Merger and acquisition activity in the advice sector is picking up once again, with financial services aggregators and large institutional dealer groups dusting off their cheque books to take advantage of growth opportunities arising out of the global financial crisis (GFC).
It seems these behemoths have their sights set particularly on the independent advisory space, eager to gobble up these groups at any possible chance.
You only have to talk to any large or smaller boutique dealer group and they share a similar story of how these large firms come knocking on their door on a regular basis armed with a host of attractive incentives to sway them.
But despite the enticing and persistent offers, these independent groups are resistant to being acquired by an institutional group or aggregator and remain steadfast in fending off the alluring offers on the table.
"We are dedicated to not be taken over by an institution," My Adviser managing director Michael Summers says.
"That's our core value proposition that we will remain privately owned so that we are not subject to any influence by our owner."
Furthermore, Summers argues industry consolidation and aggregation has gone too far.
"I think it's generally adverse for the community; the choice available is reduced and in many cases the result is a very structured, inflexible organisation where it is hard to see what benefits there are," he says.
"There is a place for large institutionally-owned groups, but I have some concern about the single practitioner organisations.
"I think there is benefit in those very small organisations joining up with similar sized businesses to arrive at something privately owned because unfortunately, despite the denials, institutionally-owned groups become institutionalised."
Risk and Investment Advisors Australia chief executive Les Mace agrees. "It would be very sad if all the independent groups were eventually swallowed up," Mace says.
"We're an independent and we don't want to be a target of a takeover by a bank or an institution. It would change our model entirely and it certainly wouldn't please our advisers at all.
"But we do get approached by the institutional groups and some of the other large non-institutional groups all the time; every couple of months or so."
Wealthsure chief executive Darren Pawski reveals his dealer group of more than 100 advisers is targeted by the big banks on a quarterly basis.
"We are approached by these groups quite a bit; they see it as another distribution network for their product," Pawski says.
"But when we set up Wealthsure we had a long-term view that we would remain independent. Now while I'm still running the show that is still my view."
However, he adds there aren't many large independent dealer groups left in the market.
"Independent groups that seem to get to a certain size, around 100-plus advisers, seem to eventually be taken out by, well these days it's effectively one of the four banks," he says. "If you look at where we're headed at the moment, the independent space is shrinking compared to the larger groups. It's getting to a point where the industry is very much controlled by the banks and the institutions."
Futuro Financial Services managing director Dennis Bashford believes this trend is only set to increase.
"I think we're going to see more and more of that happening and I think it's because it is becoming increasingly difficult for the smaller groups to remain viable. You know you need some scale to make it financially viable," Bashford says.
"I think what we're going to see in the long run is really big groups by the institutions and really small boutique groups very much in a niche market, and when I say small I'm talking about with five or six planners, and I don't think there's going to be too much in between."
Just like Wealthsure, Futuro is another large independent dealer group that garners a fair level of interest from the institutional firms wanting to acquire its sizeable advice network.
"Yes, there's a fair amount of interest from them. There's not a lot of choice out there with the large independent groups, so we are approached about three or four times a year," Bashford says.
At times the offers are very appealing and he admits it can be sometimes quite difficult to turn them down.
"It is hard and it is attractive. Probably the most attractive thing is the money," he says.
"But Futuro is a very close-knit group, and when you have that sort of relationship and culture within the group there really is an obligation, to some extent pressure, not to make a decision purely based on yourself because there are responsibilities to other people or to your network, so it is hard."
Nonetheless, there is an opportunity for the independent groups to look at how they can work together to stay out of the banking environment and create a much stronger offering to the independent financial advisory space, DKN Financial Group chief executive Phil Butterworth says. "We see there is starting to be a trend where a lot of the quality boutique dealer groups don't necessarily want to bow out to the institutions," Butterworth observes.
"I think the banks have got way too much control on the industry already and think the real opportunity is actually staying out of that framework and providing a quality offering out to wealth management firms who don't wish to be tied up in that; I think that's a tremendous market."
While there has been a considerable amount of consolidation and acquisition of dealer groups into institutions in the past few years, Butterworth believes this will continue.
"There hasn't been really a lot of mergers or transactions done within dealer to dealer, and what I think the GFC is doing is it will continue the trend of institutions buying dealer groups and dealer groups going out there and trying to form a dealer group and sell it to an institution to make a quick dollar," he says.
"But there is a lot of movement within boutique financial planning firms to get together and merge to create a greater depth of internal resources and also to cut costs and drive efficiencies.
"So we're quite active in assisting groups in those discussions and we even use our own capital to assist some of them to do that as well."
However, he reveals there are not many dealer groups in the current market that DKN would be interested in acquiring.
"There's very few that we would be interested in so we're going through a process of discussion and the short list will be very short," he says.
"But on the financial planning side there are a lot of quality firms out there still and a lot of these quality firms don't need our capital or don't want to be bought or merged or aggregated. "But there are some that are looking for those succession solutions or acquisition solutions, so I think there's still a great depth of quality in the market at a wealth management actual practice level."
