Managing Director Neil Moles examines M&A activity across the UK’s Asset and Wealth Management sector, and the role of consolidators in the industry.

Neil’s article has been published in Citywire Wealth Manager, 16th November 2016, and can be found here.

The uncertainty that has resulted since the decision to leave the European Union, coupled with the subsequent fluctuations of the value of the pound and the level of the FTSE 100, has consequently made it increasingly difficult to take an overarching view on financial topics.

Given the longer term patterns inherent in M&A activity across the UK Asset and Wealth Management sector, it is possible to consider the activity of firms which – whether they accept the title or not – have acted as consolidators.

The income pressures faced by smaller firms following the retail distribution review, with its switch to upfront fees in place of commission based payments, have been well documented. Furthermore, an ever-tightening regulatory framework and the growing take up of direct-to-customer technological tools has resulted in a landscape within which smaller companies simply lack the capital to scale up and meet demand. The demand for trusted financial advice has never been higher, and it is this demand the consolidators are aiming to meet.

While the level of M&As reduced slightly during Q2 2016, there remained relatively strong activity throughout the period. As well as our own consolidation of wealth management and legal service providers into The Progeny Group, some of the other deals which took place during the quarter included:

  • Tilney Bestinvest acquired Towry for £600million. The result was one of the largest wealth management firms in the UK, with assets worth more than £20 billion and revenue of £200 million
  • Cazenove Capital purchased C Hoare & Co’s wealth arm, increasing the size of Schroders’ UK wealth business by 10%
  • Wealth consolidator AFH Financial acquired assets of East-Anglia based CRS Financial Planning
  • Brown Shipley acquired The Roberts Partnership
  • European Wealth bought Gibraltar-based CIMCO partners for £750,000 and taking on $22 million in assets

The appeal of consolidation to both parties is fairly clear. The smaller party can continue to service their clients whilst achieving higher sales and taking advantage of economies of scale, while consolidators, are able to grow their business quickly, acquire new clients and assets and, in many cases, move into parts of the market – geographically or in terms of service provision – which they were unable to previously reach.

The process is by no means without risks. As the fallout from the financial crash of 2007/8 illustrated, sudden shifts in the market saw many consolidators forced into administration or faced with an exodus of staff key to the firm’s success. Whether the current impetus for consolidation will produce the same results remains to be seen.

The hope is for consolidators to approach the M&A process in a manner which is more likely to achieve organic and fully integrated growth.

Undertaking a more gradual, organic approach may yield less of an initial profit boost. However, it will establish a solid platform upon which to build and develop sales, profit growth and services in the future. All too often, an acquisition is seen as being the end of the process – a declaration of success, an increase in the assets owned and the confidence that all will be well moving forward.

A longer term view would see consolidators working with targeted firms in the period leading up to the acquisition, sharing the technology and scale which they can offer whilst allowing the culture of the company to slowly shift, and fostering growth in the process, until the merger is an obvious final step rather than a crude ‘bolting together’ of firms. In turn, this approach will both instil confidence in the firm being bought and reassure existing clients, by overcoming the initial apprehension of sudden change.

As the services offered change and further improve, the client is more likely to retain the wealth manager and the newly consolidated group.