Australia's financial advisory market is at risk of over-consolidation if the degree of uncertainty surrounding the federal government's reforms continues to trigger further large-scale merger and acquisition activity, a number of industry commentators have said.
Paragem Dealer Services managing director Ian Knox said mid-tiered dealer networks were facing difficult times in light of the Future of Financial Advice (FOFA) reforms and recent M&A activity involving DKN, Shadforth Financial Group and Axa Australia.
Knox said if FOFA banned volume rebates entirely, this section of the market would need to vertically integrate to create substitute revenue streams, a shift that was an inconsistent message and objective of the reforms.
He said there was a trend that larger practices in networks were recognising equity value now resided in the practice more than the dealership, particularly once private labels or volume rebates were stripped out.
The industry also had a liquidity crisis, with many older practices looking to retire in coming years, he said.
"There is consolidation with the majors looking to buy practices and networks with seductive sign-on fees and buyer of last resort facilities at levels above industry standard pricing," he said.
"The intention is to enable the acquisition to sell product at a time the industry is grappling with its destiny as an advice profession. Ironically, the majors say they have a value proposition but have to pay planners millions to believe it with handcuffing and sign-on fees.
"It's likely that consolidation will overshoot and that top-end practices will leave as the one-shoe-fits-all policy results in an averaging effect of lowest common denominator."
Kenyon Partners managing director Alan Kenyon agreed the advisory industry was at risk of over-consolidation if it was not careful.
"I share that view. My comment on the one hand you've got the consumer wanting greater transparency, greater independence and behind the scene you've got the industry gobbling itself up," Kenyon said.
He said perhaps 20 per cent or 40 per cent of the industry had not been evolving in some form or another to a fee-for-service business model and those businesses would clearly struggle, though sometimes "you've got to cut your cloth accordingly" and some of the old businesses would survive along with their old-style clients.
In Knox's view, it was time for the industry to be thinking about client outcomes and client needs, a view shared by BT Financial Group advice general manager Mark Spiers.
"It's absolutely seductive to take the bird in hand now, but [with] those decisions, people need to go in with eyes wide open to make sure that they don't undermine the structure, the value offering, the employees, the client value proposition, which can erode far more value than the initial gratification than any initial amounts of money," Spiers said.
"I'm not saying they don't have a place, I'm not saying there isn't merit in it. I'm just saying we have a model that is different and that attracts people who are looking for that model and that's our strength.
"We already have the scale so we don't need to look at acquisition strategies to build on it. We have full strategies based on the depth and quality and the delivery to our existing practices."
