Herding Peacocks

Another year on, another year closer to retirement. If you work for the Government that may be good news but for many IFAs, the perennial issue of how to get a meaningful capital sum for the business you have built has changed little.

When a few of us met in Oxford to create NFIFA in 1986 we drew up a 10 point plan. Over the next 10 years we were able to tick off 9 of those points. The one that was left untouched was a robust method for IFAs to capitalise their businesses.

I have spent over 5 years looking at consolidation projects in the UK, US and Germany and I think the time is now right for a period of educated consolidation as a number of trends are uniting to help.

There are far less one adviser and far more multi adviser firms created by local IFAs buddying up in a single office. This development should be warmly welcomed and is a fillip to consolidation.

Developments in back office IT are improving a consolidator’s ability to cut costs and provide a wider range of services. I cannot contemplate any serious consolidator allowing its component parts to be on diverse back office systems. There are too many benefits from standardising software leading to arms length compliance, combined financial control and timely management information.

Finally, there is increasing provider and regulatory support for a smaller number of better capitalised, more productive businesses and fund managers now willing to support it.

We have already seen a few businesses with access to capital running around the industry buying up practices without, in my opinion, a clear view of what they are creating or what systems those acquisitions might need. We have also seen providers buying both practices and networks in the hope of conserving distribution. Neither approach appears to me have long term potential as neither addresses the prime weaknesses of the IFA sector.

Those interrelated weaknesses are poor productivity and a poor range of services. There are many reasons for poor productivity. IFAs typically only spend between 7% and 15% of their time in front of clients. A properly funded business can hire the right practice staff and software to handle the servicing needs of their clients.

The other weakness is the poor range of services for the client base. IFAs have slowly withdrawn from different FS sectors. The client needs to be either advised directly or signposted by his adviser through another group wider firm. Part of this should include unadvised product sales which can be a very profitable source of additional income.

The consolidator’s prime need is to create economies of scale; unless this is addressed the consolidator just owns a collection of poorly performing businesses. Therefore it must have a clear view of the type of business its acquisitions are creating. This raises issues of IT platforms, compliance, recruitment and branding. It also requires the consolidator to create local teams capable of using a larger capital base to improve their size and profitability as that is the only way that adopted principals can exit the business with real wealth.

The principals of IFA businesses are by their very nature highly independent people and are not the first people you would look to as natural team members. In discussions, this process has been referred to as “herding cats”. For some IFAs I know, “herding peacocks” would be more accurate.

Being part of a bigger enterprise allows advisers to market more consistently to their clients. A collection of consolidated businesses can afford to produce a regular high quality product externally. This regular contact brings clients back for additional advice and products more regularly, adding to turnover and profits.

The most important issue is the relationship between headquarters and the acquired firms. The last thing that is needed is an over prescriptive regime that stifles the entrepreneurial flair of the principals. Advisers are spending too little time with theirs clients already. One American consolidator told me last month “We invest in people not businesses” A bit glib but it has a huge underlying wisdom as their management deliberately stays at arms length.

2008 is likely to be the year that considered consolidation starts in the UK. I know of 3 firms forming at the moment. Prime acquisition targets are likely to be medium size businesses with solid managements and pricing will be on a solid commercial basis. Peacocks can apply - as long as they are team players .

Garry Heath