If your financial adviser tells you the firm they work for has been taken over, it may well be time to look for alternative options
Across the UK in recent years, thousands of people have have been contacted by their financial firm, informing them that the business has been taken over. Of course, takeovers are common in every sector of the economy, but they’ve been an especially regular occurrence in financial advice. And while some takeovers benefit consumers, others don’t.
Regrettably, in our experience, many of the acquisitions of advice firms we’ve seen since the global pandemic fall firmly in the latter category. So, if you’re one of the many people affected, read on.
First some background. Consolidation in the UK advice sector has been steadily increasing over the years. In 2020, for example, there were around 90 mergers and acquisitions, which was already a considerable rise compared to the previous decade. In 2021 the number of reported deals rose to more than 120.
Transaction values have also risen. For instance, the acquisition of Succession Wealth by Aviva in 2022 was valued at £385 million, one of the largest deals in recent years. Other transactions, including those by Quilter, Fairstone, Perspective Financial Group and AFH Wealth Management, have involved multi-million-pound sums as well.
There’s little end in sight to this trend towards consolidation. Indeed, if anything, it appears to be accelerating. According to research published in May this year by the M&A brokerage and consultancy Gunner & Co., 50 percent of independent advice firm owners are either looking to sell or planning their succession in the next two years. That figure was up from 42% in the previous year.
So what’s driving this consolidation? It’s partly down to an increase in regulatory and compliance costs, which has had a negative impact on the profitability of smaller advice firms. Another factor has been the growing involvement of private equity. Between 2018 and 2021, more than half of acquisitions in the financial advice space were backed by PE.
Clients are often short-changed
What does all this mean for clients whose firms are taken over? Well, consolidation can have positive results for consumers. For example, larger firms often have more resources, which means they can offer a wider range of services, such as tax planning or estate planning. They may also invest in advanced technology, which can give clients access to more sophisticated financial planning tools, and provide faster, more efficient communication.
Unfortunately, though, the benefits of consolidation are generally outweighed by the drawbacks. For a start, the transition process following an acquisition can lead to temporary service disruptions, such as delays in communication, changes in reporting formats and confusion over billing. These issues typically smooth out over time, but they can cause frustration during the integration period.
However, the three biggest drawbacks are these:
1. Loss of personalised service
One of the biggest concerns for clients when a small firm is taken over is the potential loss of the close, personal relationship they had with their adviser. In larger firms, clients may feel like they are dealing with a corporate entity rather than an individual adviser, leading to a less personalised service. Clients may see their trusted financial adviser replaced after an acquisition, especially if the firm reorganises or if there is staff turnover. This can seriously disrupt the client-adviser relationship.
2. Increased advice fees
Although takeovers usually produce economies of scale, our experience is that the benefits generally don’t accrue to clients. Indeed, some larger firms may charge higher fees to cover the cost of the acquisition, especially if the firm is private equity-backed and needs to generate returns for investors. In addition, clients may face new or increased fees for services that were previously included. Some consolidators may also introduce more standardised fee structures, which could lead to higher fees for clients who previously had negotiated bespoke fee arrangements.
3. Change in investment philosophy or products
As regular readers of of our content will know, rockwealth advocates evidence-based investing — in other words, using very long-term data to construct passive, or broadly passive, portfolios, keeping costs under control and staying patient and disciplined. Most consolidators do not invest in an evidence-based way. Instead they favour more expensive, actively managed strategies.
What’s more, many larger firms have their own in-house funds, in which case there is almost invariably pressure on advisers to steer clients into these funds, even when they aren’t the right fit for clients. Some consolidators also have their own platforms, which are another way of generating fees from clients.
The FCA has warned of harm to consumers
The UK financial regulator, the Financial Conduct Authority, recently expressed concern that, in many cases, consolidation is proving detrimental to consumers’ interests.
In a letter to CEOs and directors of advice firms, Lucy Castledine, the FCA’s director of consumer investments, wrote:
“While industry consolidation can provide benefits, various types of harm can occur where this is not done in a prudent manner with effective controls to promote good outcomes.”
To address concerns in this area, the letter confirmed that the regulator will hold a review of consolidation in the market. It also set out a series of expectations from firms when it comes to consolidation, including notifying the FCA, ensuring the delivery of good outcomes and undertaking due diligence.
Now, consumers may find the FCA’s action reassuring. But we take a much more cautious view. The very fact that the regulator has deemed it fit to investigate this issue should give consumers cause for concern and put them on their guard.
Steps to take if you’re affected
What, then, should you do if your own financial advice firm has recently been taken over, or if a takeover is imminent?
The first thing we suggest you do is to conduct your own research. Find out who the firm is that’s acquiring the business and do your own due diligence.
Here are some of the questions you need to consider:
- What sort of reputation does the consolidator have?
- Who exactly owns the com[any? And is it backed by private equity?
- What has happened after other takeovers the firm has been involved in?
- Does the new firm have an evidence-based investment philosophy? Or does it recommend actively managed funds?
- Are the firm’s advisers genuinely independent? Or are they more likely to recommend in-house funds?
Assuming you have a good relationship with your existing adviser and would like to continue working with them, we recommend that you ask to have a meeting with them.
You may want to ask them the following questions and encourage them to be as candid as they can be in answering them:
- Will I continue to work with you, and face -to-face if that’s my preference? Or will I work with other advisers? And will that be remotely?
- What is your honest opinion of the firm that’s acquiring the business? What do you think of its corporate culture? Do you like and respect the firm’s management?
- Does the new firm’s investment philosophy match your own? If not, will you continue to recommend the same funds I’m in now and carry on managing my portfolio in the same way?
- Will I be paying more, or less, in fees as a result of the takeover? And will I have access to any additional services I don’t at the moment?
Now, if you’ve done your research carefully, and you’re perfectly satisfied with what you’re adviser has told you, that’s fine. But if you have any doubts at all, we suggest you start researching other options.
Good advice pays for itself
To be clear, good advice is well worth paying for. In fact, research by Vanguard has shown how, for some people, on an annualised basis, working with an adviser can add around three percent in net investment returns.
But you have to ensure that it’s good advice and that the adviser genuinely has your very best interests at heart.
You also shouldn’t overpay for advice. Ideally, that means choosing a firm, like rockwealth, that has a fixed-fee charging structure and doesn’t charge you a percentage of your investable assets.
Finally, remember that you are the customer. If you aren’t completely satisfied with the advice and the value for money you’re receiving, you owe it to yourself and your loved ones to look elsewhere.
CAN WE HELP?
If you’re looking for a financial planner, why not get in touch?
If we can’t help you, or feel you would be better speaking to someone else, we will be happy to point you in the right direction.
