{audio:0:00:07} Alex, could you paint a picture of how you view the structure of the UK wealth management industry, today?

{audio:0:00:14} The way I tend to think about it is, you have approximately, 30,000 advisors, so I will start with a distribution view. The last reliable number we have from the FCA we have is that that number has been remarkably constant for quite a while. Obviously, the advice population is of a certain age; there’s quite a lot of retirement happening, but there is also quite a lot of academies, quite a lot of young guys coming through, so that number tends to be around the 30,000 mark.

{audio:0:00:43} From there, you have approximately, 8,000, 9,000, 10,000 advisors that are part of a large wealth management group, such as St James’s Place, Quilter and some of the medium-sized ones, such as Openwork. You would almost say that they are not exactly tied, but they are certainly not IFAs; they are not independent financial advisors. They belong a vertically, or semi-vertically, integrated, national, probably FTSE-listed, company.

{audio:0:01:18} Then you probably have about another 9,000, 10,000, 11,000 that are truly independent. These can be anything from a guy working out of a garage, to a 20 to 30 strong, independent financial advisor business. The FCA are very good at giving out these numbers. These guys say, we truly believe that you have to be independent, whole-of-market, so I can pick out, for my clients, the best possible product solutions.

{audio:0:01:44} In the middle, in the remaining 10,000, there’s a whole bunch of combinations. Some of them work for banks, building societies; some of them are semi-tied; some of them are part of a network for advice on mortgages only or protection only. There is this real mix, in between.

{audio:0:02:01} But to answer your question in a very simple way, I tend to think of it that, at one end, you have the really big, vertically integrated businesses and at the other, you have the really independent ones. The two are diametrically opposed in their view of the world. The big guys say that you don’t need access to 3,000 funds in the market because you cannot possibly monitor them. We will pick the best 50 or 60 for you and get really good deals and make sure that they perform, via investment committees, research, oversights, risk governance. The other guys say, no, I want to be able to pick this particular small-cap manager because I think it has the best outcome for my client. In the middle, there is a combination of the two.

{audio:0:02:45} How is the regulatory landscape shifting the number of advisors, between those three different channels?

{audio:0:02:54} Since the implementation of RDR, back in 2012, the regulatory burden and the cost of compliance has risen almost every year. Your cost of professional indemnity insurance goes up, the amount of stuff that you need to report and the regulations coming down on you, has increased. Again, it’s probably a good thing, because the business is now better regulated than before; the entry hurdles are higher.  But what that means is, if you are an independent one, two, three-person band, you’re having to pay quite a heavy, fixed regulatory cost, to be in business. Therefore, there is almost safety and more efficiency, to be part of a larger group because then that fixed cost gets spread out over a larger amount of advisors and the business can allow itself to employ professional business assurance teams, checkers, compliance teams and so on.

{audio:0:03:50} There has definitely been a drift towards the smaller guys either moving towards the big ones or the big ones buying the smaller ones and integrating them. In that polarization I talked about, the middle is being picked off by the big guys. But there is still a fiercely independent amount of IFAs that refuse to join any of the big companies. Again, the short answer is that it’s getting harder and harder to be in business, if you’re small, unless you occupy a very particular niche.

{audio:0:04:22} What about the IFAs at the banks?

{audio:0:04:26} Banks have tried to get into advice. They’ve done this before, about 20 years ago, very unsuccessfully. Now there is another effort to go back into it. Schroders and Lloyds is probably a great example of someone who is doing it really well. Wealth management is decently high margin, it’s sticky money. Deposits aren’t earning anything, but you already have the trust of the customer, as a bank. So the banks are trying to get into advice. HSBC are doing pretty well. There are definitely pockets of success but, on average, the banks are moving into this space, quite aggressively. It’s just that they’ve never managed to do it as well as some of the independent, large wealth managers.

{audio:0:05:09} I don’t actually know the answer to that. It’s not their core business and, obviously, if you go to Coutts and HSBC Private Bank and so on, if you go to the high net worth space, they’re absolutely fantastic at it. But if you go into the mass affluent, £10,000, £15,000, £20,000, £30,000 investable, they’ve just never really cracked it. It’s always been trying to sell your in-house products, which aren’t necessarily always the best ones. Or trying to sell house insurance or whatever it is. It always feels very forced.

{audio:0:05:39} But if you look at Shroders and Lloyds, they’ve done it the right way, which is a much more wealth management-based approach, as opposed to a guy in a bank trying to shift product. I think, the second time around, they’ll probably get it more right than they have so far. But it’s lucrative and you can get more wallet share and more revenue out of your existing clients; it makes total sense.

