Simply put, a firm’s value is supported by its growth and profitability. So, combine a scalable platform with growing volumes of business and the market will pay you handsomely for your alchemy.
The challenge for acquirers in the wealth management industry is that the business of providing financial advisory services is not in itself a very scalable activity. But what makes it especially valuable is the trust advisers will have embedded with clients. That goodwill becomes highly attractive when firms can cross-sell other products and services to a trusting clientele. The opportunity then arises to capture more of the margin in the value chain and introduce compelling scale benefits.
That is why consolidators in the wealth management space typically favour firms that are leveraging the vertical integration of in-house investment management, and sometimes also platform and pension services. The addition of more clients will require more advisors, but the investment management service is likely to be able to take on more assets without incurring much incremental cost. The resulting improvement in profitability then helps to support further growth.
Challenges and considerations of a vertically integrated approach
Opinions differ in the industry about the conflict of interest it potentially creates and if it risks compromising the value of advice for clients seeking impartiality from independent professionals. How do you incentivise advisers to cross-sell without challenging the principals of clients’ best interests? Additionally, vertical integration requires investments in additional overhead expenditure be it in people, regulatory capital, systems and/or technology. It may also cause additional operational complexity, all of which requires managerial capacity and a critical mass to sustain.
With an abundance of consolidators in the market, there will likely be different models arising, albeit most share an element of pursuing economies of scale in their strategies. Some will remain steadfastly independent, with a pure advisory proposition offering solutions only from external providers. But most others have broadened their propositions, enabling them to bundle services at competitive rates while gaining the advantages of scale economies.
Whatever model you adopt for your business, be clear on how your chosen growth path will impact profitability and what outlays will be necessary for sustaining it. That will define your M&A strategy and your pitch to vendors of businesses.
On the other side of the equation, sellers should be cognisant of the differences between buyers’ models and growth objectives. Understanding buyers’ motivation will help you shape a strategy that is most likely to gain maximum traction from the market.
Before embarking on such a journey, make sure to seek professional advice. Just as your clients see value in you sorting out their financial plans and structuring their portfolios accordingly, MarshBerry can help you steer towards the most value-adding course for your objectives. Working with experienced advisors will help you navigate a market that has rarely offered a broader spectrum of options for both buyers and sellers.
