Amid a tide of adviser consolidation, a growing chorus is questioning whether brokers really have their clients’ best interests at heart. With increasing competition to buy up good planning firms, consolidators are continuing to turn to third parties to try and make introductions.
But the common charging model of those lead generators – a success fee should a deal go ahead – has thrown up concerns over potential financial conflicts, as brokers are incentivised to contact a vast swathe of firms and facilitate a deal even if it might not be the best course of action for the advice business.
“Brokers are often recruitment guys that realise selling an entire business makes them more money than just one person,” says one market insider. “They use a recruitment business model, paid by the beneficiary, which in this case is the buyer. It’s a major conflict of interest given their remuneration.”
Brokers often receive around 3% as a success fee, according to the insider, which goes some way to explaining why IFA firms report being inundated with pitches.
The method is fairly simple, according to several people with knowledge of the process.
Essentially the broker’s job is to source deals, make friends with the seller, introduce them, and then sit tight until the deal is done. Brokers gather names of firms from the FCA register or other public forums, and cold-call them to try and drive opportunities. They then contact acquirers with warm leads.
According to a survey of 600 advisers last year, 26% said they had been approached by a consolidator in the past week. Another 21% said they been approached less than a month ago, compared with 17% who said they had never been approached.
“That frequency wouldn’t surprise me,” says a consultant that has worked on multiple deals for a consolidator. “A lot of these guys are not the smartest tools in the box.”
Larger consolidators will often have in-house teams that help drum up leads. Fairstone, for example, has a team of around four staffers that builds relationships with organisations that at some stage want to sell, according to a person familiar with the firm. But many will still rely on significant support from third parties to scour the market for advice firms that are willing to deal.
“What you’re doing is casting the net around for the 1 in 1,000 that is interested. That will be a lead generator. There’s no way people have enough business development managers to have bespoke contact,” says another consultant familiar with M&A deals.
One IFA tells me that they have only received one specific, as opposed to market-wide approach from a broker in their time at the business. Not only do smaller brokers stand to gain financially from getting an acquisition on its way, Big Four consultancies stand to make money from increased deal activity too.
Depending on the size of the business, producing an information memorandum (IM), the document used by the sell-side to market a sale to prospective buyers, can cost £750,000, according to a person familiar with the process. “Nobody wants the job of saying you’re wrong,” they add.
Conflicts of interest
Several brokers in the market take a fee off both buyer and seller, raising further potential conflicts.
“No professional firm like solicitors or accountants would ever be allowed to act for both parties normally, but these are unregulated businesses who act like bottom-end recruitment agents in the main, just passing company details on with no real value added or advice given,” says one advice market veteran that has worked on acquisitions in the past.
“I think what’s important is for both sides to know who represents the interests of whom,” a broker who disagrees with the practice of charging retainers to the buy-side and a success fee to the sell-side, says.
The broker said that one firm taking a fee from both sides in the past was IFA acquisition broker, Harrison Spence. The firm was found by Brian Spence, who previously ran an advice business, Ethical Financial, which went into insolvency amid compensation claims. Spence left to set up a new M&A consulting business, HSP Consulting, in 2017.
“Many people who have no working experience in the retail financial services sector offer their services to companies as brokers as they see a great opportunity to make money in the current market conditions,” says Harrison Spence Managing Director, Alan Marks.
Marks said the main difference between his firm and many of the companies offering introductions on mergers and acquisitions opportunities is that Harrison Spence is a full-service consultancy that helps on a wide range of issues, not just sales.
“The final service we offer is introductions between engaged sellers and buyers – all of whom are aware of the way we work. In fact, we work with some acquirers who do not use any of the other brokers because they do not understand the market as well as we do, given the consultative and collaborative way we approach all of our work.”
Marks said, “Our model is open and transparent and because we are receiving fees from both sides we are not working for one party to the detriment of the other. If a broker only receives a fee from one side, then it must be cause for question who are they acting for and are they doing the best job for both parties or in particular the other party not paying a fee.”
Vines Row, the adviser acquisitions broker founded by former Bellpenny director, Dawn Pearce-Herzberg, also closed in 2017. The firm worked with SimplyBiz-linked Verbatim Asset Management among other clients.
Other brokers in the market say they have ways to guard against these potential conflicts, however.
“The fee is typically percentage-driven so the better the terms a broker like us secures for the seller, the bigger the fee – so our interest is more aligned with the seller than the buyer,” notes Patrick Isaacs, chief executive of Capital and Trust. “Also, we’re success-only, so we only get paid a fee if a deal completes. That makes us very sceptical of unproven buyers, and puts us off working with buyers who move the goal posts.
“A seller who wants to pay a retainer to a corporate finance business so they write an IM and ‘acts in their best interest’ will get no better a service than they receive from Capital and Trust – and they’ll be working with a generalist who won’t be as well connected in the wealth sector.”
When it comes to spam calls, Isaacs says that if an adviser tells an agent they don’t want to explore options for three years, say, then Capital and Trust will update its customer relationship management system and not contact them for that time, or not email them if they choose to opt out. They will have already only targeted firms that fall in the right size pool for the buyer.
“We’re usually the people a seller would speak with once they’ve made the decision to sell – so we don’t sit on boards helping them make that choice,” he notes.
Whether you think conflicts are managed or not, the numbers prove a significant number of IFA businesses are still interested in selling. That makes others in the market more sanguine about lead generators firing out thousands of emails.
“You might think I haven’t returned that guy’s call, but in five years I might want to,” says one of the consultants. “There’s a need to make sure they’re just in the advisers’ minds.”
Particularly when their advisers are retiring, clients might be interested in a deal too.
When True Potential, for example, acquires an advice business, wealthy clients will be transferred into its advice arm. But lower-value clients will be made what is called a direct offer, according to documentation I have seen, to transfer into off-platform investment solutions. Of 2,945 direct offers issued in just one month, 2334 were returned, and £308m was transferred, the documentation shows.
Whether they are conflicted or not, advisers can expect brokers to be hard at work pitching the benefits of selling up to them for years to come.