{audio:0:06:05} It’s likely that you think we’re going to see a continued attrition of smaller IFAs, to bigger groups, due to the regulatory burden and the challenges operating at such a small scale?

{audio:0:06:21} As I mentioned before, the other thing is that the IFA population at large – let’s say they have an average age of about 55 – there’s quite a lot of them that are due to retire in the next five to 10 years. Octopus Capital did a piece of research on the IFA market and they found that something like 25% of the current pool of IFAs are due to retire, in the next five, six, seven years. There’s going to be quite a large attrition of AUM and so on. One of the great things about joining a large, national firm, such as St James’s Place or Quilter, is that you almost have an exit strategy built in, from day one. You go to SJP, you work for seven, eight, nine years; you build up a nice business with a nice recurring income stream. Whenever you are ready to retire, you can sell that business back to the company, that will give you a check and they will take your pool of clients and give it to a new advisor. If you want to monetize your clients and get ready for retirement, it makes total sense to do that.

{audio:0:07:20} Again, there are quite a lot of consolidators, at the moment, that are private equity backed, that are going around and buying up all these small advisors. Maybe they want to cash out or they want to partially cash out, or they want to retire. There is a serious amount of consolidation happening. At the same time, the big guys, like us and St James’s Place, they’re looking to grow and you’re not going to grow by hiring one, two, three people. You want to just buy a couple of hundred at a time, because the due diligence is the same. I might as well buy 200 and then integrate them. There is a definitely a lot of consolidation pressures, which is why multiples are going up; there are less and less good deals. Some of the people like SJP and us are trying to move away from this acquisition-led growth and are trying to grow organically, in academies, because it’s very expensive to buy them now. But there are still a lot of opportunities in the middle and PE are amazing at this, at buying them, smashing them together, integrating them, cleaning them out and turning some average into something quite beautiful, that they can then sell to me.

{audio:0:08:31} In terms of when you value the funds under management of IFAs, how have you seen the valuation change, over the last five to seven years?

{audio:0:08:41} We always tend to say that you look at it as about 2% of AUM is the average. Or you can look at it as between three to five times of recurring income. Obviously, it used to be a little bit less, especially the recurrent income stream multiple. But in some cases, I’ve seen deals done at 3% of AUM or six times recurring income, because there is quite a lot of competition, especially for the really, really good deals and opportunities. There’s definitely upwards pressure on these. There’s scarcity, because there’s fewer deals but also, there’s much more money looking for them, so PE or consolidators or the big nationals; definitely upwards pressure.

{audio:0:09:28} But we, as businesses, have become better at valuing them now. Before, you used to go yes, 2% of AUM. Now you do much more work on looking at the client profile, what assets are they invested in? Are they going to pull those assets? Are those assets tricky to get out? Liquidity, risk; are there buried DB transfers somewhere in the basement that we’re going to have to pick up the bill for, in a few years? There’s a lot more due diligence done now, and a lot more of the deal considerations deferred, for two, three or four years, just to make sure that the money comes across and nothing comes up. There’s no more, here’s a check for 100%; have a nice day. It’s a lot more stretched out, just to protect ourselves, mainly.

{audio:0:10:12} That’s because the funds under management maybe in gestation or the different structure of them?

{audio:0:10:17} Exactly. Also there might be liquidity issues, so there might be someone who is sitting in illiquids – that might be a bad example now that is sorted out – but there might be proxy funds that we can’t pull money from. We can’t take money, for example, from something that is an absolute return fund that is really weird and has taken some heavy losses. You can’t just transfer that; it’s quite delicate. Therefore, you will almost put on a discount or an adjustment, depending on the composition of the client book. But then you will also look at the age. Are they 65 and just sitting there and drawing down their pension, which means that there is not going to be any new money coming in? Or are they 40, 45, starting to peak in their career and there’s lots of money coming into their pensions? There’s all these little considerations you have to make, when you model out an acquisition, which will dramatically adjust the price paid and over how many years it’s paid.

{audio:0:11:11} Do you see any of the robo-advisors or technology players competing for these books?

{audio:0:11:18} In the UK, so far, there’s been a couple of very high-profile crashes. The perfect example that comes to mind is Investec, who did a Click & Invest. The general average investor, in the UK, their question was, why are Sainsbury’s doing investment management. They thought Click & Collect and Click & Invest were the same thing. That just failed, at a huge cost. UBS did SmartWealth, because they wanted to attract the lower AUM clients and that blew up. Nutmeg, the biggest one, now has two or three billion now; two and a half. The more money they attract, the bigger their losses. There is perfect negative correlation between AUM and revenue. Those are all robos that aren’t working, at all.

