Advisor firm consolidations and acquisitions: learning from the UK experience
20 Mar, 2023

Jaco van Tonder, Advisor Services Director, Ninety One

 

There is an increasing focus on consolidation in the financial advice industry in South Africa to manage challenges around succession and advisor retirement plans. What can we learn from the consolidation of financial advice firms in the UK?

Research that we undertook recently concluded that, despite the impact of the Covid disruptions, the investment advice market in South Africa appears to be vibrant and healthy. The number of active investment focused IFAs (independent financial advisors) has been growing at a rate of more than 3% p.a. since 2014, with a strong cohort of younger advisors (age 25 to 45) coming through the ranks.

We have seen some consolidation in the financial advice industry over the last few years, and there is growing interest from advisors on this topic, as they grapple with how to manage challenges around succession and retirement.  We therefore did further analysis on advisor FSCA licensing data[1]  to investigate the structure of IFA firms in South Africa.

The analysis of the approximately 13 000 IFAs with investment product categories on their FAIS licence[2] revealed some interesting results, as can be seen in the pie charts.

 

The SA IFA market remains strongly entrepreneurial  

 

Source: Pi FSI 2022 database. FSP refers to an authorised financial services provider.

 

The main takeaways from these pie charts are:

 

  • The vast majority (57%) of individual advisors work for IFA firms that have five or fewer advisors in the business.
  • However, from 2014 to 2022 the number of advisors working for firms with five or fewer advisors declined from 64% to 57%: a meaningful reduction.
  • Around 70% of the advisors who exited smaller IFA firms joined large corporate advice networks with more than 100 advisors.
  • The other 30% joined slightly larger firms employing 6-20 individual advisors.

 

From this data it seems that there has been some level of consolidation of smaller SA IFA firms since 2014. This resonates with the increase in succession and acquisition conversations we’ve had with advisors. The data also reflects the increased number of advisor practice acquisition transactions we have observed over the past five years.

 

The UK experience provides an interesting perspective

Consolidations and acquisitions remain a hot topic of discussion in the UK financial advisor industry. Particularly as the UK market has seen private equity (PE) investors funding

 

large-scale consolidations in the financial advice industry over the past five years.

 

A search on UK financial services websites[3] and the Financial Conduct Authority’s (FCA’s) online portal yields several articles and reports on the topic. Comparing the UK to the SA markets, a few observations stand out:

 

  • The UK advice market also has a large number of smaller practices, although not as many as South Africa.

 

  • The UK market has had a higher rate of IFA consolidation than SA. International law firm Mayer Brown recently reported that there have been around 400 financial advisor firm consolidation transactions in the UK annually for the past three years – representing almost 9% of registered advice firms every year.

 

  • Because of this growing interest, valuations of UK investment advice firms have been attractive, resulting in investment advice firms being valued between three and five times their annual revenue.

 

  • Besides attractive valuations, market commentators in the UK list a range of factors that are driving the UK consolidation trend:

 

    1. Implementing succession plans: one article quoted 2022 data from the FCA stating that a third of authorised advisors were older than 50 years.
    2. Regulatory compliance burden: this is a major driver as overhead costs and regulatory requirements imposed on advisors are higher than in South Africa.
    3. Significant investment in technology is required to build an advice firm that can serve the client of the future: costs smaller firms struggle with.
    4. Lower market returns are shaking out firms with flimsy advice propositions.

 

The relevance of the UK experience to South Africa

Given the huge amount of publicity of the UK experience, it is easy to get caught up in the frenzy and assume that consolidation should follow a similar path in South Africa.

While some consolidation is to be expected in South Africa, we believe that smaller, well-organised SA advice practices are in a better position than their UK counterparts. This is predominantly because of the less intrusive regulatory framework in SA compared to the UK, and the strong support local IFAs receive from outsourced local compliance providers, discretionary fund managers and investment platforms.

There are also some structural differences between the two markets:

 

  • The private equity (PE) market has been the driving force of the UK consolidation trend. In South Africa, PE plays a much smaller role.
  • A combination of low interest rates in the UK since 2008 and the availability of significant capital has resulted in generous valuations for practices, supporting advisor consolidations.
  • South Africa is an emerging market with higher interest rates and less private equity and international investor interest, so it’s not surprising that SA investment advice firms are generally valued at lower revenue multiples – typically between two- and 2.75-times annual revenue.

 

Reflecting on the learnings from the UK advisor market and understanding the drivers behind the advisor consolidation trend there will help SA advisors navigate the trade-offs inherent in different succession options – which should lead to better succession decisions.

 

 

ENDS

[1] Source: Pi FSI 2022 database. FSCA refers to the Financial Sector Conduct Authority.

[2] The Financial Advisory and Intermediary Services (FAIS) Act requires that financial services providers (FSPs) be licensed.

[3] See www.ftadvisor.com

Author

@Jaco van Tonder
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