Looking to growth opportunities in the market this year, he says DKN has three core strategies.
"First and foremost it's just delivering on our organic business model and that's really just to grow our associated practices through ensuring our core services are consistently becoming more efficient," he says.
"If we're helping firms be well positioned with back-office framework, then we can free them up to be more proactive at the front end.
"The second strategy is using our capital to invest in financial planning and accounting firms and helping them acquire these smaller businesses or merge with other like sized businesses to get the resources they need and the skill sets they need to attract and retain quality clients and staff."
While DKN is gearing up to have more discussions around the deployment of its capital into these types of firms, Butterworth confirms it is currently undertaking quite a few negotiations.
"Yes, there's a reasonable pipeline there, they just take time," he says.
Meanwhile, DKN is also looking at corporate acquisitions. "We are spending a lot of time researching what other companies are out there that we should look at acquiring to build the advice channels of the DKN holding company, so we're reviewing the market as to what could fit there," he says.
"There have been a number of initial discussions; there's nothing that I would say is specifically engaging at this point. We're really just working our way through the market to see what is out there before we move to the next step around prioritising and actually taking the discussions to another level."
The core growth strategy of other aggregators, such as Plan B Group Holdings, is to remain organic.
"We've come to a view through our own experiences that the better we run our core businesses, the more successful we're going to be with any tuck-ins that we might do and any acquisitions we might do," Plan B advisory services group executive David Newman says.
"So I suppose our corporate aim is to find advisers out there who want to work with us, that we can add value to them in some capacity and then operationally our aim is to do what we do as well as we can for their clients."
Snowball also plans to grow its advisers and businesses by acquisition this year.
"I think one of the changes now though is that we're working very closely with our practices to enable them to also buy practices," Snowball managing director Tony McDonald says.
"So we're helping them by providing them with centralised intelligence on running an acquisition; so the valuation, the modelling, the deal structure and those kinds of things, so we have that in-house because we have a team that does that.
"But it's also about funding and assistance with funding and we are interested in working with the underlying practices on helping them with both of those areas."
McDonald notes there is now a higher interest among the underlying practices for local area tuck-ins and businesses they know in a similar geographical reach.
"It's a result of this whole issue around scale and I think also a result of some of those practices now in those geographical locations where they would have bunkered down during the GFC, but now they're sort of putting their head above the parapets and looking around and looking at like-minded practices that they might get together with," he says. "Scale and the importance of scale is becoming almost now the catch cry of a lot of people and I think the realisation has dawned that unless you can somehow leverage into those scale benefits, it's going to be a hard road to hoe and that includes for your small practices, just as much as it does for the dealer groups. I think that now is becoming mission critical."
On the other hand, dealer groups such as ipac are intent on using a hub approach when it comes to making acquisitions.
"We tend to use a hub approach where we've got hubs in regional centres or major centres. We want to buy businesses that we can tuck into those hubs eventually, either by buying them as a book straightaway or buying them with an upfront payment and buying them 10 years down the track," ipac chief executive Neil Swindells says.
"We're a bit different from some of the aggregators. We don't just aggregate into ipac, we actually want to aggregate into that hub then let the entrepreneur run that."
While the aggregators and large institutional firms are seeking to get bigger and boost their economies of scale, there is in fact an inherent risk for these behemoths in becoming too big.
"Yes, there is a danger that you do get too big and then the risks there are that you lose your culture and you just become another vertically-integrated model and that is a danger, but I think people are very wary of that," McDonald says.
"The other danger is there are dis-economies of scale at various point as well. I think clearly there is a risk of too big to fail, but I think now there is a healthy drive within the non-aligned groups to do two things, which is to stay non-aligned, but also to grow both organically and inorganically so that there is a viable non-aligned segment of the industry."
But there have been very few aggregators, if any, that have actually been successful, according to Butterworth.
"My view on aggregators of wealth management or accounting firms is that whether it's our industry or any other industry, a lot of these aggregators fail and if you have a look at financial services there is a graveyard of aggregators that never got up and running, or got up and running and blew themselves up," he says.
"But if they take their time and they do it slowly and there's not a mad rush, then there's a higher chance of them of succeeding.
"The aggregators that maybe do 20 or 30 transactions within an 18-month period, I just think that's a disaster waiting to happen. So slow and steady and making sure that they've got the appropriate skill sets of integration and management will ensure the success of these businesses. But there's probably only one aggregator out there that I would probably rate."
While Newman cannot pinpoint what exactly an aggregator can add in terms of value, he says there will always be a place for such an entity in the market.
"Yes, I think there's always going to be an aggregator out there who thinks that they can do it so that's just the nature of the industry. I'm not sure in financial services that we've seen a really good aggregator model," he says.
"I'm not sure what a pure aggregator ultimately adds in terms of value, so the so-called multiples argument, yeah it works, but it works in good times and those times don't often last long enough for people to cash in their shares."
