Russell Andrews: "So while the pace of consolidation shows no signs of relenting, it's beneficial to look beyond the transactions and assess why this trend could actually prove to be something of a silver bullet for solving some of the challenges faced by investors and advisers."
Russell Andrews returns to PA with an overview of the consolidation market and asks if his trend could actually prove to be something of a silver bullet for solving some of the challenges faced by investors and advisers...
Despite suggestions that consolidation in the advice industry was set to slow down, we continue to see deal after deal announced, proving that there is a long way for this trend to go yet.
So while the pace of consolidation shows no signs of relenting, it's beneficial to look beyond the transactions and assess why this trend could actually prove to be something of a silver bullet for solving some of the challenges faced by investors and advisers.
Improving customer outcomes
One of the first priorities for any adviser is understanding what customers want and need from their wealth in order to deliver the best outcomes possible. Over the last decade or more, most advisers and customers have done fairly well, markets following the Global Financial Crisis grew steadily, and inflation was consistently low. Just being advised and invested meant customers had a pretty good chance of achieving their goals. However, with market returns expected to dampen and inflation growing to generational highs, achieving customer goals is simply going to get harder.
So how does consolidation help? One option to successfully navigate a low-return, high-inflation environment could be using actively managed investment solutions to capitalise on market dislocations and investment opportunities. However, access to the best research, portfolio managers, and implementation options aren't equally distributed or guaranteed for all. With consolidators, however, a bigger AUM pool, specialist teams, and deeper pockets can ultimately offer the opportunity of greater access to active solutions that otherwise may be hard to gain access to.
In support of this, partnerships with consolidators are considered a big opportunity for asset managers—even those with institutional credentials—because of the opportunity's size. As such, extracting maximum value from their resources and expertise can go a long way to benefit end customers and improve the likelihood of goal achievability and great outcomes.
Lowering costs
Lowering of the total cost of advice, investment management, and administration to end customers is another potential benefit from consolidation. In general, the total cost to customer has been an area of much discussion for many years now, and newly empowered customers are challenging more than ever.
In many cases, advisers have turned to passive solutions, either in full or blended with active solutions, to bring costs in line with what customers are prepared to pay and what they consider good value. However, as real market returns come under pressure relative to inflation, passive investing may not be the right way to deliver the desired outcomes and manage risk at an acceptable cost.
As consolidation happens, advisers and their customers become part of a bigger pool of assets, which in turn comes with an inherent improvement in buying power when it comes to active asset management. When passed onto customers, these cost benefits not only enable access to potentially better solutions and outcomes, but they do so at a cost that remains acceptable to clients, without eroding the adviser's revenue potential.
Solving the advice gap
Becoming part of a business already at scale and with scale can bring efficiency. An overall reduction in the cost-to-income ratio as assets and revenue grow means the advice firm is able to invest in modern integrated technology comprising business, advice, investing, and compliance tools.
Additionally, with insurance and regulatory costs also rocketing in the advice industry, smaller players are struggling to find a way of making lower-value clients profitable. With the potential scale and infrastructure that comes with a consolidator, these centralised expenses can be more easily absorbed as balance sheet capital is more readily available and can be deployed to support overheads without compromising revenue and profit opportunities.
With this built-in scale and efficiency, consolidators have the potential to lower the cost of advice. This means they can also offer their services to clients with lower asset values, thus bridging the expanding advice gap—something the industry has been grappling with for years.
Client Centricity
Not all consolidators operate consistently, but one thing that should be the same is a primary focus on delivering benefits to the end customer through the consolidation strategy. There can, of course, also be significant benefits for shareholders and internal stakeholders, but those with a relentless focus on client-centricity will most likely win out in what is becoming an increasingly competitive sector of the industry.
Looking ahead, the appetite for consolidation from the capital-rich buy side will likely continue for some years to come.
This is due to the typical cycle of private equity investments, alongside the growing trend of asset managers and insurers strategically looking to take a more vertical role in the advice value chain in order to grow their businesses.
Coupled with what remains a large pool of acquisition opportunities and an ageing adviser population, we could even see further acceleration in this trend in the next five years.
Russell Andrews is global head of advice solutions at SEI Asset Management Distribution
