershire-based 80Twenty, bringing in more than half a billion of funds under management.

Foster Denovo CEO Roger Brosch said firm makes the distinction between being a ‘consolidator’ versus adopting being a ‘facilitator’.

There have been two acquisitions announced by the firm this year, as it also bought Rosemount Asset Management.

“‘Facilitating’ is about ensuring a smooth transition for clients, removing as many points of friction as possible by ensuring the cultures of each party are closely aligned,” he explained. “It also means being flexible in how business owners work with you. Let them choose the structure that works best for them until they are ready to work under one single-branded business and proposition.”

Brosch highlighted that for smaller firms, the administrative burden can be “hugely onerous”.

“Having access to very well-resourced compliance and marketing departments, as well as the robust due diligence of an established investment committee, significantly reduces the admin burden and means advisers have more freedom to advise clients and grow more quickly,” he said.

Taking a different approach

Consolidator swoops for entire businesses or client books may regularly hit headlines, but buyers and sellers have continued to take differing approaches.

Rather than making a full purchase, Soderberg & Partners takes minority stakes in IFAs.

It most recently made investments in four IFA firms: Tunbridge Wells-based Courtney Havers, Chartered IFA practice Bespoke-Advice, Clear Financial Advice and Bigmore Associates. It has now made investments into more than 20 UK advice firms.

Söderberg & Partners CEO Gustaf Rentzhog said the firm is built around identifying skilled entrepreneurs and supporting them in growing their businesses.

“Unlike traditional consolidation strategies which often prioritize cost synergies, our focus is on investing in talented entrepreneurs and embarking on a growth journey with each of them,” he explained. “We don’t have an exit strategy where we plan to build something over five years and then sell it off. Our approach is not about taking over, each entrepreneur remains in control, running their operations independently.”

‘My clients were not for sale’

IFA Bank House Financial Planning’s buy of local single-adviser firm Fox Whittle Financial Management was also different to the consolidation route.

Fox Whittle Management founder and director Simon Aucott made it clear that his clients were “not for sale” and that he “would not ever consider approaching a consolidator” to take over his firm.

Speaking to PA, Aucott said that consolidators have a place in the financial advice market, but was not the option for him.

“Perhaps if I had met a consolidator that had a similar profile to the core of my business, it would have been an option,” he said. “However, I wasn’t going to give my life’s work away to a company that won’t treat my clients well.”

In other deals, advice firm Ron Walker took a different exit route as he is setting to retire in the next five years, by completing a MBO of his firm Clarion Wealth Planning.

Walker sold 60% of his shareholding in the Alderley Edge-based practice to his company management team.

He told PA that his succession was “never going to be about just the money”.

“It was always going to be what’s the best thing for the clients, colleagues, and the people who work with me who’ve helped me build the business,” he said.

Walker said he investigated what selling to a bigger firm might look like and his business received a lot of interest. However, he did not want his firm to be “absorbed” by a consolidator.

“There’s lots of firms out there who want to buy businesses like mine,” he said. “But I didn’t want my business to get swallowed up and suddenly become part of a big company whose culture maybe doesn’t match.”

Remaining independent

Many continue to remain staunchly independent and view being smaller as a benefit.

For IFA firm Magenta Financial Planning managing director and financial planner Gretchen Betts, the advantage of having a small practice is agility.

“You can react to things in your own way and give your advice in a voice that is authentic to you,” she told PA.

Betts said that when you remain independent, you are not “tied or restricted” to certain propositions.

However, she noted that “not all consolidators are the same” and there are different models.

“There are other solutions out there that might allow you to be an appointed representative of a larger practice, where can still have your brand and remain a little more independent.”

The FCA has been tight-lipped on how the firms under scrutiny as it embarks on its review, with Hulme having repeatedly said the regulator is “agnostic” on firm size. Given this, it remains to be seen what impact it could have on M&A, but advice business owners and buyers across the board will be expecting additional scrutiny and clarity.