Consolidation has been a feature of the adviser landscape for the past decade and more so the publication at the end of October of the FCA’s review of the area is arguably well overdue.
The Multi-Firm Review of Consolidation in the Financial Advice and Wealth Management Sector, to give it its full name, sets out the regulator’s expectations for the outcomes of such mergers, along the way raising some concerns about client outcomes and business sustainability. So just how likely is it to change the way advice groups approach mergers and acquisitions?
The review highlights some danger spots where the FCA believes consolidation can create harm – top of the list being debt-funded growth. Here, argues the regulator, groups needed a clear plan to service the debt and ensure long-term financial sustainability.
It also made it clear the right governance, oversight and control frameworks need to be in place, while conflicts of interest – particularly around virtual integration models – should be addressed. Above all, the FCA needs to be convinced there is no detriment to clients as a result of consolidation. Consumer Duty must still be observed.
According to Bella Caridade-Ferreira, CEO at Fundscape, the FCA review has prompted a shift in the market. “Advice consolidation will continue but with a different cadence,” she explains. “It has been the soundtrack of the advice and wealth market for years – and it’s not about to stop – but the regulator’s review has definitely changed the key.
“The FCA has not slammed the brakes on but it has made it crystal-clear the free-wheeling, debt-fuelled, ‘land-grab’ days are behind us. From now on, only consolidators with proper governance, sensible balance sheets and a credible integration plan will glide through regulatory traffic.”
“The FCA has not slammed the brakes on but it has made it crystal-clear the free-wheeling, debt-fuelled, ‘land-grab’ days are behind us.
Bella Caridade-Ferreira, Fundscape
Emma Napier, NextWealth
For her part, Emma Napier, consulting director at NextWealth, says changes had already been happening in anticipation of the review, with advice groups paying increasingly close attention to governance, culture, people and outcomes. “There were no surprises from the consolidator review,” she continues. “The consolidating firms were already saying it was taking a lot longer to do an acquisition and carry out the due-diligence process.”
That due-diligence often starts up to six months ahead of the planned acquisition date, says Napier, adding: “It is also much more structured, so it can be more defensible if it is questioned further down the line. Have they considered the people? The client outcomes post-acquisition? Do they have everything lined up? It is a framework and there are clear measurements.” As part of this, advice groups are increasingly making sure legacy and new acquisitions are aligned.
Private equity’s influence
Private equity has been a prominent driver of adviser consolidation and the sector continues to see the opportunity in UK financial services – at heart, an ageing demographic of target clients, attractive margins and plenty of business-owners looking for an exit. Groups such as Cabot Square Capital, Charlesbank, Permira and Sovereign Capital Partners have all been participating in the market.
With the funding environment becoming more challenging and exit options remaining anaemic, however, the market is less appealing than it was and Caridade-Ferreira warns private equity’s ‘golden age’ may be ending. “Deal activity is subdued, exits are scarce and fundraising is tougher than ever. EQT’s Per Franzén warned that around 80% of private capital firms could become zombies within a decade – managing legacy assets but unable to raise new funds. For UK consolidators, that’s a double-edged sword.”
As such, weaker sponsors may step back, reducing competition and cooling overheated valuations but Caridade-Ferreira adds: “Firms reliant on external funding will find refinancing harder and more expensive – particularly with the FCA now taking a keener interest in leverage and post-deal integration plans.”
The cowboy era is over – the regulator has politely shown everyone the dress code.”
All of this feeds into a much higher bar for would-be buyers – which, to Caridade-Ferreira, suggests there are likely to be fewer opportunistic roll-ups, more scrutiny of funding models and a clear preference for acquirers who can prove they are improving client outcomes, not just ‘hoovering’ up assets.
“Lenders are already signalling the shift,” she continues. “They want clean balance sheets, recurring revenues and evidence of proper operational control. Deals will still get done – but at lower multiples and with far more strings attached. Secondary sales between private houses will rise while over-leveraged consolidators may find themselves on the wrong side of the shake-out.”
Napier meanwhile notes that many of the private equity houses that first became involved in the sector as long ago as 2000 are nearing the end of their holding periods – for example, Permira and Warburg Pincus are reported to be looking for an exit from Evelyn Partners, having hived off Smith & Williamson’s accounting business to Apax in late 2024.
Concentration of capital
Napier suggests these trends are not necessarily slowing the market – although deals are becoming larger and there are fewer of them. To put it another way, a lot of the low-hanging fruit has been consolidated and, as early-stage backers move on, larger private equity buyers may step in.
Caridade-Ferreira agrees, saying: “The long-term picture points towards concentration – fewer, larger distribution groups with in-house platforms, DFMs and vertically integrated investment solutions. Capital is gravitating towards the strongest names. Firms with robust governance, transparent economics and sustainable cashflows will thrive. Those without that risk joining the zombie ranks of their sponsors.”
Of course, new players may emerge – for example, among the rumoured buyers for Evelyn have been NatWest and Royal Bank of Canada. Consolidated wealth management groups with well-defined processes – and where some of the regulatory problems have already been ironed out – are likely to be a more attractive proposition for these large buyers. Notably, back in October, Lloyds Banking Group announced the full acquisition of wealth management business Schroders Personal Wealth, which will now be rebranded as Lloyds Wealth.
Whether from the banking sector or later-stage private equity, these newer, larger investors are likely to be more risk-averse, recognising they need to adhere to the recommendations of the FCA review. In turn, sellers with poor preparation, weak record-keeping or difficult legacies will be less attractive. Equally, the new breed of buyers may prefer businesses that can slot relatively neatly into the integration model they have established.
Rather than imposing a new set of rules, the consolidation review has perhaps more codified a trend that was happening anyway. Larger, more demanding and risk-averse buyers, alongside higher funding costs, were already creating a higher bar for acquisitions.
As such, the review looks set not so much to slow consolidation as create larger, better-quality deals, while also providing consolidators with a clear roadmap and expectations. “Consolidation isn’t going away, but it is growing up,” says Caridade-Ferreira. “The cowboy era is over – the regulator has politely shown everyone the dress code.”
