Sharing his analysis on what we might expect to see in 2025, Carl Woodward, Director at Simplify Consulting, tells us why he believes that growth for the financial services sector is set to continue – but in many different ways not just in M&A activity.
M&A activity in wealth management has been frantic throughout the last decade. While the UK wealth industry remains fragmented, M&A activity is growing in firms’ quests to achieve greater scale and build out their offerings with new skills/expertise to meet the evolving needs of clients.
In recent years, private equity firms have been snapping up wealth managers amid a wave of consolidation in the sector and all in all, the sector itself continues to display remarkable resilience, despite ongoing economic challenges.
With pension freedoms freeing up billions of pounds buyout firms have scrabbled to invest in wealth firms wanting to benefit from an ageing population that’s living longer.
Additionally with operational costs rising for advisers, both in terms of regulatory cost and technology, private-equity-backed consolidators have been looking to take advantage of economies of scale by bringing these firms together.
It’s also increasingly the norm for private banks looking to expand their operations to do so through M&A.
But is this a good thing for investors and what can the industry expect going into 2025?
Expectations
Inevitably in 2025 we can expect more of the same. Subscale offerings will undoubtedly struggle to balance the regulatory and administrative burden and remain competitive given lower margins.
I don’t think the National Insurance rise will be a catalyst alone for more M&A. Fundamentally business models are evolving and being sub-scale is difficult in an increasingly complex regulatory environment where margins are being squeezed. We saw plenty of M&A before the NI rise and we will continue to see further consolidation into next year. It makes sense for businesses where costs are disproportionately high and where it’s in the interest of customers.
We are already seeing the growth in advisers sourcing their own model B platforms as a way to drive down costs and capture more of the value chain, especially in the context of further consolidation and acquisition.
Research by Investec Wealth & Investment earlier this year revealed 90% IFAs and financial planners believe there will be an increasing trend of mergers and acquisitions in the IFA and wealth management sector over the next five years.
It’s clear that smaller firms that cannot evolve to meet the changing needs of clients with rising costs will almost certainly struggle in this environment. But those able to adapt and adopt new technology could thrive.
Opportunity?
The landscape for financial services and advice in particular is changing rapidly and M&A represents the opportunity that companies are seeing in growing assets under management to drive revenue. It is increasingly difficult for smaller businesses to survive and we consistently hear of the challenges that businesses face in meeting their regulatory obligations while providing end investors with the quality and breadth of advice that is required in the very complex financial world in which we live.
I don’t think this means the end of very small advice businesses, but those of a certain size will be attractive to consolidators, who can drive operating efficiencies through economies of scale and benefit from assets under management to instantly achieve revenue growth.
The one cautionary tale is that the consolidation is currently backed by private equity which oftens has a short term objective to realise growth quickly while reducing the cost base rapidly. Integration is therefore crucial and any change must be delivered in the spirit of the Consumer Duty.
The question regularly asked of M&A deals in wealth management is whether it is good or bad for end investors?
Some have questioned whether it shrinks the field of choice for consumers, particularly in terms of cost but I don’t think we are at the point where we are sufficiently eroding choice for the consumer to be concerned that the current level of consolidation is anti-competitive.
Conclusion
Growth for wealth and advice companies can come in a variety of forms; organically by delivering great service and retaining customers whilst onboarding new ones, or through the development of products and propositions that prove attractive to customers and advisers alike.
There is still a significant amount of transformation activity underway (outsourcing, replatforming, etc) and we expect that to continue so that organisations are lean and agile in the future.
We will continue to see platform consolidation, adviser consolidation, launch of new Model B arrangements and outsourcing deals in 2025.
No-one will want to stand still; the market just won’t allow for a year of treading water, especially with so many deals in-flight.
In the context of the operating environment influenced by regulatory, legislative and general market forces and customer sentiment, firms will still need to grow and continue to win new business.
