Consolidation won’t run out of steam anytime soon

Consolidation in the consulting market is set to continue and any suggestion of a slowdown is misplaced.

According to Russel Andrews, head of advisory solutions at SEI Asset Management Distribution, there are many trends and factors driving further consolidation.

He said Money Marketing: “Some commentators have recently explained that they believe that the consolidation of the consultancy market will potentially slow down.

“I don’t see that happening. There is still a huge amount of dry powder still available for many consolidation companies.

Through private equity or recapitalization investments, Andrews believes the consolidators still have enough cash to spend on new acquisitions.

Additionally, the costs of doing business are rising, making it more difficult for small businesses.

“The industry is very fragmented but operating costs have steadily increased including compliance, risk management, the need for new technologies and of course the FSCS tax,” said Tilney’s chief executive. Smith & Williamson, Jason Hollands.

Andrews added that the number of consulting firms “conceptually available” to acquire remains “incredibly high”.

According to Financial Conduct Authority dataonly 35 companies have more than 50 advisors, while 2,350 companies are run by one person.

Advisor group Number of companies Number of employees advising on retail investment products
1 adviser 2,350 2,350
2 to 5 advisors 2,023 5,613
6-50 advisors 424 4,526
More than 50 advisors 35 11,882

Source: Financial Conduct Authority

Additionally, a significant number of counselors are nearing the end of their careers and looking for an exit.

Hollands said: “It is well known from countless polls that many advisers are in their mid to late 50s and will therefore be thinking about their own retirement.

“In many cases, their customers have become friends and so they will want to leave their customers in good hands, as well as monetize the businesses they are proudly building.”

For Andrews, all these factors indicate that the consolidation should continue.

“All of these different dynamics really suggest there’s a big opportunity for consolidators to continue to follow the same business acquisition strategy,” he said.

Continued ‘inevitable’ platform consolidation Still, consolidation does not mean the end of small financial firms.

Hollands said: “There will always be a place for small business and there are undoubtedly some very good small consultancy businesses out there.

“But do I expect small businesses to be around 90% of the market like they are now? I think this is highly unlikely given that cost pressures are driving the need for greater scale.

Andrews cautioned, however, that consolidation can also bring its own challenges, particularly when it comes to technology.

He said, “Being part of a consolidation or consolidated organization often forces advisors to move away from their existing technology.

“There are scenarios where consolidators look to organizations that potentially already have the same technology components that they also have within their organization, as this can streamline the integration of this activity.

“But for companies that have spent a relative amount of time and money developing their own technology, it can quickly be devalued on the grounds that it will become redundant as part of a consolidation exercise.”

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