How an alien adviser might see SA’s adviser-book buying obsession

If an alien financial planner beamed in from one of the other inhabitable planets in our ever-expanding universe, it would likely want to know more about South Africa’s obsession with ‘buying’ distribution. You know the story, dear reader, which involves those large, institutional product provider chasing after the most successful independent financial adviser (IFA) practices and assimilating their books.

Why are private equity investors so keen?

The topic was unpacked in more detail by a panel discussion at the two-day-long virtual Financial Planning Summit 2023, hosted by The Collaborative Exchange. Kevin Hinton, a Director and Founder of the exchange, put four experienced financial services ‘gurus’ through their paces. Among the questions the experts were tasked with answering: Why investors were so interested in acquiring financial advisory businesses; what types of acquirer models were at play domestically; and whether discounting the present value of future income was ever worth it to the selling advice practice? 

Citing news sources out of the United States, Hinton said that private equity deals in the financial advisory segment reached a record in July 2023, with transaction values up 45% over the prior year. Meanwhile, in the United Kingdom, there were something like 34 private equity firms involved in transactions over 2022, impacting around 11% of that country’s 36 000 financial advisers. “We have seen a predatory force at play in the global wealth and financial adviser practice ‘space’ over the past two years,” he said, before asking Heiko Weidhase, CEO of Efficient Wealth, to explain the rationale behind this private equity acquisition frenzy. 

The role of the adviser is paramount

Weidhase, commented in the context of his experience with JSE-listed Apex Group. “We listed in 2009, raised capital and started with one adviser,” he said. “We used that capital to grow the business to more than 200 advisers; but when the next opportunity came, we were not able to raise further funding in the listed structure”. The result, a delisting and an exceptional outcome for Efficient Group. According to Weidhase, global private equity investors are chasing advisory practices because “they see the future role of the adviser as paramount”. Human rather than Robo-advisers are expected to dominate the financial advice landscape. 

The panel moderator then bandied about some multiples being paid for Australia- and SA-based financial advice practices, with some transactions in the former country reportedly going through at 11 times price-to-earnings multiples. Locally, the norm has been closer to 2.5 times revenue. Callie Nel, Head of Retail at Discovery picked up the microphone to offer the so-called Life Office’s view. “The independent financial adviser has probably been around for about three decades,” he said, before commenting that the product and regulatory universe that advisers had to navigate was ‘night and day’ then versus now. 

Nel suggested that the low multiples being paid for local advice practices stemmed from the regulatory complexity and cost involved in transitioning the target firm’s adviser-client relationships to the acquiring firm. In determining price, potential buyers have to roll the dice on how many of the target firm’s clients are actually prepared to move to another relationship under a new financial services brand, which may or may not include a transition period with the existing adviser. Another drag on financial practice valuations in the domestic context is that there are more sellers than buyers, and not enough funding to complete transactions. Sticking with the topic, Hinton asked the third and fourth panellists to share their views. 

IFAs face significant pressure

“There are a couple of things that are driving the industry at the moment, most notably the pressure being put on the individual, independent financial adviser,” said Hannes van den Berg, CEO at Consult by Momentum. This so-called one-man-band faces myriad challenges including access to research; cost of compliance; investment needed to keep up-to-date with evolving technology; and succession planning, to name a few. These challenges, mused Van den Berg, were driving the consolidation in the industry, and also the move to networks. He conceded that the market was very ‘active’ at present, with “everyone looking for advisers to join their businesses”. 

Piet van Zyl, Business Development and Marketing Executive at Private Wealth Management, also weighed in with a couple of points. “The economies of scale [that advisers derive from] being in networks definitely plays a role; and from the employer side [the driving force hinges on] organic growth being so small,” he said. “If you want to grow your business, you have got to go and buy it”. All participants seemed in broad agreement that the current economic backdrop made it incredibly difficult for advice practices, and indeed product providers, to grow their revenues organically. 

Hinton shared a slide showing subtle nuances between buyer and seller motivations. “The seller wants to reduce operational and regulatory duties  and focus on clients’ needs; achieve full or partial liquidity; and take care of the succession planning angle whereas buyers want to bring top talent into their business; enter new geographic markets; and grow their share of assets under management,” Hinton said. He asked the panellists to reflect on the potential for “mismatched expectations” following a book buy or advice practice acquisition or merger. 

The value in multi-product advice practices

“One of the biggest challenges that broker houses face is that they might have focused on one line of product,” said Nel. In contrast, a network creates opportunities to refer business to a health desk, a short-term insurance desk etc. This created potential sticking points post-transaction. Van Zyl commented that succession planning should start earlier. “You must decide who you successor is, and your clients need to be sensitised to where you are going, so they get comfortable with whoever is going to take over,” he said. He added that one of the mistakes IFAs make is to wait too long before they start with succession planning. 

Weidhase reminded the audience that no two transactions were the same. “You need to use kids gloves when you deal with clients and their advisers [and] remember you are often only buying goodwill, which is easy to impair,” he said. “Overpaying is very easy, but these transactions carry a lot of risk for all the parties involved”. His advice is to make sure that each transaction is a good fit for all stakeholders, and that the process is value-accretive for buyer, seller and the client. Of course, agreeing to the transaction is only part of the struggle, as stakeholders travel the long road to bed the transaction down. Hinton steered the conversation to the regulatory complexities associated with finalising same, which the panel agreed were extremely demanding. 

Whatever happens on the transaction front, the face of financial advice will look different five-years hence. Though Van Zyl immediately countered that adviser-client relationships would remain crucial. “Our ability to provide objective advice, taking the client’s interest into account … [although ]at one stage we all reckoned that Robo-advice would be a massive thing for the industry, COVID taught us different ways of interacting with our clients,” he said. 

Weidhase commented on likely tech-linked changes, which he said would be driven by data aggregations, and the ability to create a single view of the client. “Products have become commodities, and value to the client will be added at the adviser and discretionary investment manager levels,” he said. 

Technology set to dominate the advice landscape

Hinton ended the discussion by asking whether technology might be considered the Holy Grail of financial advice practices. “We are going to see a lot more technology at play; and [we will leverage it] to show the client a total view on his or her needs and solutions as opposed to a ‘product only’ view,” Van den Bergh said. And Nel agreed, before offering three reasons why financial advice practices would have to scale for future success. 

Firstly, you need capital to be able to buy books and do proper succession planning. Secondly, you need to consider the advice risk that goes hand-in-hand with giving financial advice. And thirdly, it helps to have a big financial partner backing you up in the accountability and responsibility ‘stakes’. Nel concluded that five years from now, big broker houses that had proper structures would dominate, and that the industry would have to expend effort, and spend money, to develop new talent to fill the shoes of the current body of advice professionals. 

Writer’s thoughts:
The complex and costly regulatory, operational and technology environment is making it increasingly difficult for small, independent financial advice practices to stay in business. Do you agree that the future financial advice landscape will be dominated by large brokerages and / or networks? Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts [email protected].

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