How £3.4bn of Debt is Impacting Financial Advice & Wealth Management Platforms
The Citywire article by Jack Gilbert, Daniel Grote, and Seline Bucak, published on 12th December, was a brilliant, if disturbing, summary of the debt-fuelled PE acquisitions are strangling many advice firms and platforms. How £3.4bn of debt has changed the face of financial advice
The revelations come as the FCA reviews the advice consolidation market, warning chief executives that firms need 'a credible plan to service the debt' used to fund acquisitions. This sounds like a horse, stable door, and bolted conversation. It's a bit late to be savvy now.
Having been employed (briefly) by a PE who bought a platform and with a consolidator attempting to build value within the financial advice space, many of the points raised about unsustainable debt struck a chord. For debt-funded subscale platforms, the outlook for 2025 is bleak as growth and ability to act strategically will be constrained by:
Outflows wrecking the anticipated AUM growth and EBITDA targets.
Unaffordable cost-to-serve. Constrained by unconnected legacy technology and flabby operating models that need more automation and self-serve capabilities.
New entrants providing platforms and interconnected ecosystems that are competitive and profitable in a sub-15bps world.
Platform migrations becoming routine if approached with a systematic mindset. We just completed one where we batch-transferred clients in 8 weeks with no drama.
PEs taking a seat on the executive, focusing on cost reduction, not value creation. Money men pulling the strings.
The only lever left to pull is cost reduction through outsourcing technology and operations to scale players employing automation and cheaper offshore labour. However, this is a perilous route that comes with risks:
Firms will not like the idea of outsourced service, especially during the transition period, which typically takes 18 months. Firms buy on price but leave platforms because of service failures.
The valuation for a future sale could be eroded as there won't be any technology, operational, or client engagement USPs. Commodity valuations are inevitable, and they will fall way short of the targeted selling price.
In summary, there are too many platforms servicing our industry, and 2025 could see the first wave of extinction. Who would have thought at the beginning of 2024 that M&G would fail to find a buyer for its platforms and pursuing a wind up?
For acquisition driven advice businesses the future is equally challenging for those with significant debt exposure and paying interest north of 12%. If you're paying back a chunky loan at double-digit interest rates, you won't have the surplus required to invest in the business. The only option left is to pursue cost savings. The most obvious target is reducing the number of platforms to a handful rather than the 10 – 20 that are in use with some consolidators. Even if firms can service the debt, two challenges remain:
Buyers' appetites have changed, and multiples will be driven by long-term value creation rather than the pure play multiples uplift that scale brings.
Advisors may become disenchanted and leave the business, starting afresh and bringing their clients with them once any exclusion periods are over.
Fundamentally, financial advice and planning business are relationship-based, supported by tech-enabled operational efficiencies and transformational client experiences. Economies of scale are seductive and hard to deliver when multiple firms are brought together. With the arrival of AI-assisted processes that have in-built compliance and joined-up tech ecosystems that eliminate manual processes, small firms can be as efficient as larger consolidators, and the entry barriers are no longer prohibitive.
The gold rush of consolidation is over, and the promise of financial engineering through acquiring assets at single-digit multiples and selling for double digits is a busted flush. Winners will emerge who focus on sustainable value creation through cost and revenue synergies and, most importantly, engaging client experiences. If servicing debt becomes disproportionate to revenue, then the investment spend required will not be available to retain clients, and the downward spiral fuelled by outflows will accelerate.