The UK financial advice sector has become one of the most highly coveted areas over the last few years.
Many firms want to establish a presence in the industry whether that is large fund houses or big US private equity giants. Everyone wants a piece of the IFA pie.
This is also the same for UK fund distributor Ganita Wealth. It recently launched a bond to fund its acquisition spree in the financial advice market.
Paul Smith, chief executive at Ganita Wealth, said: “We see a lot of value in the businesses that have been coming up for sale now. We are a very forward-looking company and I think we can bring some modern techniques to these companies that are quite old fashioned in the way that they have been run.
“We are a distributor, this is what we started out as, and as this year has progressed, we’ve turned into a fund creator purely from the frustration of working with a lot of companies that aren’t very forward thinking.
“We’ve been forced into a lot of the decisions that we’ve made, and out of that frustration, we decided to create our own platform. We’re quite an aggressive company, and we look at the acquisition of wealth managers in the UK as a natural progression.
“We’re looking at also buying overseas wealth managers as part of the group. We want to connect everything together. Instead of just having a separate UK market, we’re going to have a UK market presence and an international market presence and join them together.”
Value in IFA firms
The recent love of owning IFA firms is rather puzzling as many advisers want to leave or have been forced out of the market due to rising regulatory costs and hardening of the professional indemnity market.
Smith said the firm has been impressed with the sector and sees value in “the service that has been given regularly” but also “the price” of these companies.
“We can buy them for maybe three- or four-times turnover,” Smith added. “It’s a no brainer for us. They are already profitable. We’re getting probably a 20% return on our money, just from buying the company, as well as being able to add extra value through our funds.
“The easiest way to explain it is that it’s an ageing market. The people that own these companies are now getting to retirement age, they are looking to sell their practice, and unfortunately, you haven’t got the young financial advisers coming through.
“The number of financial advisers is going to dramatically drop over the next few years, and that’s where we see the value in being one of the best advisers around.”
The former deVere Group wealth management consultant said that he wants acquired firms to “keep their independence”, as Ganita aims to offer out its funds to the companies it buys via its platform.
“We obviously want exposure our funds, but they have to be sold on merit,” Smith said. “We are in discussions at the moment with a DFM in the UK that we’re looking to have a joint venture with as well.
“We’re buying the IFA firms for the value that they represent as they are. However, there is additional value obviously, in being able to put our funds in front of these guys, and then to have a look at them and distribute them that way.
“We’re not putting any handcuffs on anybody, we want these businesses to run as they are and also improve to be a little bit more modern.”
Where is the market going?
There may be value in the financial advice market, however Smith believes change is coming for the UK industry.
“Financial advice is always going to be needed,” he said. “I think there’s going to be a hybrid between Fintech and there’s going to be advice as well. But I think one cannot exist without the other. I think the old type of adviser is destined for history. I think there is a new type of adviser that will be coming through.
” I think the international market has got this, they’ve understood this, especially if you look at the big international wealth managers, the amount of fintech they are investing in, and how they’re using this hybrid approach.
“I think the international market has two or three years on the UK market. I’m looking to bring that experience into the UK market and get ahead of the game because I think it’s only going to change one way.”
There are a lot of different consolidators in the market currently, all with different approaches to acquisitions.
What will Ganita Wealth look to do with M&A deals?
Smith added: “We’re probably in negotiation with around 30 IFA practices at the moment in the UK and Northern Ireland. The first three or four deals will be at the beginning of next year.
“We’re not just going to buy anything. We’ve certainly had differences of opinions with some of the IFA owners, where they very much want somebody exactly the same as them who’s going to come in and do the same kind of things, and they are not looking for somebody with a more modern twist.
“When we talk about fintech with some of the older owners, they don’t really see how this is going to play out. That is the challenge that we’re finding. It is easy to find firms for sale, that’s not the problem, but we need to find somebody with a shared set of values.
“Coming from an international IFA background, I see sales and financial services as one and the same thing. I know there are rules, but I think the UK certainly doesn’t look at it like that.
“I think it’s still very much like a dinosaur, and I think there need to be new practices coming into vogue, new ways of doing business, rather than just the same old people with the same old pension products.
“Our due diligence is quite simple. We’re not just buying IFAs. We also want to be tying up with up and coming IFAs as well, where we may not be able to buy all the business straightaway, but we may be able to either invest and take part of the business and encourage them to grow their business.
Competition in M&A markets
There needs to be a unique selling point when companies look to acquire IFA businesses because there are so many different buyers looking to become part of the market.
Smith believes that the firm has got “a more modern take on it than these other consolidators”.
“These groups that are going around buying existing IFAs, they’re still sticking to the same model,” he added. “They’re still building up their client base but keeping the same clients.
“I think we’ll be going after newer clients, especially on the younger side. I think young professionals, who really are very much based around the tech side. They are used to handling their money, but they still need advice.
“We’re going to try and be a little bit more modern in how we’re approaching this. The way that we use our social media, trying to attract and get our message across to people, will be slightly different.”
Bond and funding
The acquisitions need to be funded and this is why Ganita Wealth launched its new bond several weeks ago.
The firm said the bond is for professional investors, as well as friends and family with a minimum investment of £20,000 ($26,742, €22,029).
Smith said: “For us, the biggest selling point is that we’re getting people to invest in the UK financial services market.
“There’s a lot of excitement around that because I think with Brexit as well, they see an opportunity in the UK for the financial services market to finally take control of its own destiny.
“Our first tranche is £3m. We’ve got up to £10m, but with the ability to extend the bond as well.
“The first tranche that comes in, we’ll use that to buy the first IFA firms, which are now on our current shortlist, and get all the processes in place. Then once that is done, we will roll out the further £7m.
“We have a new hire who has had a long career with some of the big IFAs in the UK, who will handle the IFA acquisitions and the distribution side.”