The Independent Financial Advice (IFA) and Wealth Management market in the UK has undergone a huge transformation in recent years, driven by regulatory change (MiFID II, PRIIPS, the General Data Protection Regulation etc), the introduction of innovative fintech solutions, and significant shifts in office working patterns.

Here we take a quick look at some of the industry’s major ongoing trends and their impact from a mergers and acquisitions (M&A) perspective:

1) Consolidation

The UK IFA and Wealth Management sector is highly fragmented with over 27,000 advisers across more than 5,000 firms*. Consolidators have been active in the market for decades, as they look to benefit from economies of scale, and private equity investment has been on the increase over recent years. However, despite increasing investment from private equity and from alternative finance providers (lender ThinCats recently announced that it expects to invest £200m into it over the next three years), the market remains composed of mostly small, independent, operators.

Nevertheless, there are a number of factors that are making this an attractive industry for investment:

• Independent firms tend to be small and focused on individual regions, so buy-and-build strategies allow access to new markets;

• The industry operates on a recurring revenue model, with minimal churn from a loyal client base; and

• Intellectual capital and regulatory requirements provide high barriers to entry.

A key factor driving the increasing consolidation is the increasing age of the market. Three quarters of independent financial advisors are planning to retire in the next decade** and are likely consider a business sale as part of their retirement plan.

It’s worth noting here that selling a business can be a challenging and stressful proposition. Smaller IFAs are often unacquainted with the art of M&A and can soon find themselves outmatched by the wealth of expert advisors and the M&A experience that can be brought to the negotiating table by larger consolidators. Therefore, it is vital for prospective sellers to have an experienced advisor to support them through the process.

Furthermore, in a fragmented industry, such as this, where employee numbers are small and the owner-manager is personally responsible for a large proportion of the financial performance of the business, there are clear implications for the timeframe of an exit. An earnout structure is common, meaning that only a portion of proceeds are received on completion and an exit will need to be planned well in advance.

2) Continuing Regulatory Change

The industry is facing increasing regulatory pressure, forcing smaller businesses to exit the market and increasing the barriers to entry for new firms. This clearly offers excellent opportunities for larger players to consolidate and increase their market share, while benefitting from reduced rates on professional indemnity insurance and other economies of scale.

A number of major regulatory changes are on the horizon, driven by a range of factors, including continuing fallout from the UK's exit from the European Union, the rise of technology, and the increasing focus on consumer protection. The impact of the FCA’s Future Regulatory Framework and Consumer Duty will also come into force this year, pivoting to an outcomes-focused delivery of services and requiring firms to both deliver good outcomes for retail customers and to demonstrate that they are meeting these obligations. For many IFAs, the expanding regulatory burden is likely to make a company sale to a consolidator an increasingly appealing option.

3) Technology

The rise of technology is transforming the wealth management industry, creating new opportunities for businesses that are able to adapt to the changing landscape. This is leading to increased M&A activity, as businesses seek to acquire new capabilities and technologies. For example, businesses which can develop and implement robo-advice platforms (automated investment platforms which rely on algorithms to provide investment advice) are able to benefit from a number of advantages over traditional IFAs, such as lower fees, greater convenience, and access to a wider range of investment products.

Marcus Harrison is an Executive - M&A at Shaw & Co

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If you'd like to discuss how Shaw & Co can help you sell, buy or fund the growth of a business, please book a meeting here

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Sources

* www.nextwealth.co.uk/uk-financial-adviser-market-2021/and www.statista.com/statistics/317905/number-of-financial-advisers-in-the-united-kingdom-uk/

** www.ftadviser.com/your-industry/2023/05/22/three-quarter-of-ifas-plan-to-retire-in-next-decade/