Newman adds Plan B does not see itself as an aggregator.
"We don't see ourselves as an aggregator at all; we see ourselves as an integrator. So for us to make an acquisition we have to add value to the business that we're buying," he says.
"Particularly now as we have industry reform coming in, you run the risk of just simply acquiring for the sake of scale and not realising that a lot of time is required in terms of either people resources or financial resources to re-engineer the business you're buying."
While merger and acquisition activity continues to increase in the market, Kenyon Prendeville director Alan Kenyon does not see any great changes to the current state of supply and demand. While it is still very much a sellers' market, he does believe this could change within the next five years.
"I think the supply and demand in three to five years might change, so it may well become a buyers' market as distinct from a sellers' market possibly and I think there will be a different look and feel for the boutiques' market," Kenyon says.
"If we continue to see the big trying to get bigger by just acquiring dealer groups and numbers of planners and businesses, I think over time, maybe it will take one to three years, what we'll then see is the boutique market growing because I think that some of the big institutions in my view are not flexible enough to be partners with small business."
For those aggregators and institutional groups gearing up to make a host of acquisitions over the next few years, Newman warns they must be very clear about what their own model is before they go on a spending spree.
"So what is the model that they have, what value do they either create or offer or bring to the table, so that any acquisition they're making is an extension of that model," he says.
"Otherwise you just acquire for the sake of scale and then you've got a mismatch of businesses, you've got no consistency, you lose your way, and then it becomes a case of 'okay, we need more capital to do this, we need more people to do this', and the acquisition doesn't meet its hurdle rate."
Furthermore, McDonald says it is all about considering the synergies and culture of the organisation before the acquisition deal is signed.
"For us it's very simple; if culturally it doesn't fit the family photo, if it doesn't look like it's a natural family photo with everyone in the same room, then it will probably end in tears no matter how hard you try," he says.
"I think there's a danger of marriages done in the heat of the moment because everyone else is doing it. Secondly there's a danger that the consumer gets disenfranchised.
"Consumers are asking some hard questions post-GFC and if they're not listened to, it doesn't matter how much merger and acquisition activity goes on, the consumer will say, 'well that's all very well and good for you that you're chasing economies of scale, but what's in it for me?'"
He adds the financial services sector is littered with failed mergers and acquisitions.
"They've failed because of indecent haste and they've failed because there just isn't enough time invested at the beginning on sorting out the cultural aspects and sorting out whether at the end of the day there is a true benefit as opposed to an on-paper benefit," he says.
"I think the smarter ones will hasten slowly in that regard rather than just a rush to the altar. But there's no doubt there will be some accidents."
Kenyon agrees the cultural fit is a primary issue, as well as considering the business opportunities, synergies and revenue streams that could arise out of the deal.
"I think if the big are buying up the small, they need to be careful; they can't be bullied. There are really good businesses out there that the quantum of what you're paying is a lot less than you used to pay," he says.
"But multiples haven't come down and that vendor is going to have the choice of three or four or five people who he or she will sell to and so if they ride in with the cheque book waving and try to bulldoze their way through, they'll finish up not doing anything, so I think they need to be careful of that.
"The other thing that we see, and it's only a perception, is that if a bigger business is buying a smaller business and they're keeping the principal around for a period of time, they've got to work really hard at not making it look like they're not being gobbled up, when in fact that might be exactly what's happening, so they've just got to work at having their interpersonal skills at a high level."
Butterworth adds the due diligence process shouldn't be taken lightly.
"Absolutely know who you're aligning your assets with. The due diligence isn't just a two-week due diligence, it's got to be a due diligence that you take time in understanding each other's businesses," he says. "It's about making sure they don't compromise your asset and they can actually add value to it. It's really about understanding that."
He explains it's about spending the time to understand who your business partners are and whether they are going to add value to your asset or if they are in fact going to compromise it.
"If I was running my own wealth management, financial planning or accounting business and we're doing an aggregation, I'm putting my asset to the mercy of maybe 30 other firms I've just merged it with and I guarantee that that firm hasn't gone around and done their due diligence on the other 30 firms," he says.
"So all of a sudden you build a beautiful asset and then you hand it into this aggregation and your asset could be compromised because of the attitudes or behaviours of those other parties that you don't know. I think it's a big risk strategy unless it's done very slowly."
Swindells agrees, noting it's about building the relationship with the acquired business and the clients.
"Even with a book buy we're going to put an adviser in place who builds the relationship with both the existing adviser and the clients and if that's important to an adviser, it's likely to be a fit, so it's not a case of just hand us the clients, hand us the money flow and that's it," he says.
"Where the aggregators failed in the early days was that they bought up businesses which were good in their own right, but then they tried to force them into a model where the advisers weren't willing to change from their existing model.
"They didn't have a desire to fit into a business that could be handed over to others to operate.
"We look for people who are running a business that could be corporatised, or businesses that we could run by putting them into a hub and migrating them over a long period of time."
