Navigating the Evolution: Insights into the Winners Profile for Advice Consolidation

The market dynamics for advice firm consolidators are changing, driven by two main themes:

• Higher interest rates make debt more expensive and less freely available.
• The impact of consumer duty and the FCA's intent to make firms deliver fair value.

Citywire’s PE leaderboard shows acquisitions were down 10% from 2022, with 115 completed in 2023 compared with 128 in the previous year. Only eight firms (22%) received new private investment in 2023, while 32% attracted new funding in 2022.? Given these twin pressure points, the business models for consolidators will have to adapt and add new capabilities to augment financial engineering. Their business models must broaden beyond asset accumulation and EBITDA multiples uplift. ??Those that focus on service excellence and client value delivery will be the new winners. However, these skills and capabilities will be completely alien to many firms and require a fundamental change to target operating models, propositions, and underlying technology systems. The FCA's recent muscular approach means time is not on their side.

The FCA is ratcheting up the pressure, starting with the top 20 firms, to evidence that clients are getting value from the ongoing advice fees. In a letter sent in December 2022, the FCA noted that advice firms were not adequately considering the relevance, nature, and costs of ongoing services. This was followed up by another letter sent in January 2023 explaining how advice firms should approach consumer duty, reminding firms to act in good faith toward customers, avoid causing them foreseeable harm, and enable and support them to pursue their financial objectives.?In a consumer duty webinar in December 2023, the FCA flagged concerns that it appeared some consumers may be paying for annual reviews but were not receiving them. When SJP disclosed the bombshell provision of ￡426m to compensate clients, the potential fallout was brought into a laser-like focus.

The latest turn of the screw came on the 15th of February 2024 when the FCA issued a questionnaire to the top 20 advice firms regarding the implementation of consumer duty on 15 February 2024. The questionnaire aims to gather information about ongoing client services, including costs and how clients are charged after receiving advice. Going forward, advice firms will face increased and ongoing scrutiny around costs, charging, and value. ?It may be possible to keep the FCA at bay for a while, but savvy firms will reinvent their target operating model to create a sustained competitive advantage with a focus on:

• Value delivery to clients that is much more ambitious than do-no-harm.
• Operational excellence that enables scalability, consistency of service delivery, and optimised cost-to-serve.

In February, Mark Mortimer and I published an article, “Cost to serve the most important KPI you aren’t using”. The thrust of the article was the need for firms to “lift the bonnet” to quantify and measure what activities drive workload demand and, using that insight, to reduce “unit costs” and improve service efficiency, client value delivery, and experience. It's about systematically identifying and eliminating activities that add no value to free up capacity to serve more clients at a lower price point without eroding profitability. Using metrics like cost-to-serve requires a fundamental mindset shift and a new set of design, execution, and data analysis capabilities that haven’t been required. This is non-trivial, and most firms won't have previous transformation experience to fall back on and won't know where to start.

Let's look at a typical integration. This is considered done when:

• The rump of assets are moved, and the associated revenue uplift is captured.
• Clients are migrated, and pricing models and staff contracts are harmonised.
• Shared services are in place.
• Client-facing and compliance processes are implemented and ideally supported by one CRM and reporting system.

Going forward, the “definition of done” stops too early and won’t provide a foundation for ongoing service excellence and optimization. It’s common to find advice firms that have grown through consolidation, operating 10 or more platforms. Rationalisation has not occurred because of promises made during the deal courtship, and the prize of moving on to the next integration has outweighed the inefficiency drag that has been left behind. But capital cost, scarcity, and regulatory pressure mean those days are gone.

Fortunately, there are some lessons advice firms can learn from the IT industry. In 2011, Dean Leffingwell published the first version of the Scaled Agile Framework.?Dean set out to solve the problem of scaling software development without destroying small team efficiencies, culture, innovation, and productivity while providing certainty of delivery. The framework focuses on inbuilt quality to reduce defects and the need for expensive and adversarial testing cycles. ?If you think this sounds like file checking, you're on the right track. The scaled agile framework is about creating synergy between teams and aligning them toward common goals while preserving the agility and flexibility of smaller teams. It does this by:

1. Making value delivery the ultimate goal.
2. Aligning strategy with execution.
3. Promoting transparency and alignment.?
4. Implementing KPIs and metrics that support effective delivery and value creation.

We are entering the next consolidation phase; firms must adapt and augment financial engineering skills with new capabilities emphasising operational capabilities. The winners will:

• Own as much of the value chain as possible.
• Have a focus on operational excellence and scalability.
• Offer different propositions optimised to different client cohorts' needs.
• Deploy a modern and integrated tech ecosystem that eliminates double keying and is underpinned by a single, one-source-of-truth data source.
• Double down on the cost-to-serve.

The FCA's appetite for transparency on the dynamics that drive pricing, servicing costs, and value delivery is set to increase. The questionnaire to the top 20 firms is the first foray. Staying on the right side of the FCA is one thing, but the real prize goes far beyond keeping the regulator at bay. If you would like to find out more about acquiring the new skills and capabilities to create a competitive advantage through operational efficiency and service excellence, get in touch.