Multi-billion dollar bank mergers make for dramatic headlines but, on a smaller scale, there is a trend of M&A activity in the market for financial services firms, with rising regulatory costs associated with the upcoming UK Retail Distribution Review frequently cited as a driver for these unions. The RDR, which comes into force at end 2012, seeks to stamp out the use of sale commissions and raise education standards in the IFA industry. Some industry figures say the RDR could cause up to 20 per cent of advisors to leave the market.

“The conventional wisdom – and most of the press coverage – suggests buyers have the upper hand in the market for IFA practices, with droves of IFAs looking to exit before RDR kicks in. This is simply not the case,” said Brian Spence, who set up his consultancy, Harrison Spence Partnership, three years ago. He subsequently launched IFA Realtor in August 2010 as an independent broker acting for both buyers and sellers of IFA practices.

“Across the country, there are lots of serious acquirers struggling to find IFA practices that are both suitable and available. During the fourth quarter of last year, at IFA Realtor, we received 18 enquiries from potential acquirers for every one enquiry from a potential vendor. This obviously gives sellers a strong bargaining position,” Spence continued.

“When IFAs do decide to sell, they are understandably cautious about making their position known. This means they often limit their discussions to a network of personal and local contacts. But, in doing so, they miss out on potential interest from regional and national players, and often fail to secure the price their practice deserves,” he said.

Aggregators

A number of IFA “aggregators” have been adding to their groups via M&A deals in recent weeks: Towergate Financial, Focus Financial, Syndicate Asset Management and Perspective. Perspective, for example, embarked on a buying spree over the last year. Earlier in January, it added Leedham Independent Financial Advisers to its roster of businesses, bringing the total number to 20 at that point.

Spence brings plenty of first-hand experience to his job. He has spent almost 30 years in the industry, experiencing the peaks and troughs of markets during that time and knows how valuations of certain business models can gyrate dramatically.

"Our experience is that there are very few vendors in the marketplace; where deals are being done, it is on a local level with people who have known each other for years and years," he said.

Spence said he did not think there was any mood of alarm among IFAs, concerned about the need to sell their businesses or forge alliances in a hurry to deal with the costs associated with the RDR. "IFAs are shrewd and adaptable people and they are not going to be frightened," he said.

"The main enquiries we get are from individuals who feel they cannot operate as one or two-man bands without the support of a larger company. IFAs are waiting to see how the land lies. Those that are coming to the market are professionals who see a good opportunity," he said.

"Once the RDR button was pressed, more than 90 per cent of enquiries to us at Harrison Spence became about M&A,” Spence added.

In any M&A market, business owners and investors will be aware of the concerns that can arise as to whether such mergers or acquisitions really do add value in the long run, or simply make advisors and lawyers a nice fee. With the asset management industry, for example, the sector has its share of failed marriages and cultural clashes. However, the rising burden of costs and a period of moderate returns meant that firms wanted economies of scale.

Karen Barrett, chief executive of unbiased.co.uk, the professional advice website, said that although some IFAs may quit the market due to the RDR, or be absorbed, remaining advisors will be strong businesses.

“With some IFA firms merging or leaving the IFA sector altogether, the quality of IFA firms remaining in the market and the services they provide will only improve.  Each year unbiased.co.uk helps over 400,000 consumers find a professional advisor showing there remains a high demand for the gold standard of financial advice,” Barrett said.

“The IFA market is currently in a period of change and facing challenges – the main two being the Retail Distribution Review, and the current economic climate.  These triggers are stimulating IFAs into reviewing their current business model and evaluating how they can best serve their customer base whilst at the same time developing their businesses.”

“This review may make it clear for some advisor firms that now is the time for radical change to their business model - such as the recent merger between 2Plan and Openwork.  Their other option is to embrace the fee model as early as possible, as well as ensuring that their own advisers are suitably qualified to RDR standards, provide a first-class service that is demonstrably in demand and continue to run a profitable business,” Barrett added.

To view the Harrison Spence partnership site, click here.