The Takeaway: Consolidate or Be Consolidated? For the UK Wealth Management Sector, the Clock Is Ticking for Small Independent Firms
What are the burgeoning trends in the sector?
The market remains very fragmented which has led to a lot of PE investment, and therefore the opportunity for consolidation will remain for many years to come—significantly more businesses will want to sell than there is capital currently available. Over time, we expect the industry in the UK to follow the insurance broking sector and end up with a smaller number of larger independent players. The key trend right now is how firms are thinking about differentiation. Will you be a consolidator or be consolidated? Differentiation can come in many forms. For example, a focus on a specific customer segment, a targeted M&A strategy, a winning client journey and proposition, good technology, or the level of integration within the firm.
So, what are the structural drivers of growth, and are certain drivers accelerating more quickly than others?
Strong underlying wealth creation trends include the increase of income from top-earnings households, house prices and housing equity, and government policies put in place to encourage long-term savings. The ageing population is also a driver, with the 65+ population expected to increase by 4.5 million by 2040. The pool of DC pensions is expected to grow significantly, creating a new pool of addressable assets. We still also see opportunities for the advice gap to be filled by more tailored propositions and capturing clients earlier in their wealth creation e.g. through the workplace. UK wealth is generally concentrated in the top 20% of households (typically 55-year-old individuals and their families), who control 80% of financial assets, and there is a very significant intergenerational wealth opportunity to take place in the UK. Annual wealth transfers are set to grow to £100 billion by 2025 and to £355 billion by 2047, with trillions of pounds expected to pass to the next generation over the coming years.(1)
How has the recent macro environment affected industry participants?
Market volatility and a rise in interest rates have led to some clients taking a more cautious approach to their investments and investing money in cash. For UK wealth managers as a whole, this has led to a decline in new business. Some firms have also experienced withdrawals as clients have needed to pay off debt or pay off the debt of their children and grandchildren. We expect this to have a short-term impact on the market, with portfolios in the wealth management sector being highly resilient to market volatility over the medium term. For those able to make acquisitions, this opportunity more than makes up for any short-term reduction in organic growth rates.
Have you seen the pace of sector consolidation increasing?
Consolidation has actually sped up over the past few years, though there is still not enough capital in the market to consolidate the sector. There is a significant supply of small advice firms wishing to explore sales in the next five years, and according to L.E.K. Consulting, there is a future supply of 400–500 firms looking to explore a sale every year. With the average age of an advisor in the UK being 57, another trend we are seeing is that these advisors want to retire and capture the value of their business and client portfolio. Some firms are focused on this segment, in which it is important to have the right infrastructure in place to develop homegrown talent and to provide the support necessary to transition and retain the clients of a retiring advisor. The other driver at the moment is Consumer Duty, which is putting pressure on smaller firms to sell earlier.
So, who are the core buyers and consolidators?
There are now a number of PE-backed platforms, ranging from those backed by a family office to large PE funds at the top end. In addition, some of the large strategics are also pursuing this strategy, such as Aviva with its acquisition of Succession. What is interesting for us to see is that each of these firms has a slightly different approach to M&A, integration, product proposition, culture, and other factors, which gives IFA firms lots of options. But while there are many options, these tend to narrow down to less than a handful of consolidators looking at any one firm. Pricing for acquisitions also seems to have stabilised.
And are you seeing similar trends in Europe?
Each market in Europe has its own characteristics. We have been active in advising businesses in a number of continental European countries and have found the macro trends to be broadly consistent: Independent wealth managers are growing at a faster rate than the large banks/insurers, there are strong structural and demographic growth trends, M&A exists through market fragmentation, and often government reform is driving change. Not many firms are yet developing an international strategy.
(1) Kings Court Trust, Wealth Transfer in the UK: The Continuing Story of the Inheritance Economy.
