Acquiring companies in the financial advice market is now “more attractive” because of increased regulation, IFA consolidator Elevation Financial Group (EFG) believes.
Birmingham-based EFG recently bought Innovate Financial Solutions for an undisclosed sum, its 11th deal in the advice market.
Tony Smith, group managing director at EFG, told International Adviser: “I think the M&A model has got stronger. I was reminded recently that our first main acquisition was 10 years ago, which wasn’t a bad business, but it was far less professional.
“The income levels were more weighted in those days towards new business than recurring fees. There was a lot more volatility then with what we were buying.
“I think where we are now is the professionalisation that came through with the Retail Distribution Review in 2013, which is beginning to mature. There’s less variety in the businesses that we’re looking at now, as you’re not looking at all shapes and sizes which you were 10 years ago.
“I think regulation has meant more consistency. I think that’s led to a more attractive market to buy in, and probably that’s had a big effect on pricing.”
All under one roof
Smith was asked where he sees the advice M&A market going over the next few years.
He said: “There’s still a huge amount of consolidation to be done. It still is a very fragmented market, but it’s more professional.
“I’m in discussions at the moment with an accountancy network, where there’ll be more collaboration and integration between firms. I can see IFAs and wealth planners coming into the same group as legal and accountancy operations to service the all-round needs of clients.
“I think the reason there’s been a resistance of it at a very local level is because the law firms are fed by accountants and other professional sectors, and they think that if they do everything in house, it will cut off the oxygen supply of new business.
“But I know the best serviced client has an accountant, solicitor and financial adviser singing off the same hymn sheet, and they don’t have to go to different agencies to get advice.
“We’ve had this conversation about 15 years ago, and I suppose I’m surprised it’s slow in the uptake, but there is a bit of self-interest within the market. That means it’s not as obvious to bring everything into one house as you’d think. But I would like to think we’ll get closer to in-house services because it leads to better outcomes.”
EFG is not the only company looking to buy in the advice market. There have been a number of different businesses entering the M&A merry-go-round in a bid to grow their company.
This means firms have to stand out from the crowd.
Smith said: “We’ve dealt in integration of smaller IFAs into our own business, some of those have succumb to going straight the way to big national consolidators.
“But anecdotally, what is happening is that they’re finding that there’s too big a step between their size and the model of a large national consolidator, in terms of systems, controls and culture. This is where the stress has come because the price might be right, but everything culturally, they just can’t cope with.
“They’ve been small business people who’ve been able to experience making decisions on a business. So, what we’re seeing now, and this is backed up by evidence in the market and comment in the market, is that medium sized consolidators can be slightly more bespoke about how we integrate.
“This has become more attractive because IFAs feel that they can work with a company that will work with them over two years, and not be overly prescriptive.
“Even though we might not be able to pay the same price, the middle market has become more attractive to the smaller seller.”
One of the big differentiators is the sums of money that big consolidators can offer businesses in the advice industry.
Smith added: “I think IFA practices have got to become more imaginative, because ultimately, and this is the problem in the American equity market at the moment, that prices don’t reflect underlying profitability.
“Everybody’s looking for an expectation on return on capital. If we if we’re looking at values going through the roof, then that will be a break on that.
“Having said that, I think that investment coming in, if they’re looking at an underdeveloped business that they know they can add new lines to, and they can add value, then they’ll continue to pay a premium. I think we may well see an increase in values.”
Searching for businesses
EFG does not have the mass-buy strategy of other consolidators in the market – and therefore likes to take its time to acquire companies.
Smith said: “We’ve had aborted deals in the last year, where IFAs have been slightly maverick in their approach, don’t communicate particularly well or they’re not that professional. All we want to do is to improve, upscale and professionalise businesses, and if it’s like pulling teeth, it’s a turn off.
“We do look to the people who are selling, and whether they have integrity, communicate well, are supportive, and know that we’re both trying for the best outcomes for their clients.
“The businesses we look at don’t have to be that sophisticated. It can be a regular IFA practice with one-to-four partners, who haven’t been trying to do clever things. This means they haven’t got involved in Sipp and Ssas markets or tried to do weird and wonderful things with property. The more regular and boring, the better.”
The IFA consolidator has an head office in Birmingham, dealing with admin, finance and technical compliance, which services its three advice hubs in Birmingham, Nottingham and London.
But EFG could soon set up more hubs across the UK.
Smith said: “We’ve got two interesting businesses that we’re looking at in the Midlands, we’re well positioned to concentrate more in the Midlands. But the way we’re constituted, if something came up in Manchester, Leeds, Bristol or any of the main red brick centres, we would be interested.
“Equally, we’re interested in a model that we’ve seen of late where IFAs are opening offices in the high street. I saw an IFA that we are close to recently go into Ashby De La Zouch in Leicestershire and take over a shop I used to visit as a child.
“Because the face of retail has changed, and they’re trying to tap into the lifestyle of the town is trying to develop, it’d be quite interesting to see how that develops. The old presence of an IFA in the town maybe coming back.”