‘Race to complete’ wealth management deals as M&A takes off

Following an unstable year in the advice and wealth management sector, the race is on to complete deals in the first quarter of 2021, according to insiders. A number of factors have led to a rush in dealmaking since the beginning of the year and the advice M&A market is set to continue to grow as we move further into the spring and recover from the pandemic.

Here, we look at some of the reasons for the M&A rush and examine the deals that have taken place so far.

Why the mad rush?

The coronavirus pandemic
The dark cloud of the pandemic has, of course, had an impact on almost all industries and the advice sector is no different. When it comes to buying and selling, many in the wealth management and advice market decided to take a ‘wait and see’ approach over much of 2020. It’s understandable that investors and other potential buyers would take a step back during the worst months of the pandemic.

There has been a resulting upturn in M&A activity so far in 2021, now that strategic buyers, as well as private equity investors, are ready to pounce. The pent-up appetite for doing deals is starting to reach the level where it cannot be contained any more, and it has become a sellers’ market, with several buyers for each advice business coming onto the market.

Difficulty achieving organic growth
It’s been increasingly difficult for wealth managers and IFAs to grow their businesses organically over the past few years. Changes in regulation saw wealth managers required to be more transparent about their fees. As a result, some wealthy investors are moving away from using advisory firms, only to be replaced by less wealthy clients - resulting in stagnant revenues for IFAs all over the UK.

On top of this, many wealth managers would have seen their assets under management decline over the past year, with coronovirus seriously stunting many of their clients financially. For more about this, take a look at our previous insight piece, here.

Forthcoming Capital Gain Tax changes
Another factor that is accelerating the rate at which deals are being done are the impending changes to Capital Gains Tax (CGT). In Autumn 2020, the Office for Tax Simplification (OTS) published recommendations, on the Chancellor’s request, calling for changes to CGT. The recommendations include the introduction of a flat rate for CGT, which would see rates increasing to closer to income tax rate. It also proposed a remodelling of Business Assets Disposal relief, which could specifically impact business owners disposing of their assets.

There’s no real indication of whether the government is going to act on these recommendations, and another review is expected to be published later in 2021. Indeed, an earlier set of recommendations were published in 2019 and have not, as yet, been acted upon. Nevertheless, the threat of much higher tax implications when disposing of a business has led to a rush in dealmaking over the past few months.

Increased compliance burden
Regulatory changes are coming into effect over the next two years that will increase the compliance burden for IFAs.

The European Securities and Markets Authority is making changes to the Mifid II rules to bring European IFAs into line with the European Union’s climate action plan. They will need to implement an Environmental Social and Governance (ESG) process as of 10th March 2021. Climate-related disclosures will also apply to UK firms from 2022 for larger firms and 2023 for smaller IFAs.

The FCA is also planning to insist that IFAs can demonstrate robust operational and cyber resilience by the end of 2021. As use of artificial intelligence is becoming more prevalent throughout the industry, bringing with it a simultaneous increase in efficiency and risk, it is important that firms can demonstrate their awareness of potential vulnerabilities, and that they have processes in place to manage IT upgrades and privacy obligations.

Ageing owners
The Health Report, published in 2019 by the Director General of trade body Libertatum, Garry Heath, shows that the average age of an independent financial advisor in the UK is 58. One in five plans to retire within the coming five years, and it’s thought that the pandemic is expediting this for a large number of advisors.

When advisors decide they want to exit the industry, many of them look to sell. A percentage of these retiring IFAs would have halted their selling plans in 2020 due simply to the uncertainty and the perception that selling would be difficult during lockdown. However, as things start to ease in 2021, there is likely to be a rush to sell, as IFAs make the most of investor interest in the industry.

AFH Financial

Beech Tree/Advanta

Deep pockets Vs experience and expertise

If you are an IFA looking to sell over the coming few months, ahead of the possible CGT changes in April, it can be tempting to rush into a deal with a buyer who might not be quite right for your business.

As private equity investors race to get hold of advice firms, as a seller, opting for a buyer simply because they have endless amounts of cash to spend, isn’t necessarily the right decision. Equally, if you are a strategic buyer faced with the prospect of competing with PE investors when trying to win a deal, deep pockets aren’t the only thing sellers are looking for. From a transition and consolidation point of view, experience and expertise in the industry are valuable attributes in a buyer.

Leigh Philpot of Kingswood, a wealth management group that successfully uses acquisition as a way to grow its business, said "acquirers who can demonstrate a great cultural fit for staff and clients are likely to benefit, rather than those with the deepest pockets."

So, whether you’re looking to sell your advice business, or buy in this market over the coming months, the opportunities are there for the taking. And among all the talk of a ‘race to complete,’ it’s important to take the time to find the right fit.

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