Old-school consolidator businesses could experience further issues this year as the conflict between squeezing out profitability and treating customers fairly comes to a head, the chairman of Beaufort Group has said.
With recent newsflow in the sector showing the challenges facing consolidators, Beaufort Group’s Chairman Simon Goldthorpe says the notion of buying up books of clients and seeking to simply take over existing relationships is unlikely to deliver positive outcomes for clients or consolidators.
“Old-model consolidators are under pressure. Advisers not feeling included is the key issue. If people aren’t actually getting anything out of deal and feel pushed out, why would they stick around and not go ply their trade elsewhere?
“The key point is, models simply don’t have to work like this. There are several firms now saying, we want to take a stake but we want you to carry on doing what you do best, remain independent. We won’t try and shoehorn funds into our investment process,” he said.
Goldthorpe believes estate agency consolidation in the 1980s serves as a good past example of where some adviser consolidator models could end up.
In the 80’s, large firms would consolidate smaller groups and force their own branding and way of operating on the consolidated agents. The local agents, similar to advisers now, “would just get steamrollered out of the way” Goldthorpe said.
“The problem was, so much of the individual business’ success was based on those personal, local relationships, and the same is true now with IFAs,” he said.
“Unless the purchaser, adviser and client interests are all aligned, you’re going to come unstuck. This is too often the case and can lead to problems, as what’s good for the remaining advisers and clients may not suit the acquirer’s interests.
“For example a firm might come in and buy a bank of clients, then suddenly they’ll be dealing with an adviser solely on the phone in some far away office. Understandably, a lot of clients don’t really like this approach.”
Goldthorpe says that the new, more “human” models coming in present a refreshing alternative.
“New players are looking to take minority or majority stakes in other businesses and leave much of the equity intact for existing owners. This encourages a willingness to stay around, as they get to continue having a hand in the immediate future of the business. It also protects their existing culture and relationships with clients, which is crucial.
“Firms that maintain more of the real adviser relationships in the business will see much less disruption in the way clients are dealt with, in turn leading to better retention.”
He said keeping adviser owners with substantial skin in the game, and the prospect of much higher values for their business’ over time, took a lot longer than some consolidator models want to take. But he said this slower approach was the future for the sector.
“If you embrace the fact you’re working with advisers who know their clients and what’s important to them, then there’ll be far more future in the business. If you want to then build on that as a consolidator that’s fine, but it’s far less brutal and disruptive. It’s a slower build. At the end of the day you finish with better client lists and better businesses,” he said.
“If we bought a business tomorrow and it was worth £4 million and left the owners 25%, they’d get £3 million tomorrow and their stake. But if we then worked together over the next five years to make it worth £20 million, they’re left with 25% of something much larger, while crucially the clients are happy because they’ve maintained those relationships. Everybody wins, but it requires a long-term approach which some models are not interested in.”