{audio:0:12:03} However, if you look at the US, Betterment is absolutely killing it. Wealthify, Vanguard passive, they are all attracting huge amounts of money and making lots of margin. Usually, what happens in the US, eventually comes here. We can see almost a robo 2.0, in the UK, starting to emerge. PensionBee is doing really well, for example; that’s a product that I have a lot of time for. They help you consolidate your pension schemes from all over the shop and put it into one simple app, stick it into passives, at a really good fee. Stuff like that, that solves a real problem, I think is going to really win. But if you just go, let’s invest money at 1% a year, in something that has a digital app, no, not yet. There has to be more.

{audio:0:12:54} What does Betterment do so much better than the UK robo-advisors?

{audio:0:13:02} The US robos, they have multi-stage cash flow management; you can set goals, pots.  For example, you can say, I want my daughter, to go to Cambridge when she’s older and that’s going to cost me £50,000, in 10 years, to send her to uni, for a degree and then a master’s. Today, I need to know how much I need to put in and how much risk I need to take, for that pot to happen. In your app, you have a view of all your finances. They did open banking, open finance, years ago. You can set these pots with different risk levels, different objectives, different targets and every time you log into your app it says, the probability of her going to uni, at the moment, is about 75%, so you either need to pile on more risk, or increase your contributions. Wow, I’d better stick an extra couple of hundred quid in a month.

{audio:0:13:57} Most of them have lending or cards against their asset portfolios, so you have integrated Lombard Lending, which is pretty cool. It’s a much slicker, much better experience at a much cheaper cost. Schwab and Vanguard do wealth management online, for 30 or 40 basis points, all in. In the UK, they do 32 basis points, for live strategy, with platform and asset management. That is fantastic and, as soon as it comes to the UK, but properly in the way it’s done in the US, I think it really will take off. The younger generation will adopt it more and more, as money is passed down from their parents. You need that little inflection point where the inter-generational wealth transfer meets this new technology piece. When that happens, I think it’s going to really take off.

{audio:0:14:54} Do you think the likes of Betterment or a UK version, or Betterment itself, would be a major risk to the likes of St James’s and other large advice players?

{audio:0:15:05} I think Betterment are doing so well in the US that I think they are probably not. But Vanguard are coming to the UK. Vanguard already have an advice proposition here. It wouldn’t take much for them to roll out a digital or telephone-based advice proposition here. Honestly, I would be very surprised if the big guys aren’t, themselves, developing secretly, some kind of digital advice. Or, at least, a hybrid advisor. That’s a tool that allows the advisor, the human, to see more clients but also taking away some of this stuff that doesn’t really add much value. Reporting, rebalancing, contract notes; all that stuff doesn’t have to be human. It can be a machine. Or even if the client wants to log on and update their own address, you don’t need to call your advisor for that. Therefore, the advisor can do more value-added stuff. That, I think, is probably being developed at quite a lot of the firms in the UK, right now, to keep margins and evolve with tech.

{audio:0:16:09} But the older advisors are a little bit reluctant because they feel threatened by it, in some cases.

{audio:0:16:18} Almost cannibalizing themselves?

{audio:0:16:20} Exactly. Instead of seeing 100 clients, I can see 200, with the help of technology. They think that the point is, eventually, technology will replace them, which doesn’t always help.

{audio:0:16:32} How do you look at the importance of distribution? Firstly, today, but also as you see these robo-advisors and a more digital shift?

{audio:0:16:42} When I was at St James’s Place, the managing director, David Lamb, used to say that distribution was everything and that if you control that, nothing else matters. Obviously, tongue in cheek, but his view was, very much, if you control the distribution, which St James’s Place do – they have 4,300 very good quality advisors, that they trained and recruited – and if you have that and a vertically-integrated model, it’s an amazingly powerful tool. If you look at the components, the value chain, of a wealth management business, you have advice, platform and investment management. Within those three, the bottom are now being heavily commoditized where, if you believe in efficient market theory, it’s hard to differentiate passive management, unless you go into the old space or the liquid stuff.

{audio:0:17:36} You can now get platform for one, two, three basis points. Those two are being very strongly squeezed by the market pressure or market regulation and competition. But the one area that remains largely immune, is advice, because you have the relationship with the clients, with the money, and you direct that to wherever you have the best possible outcome for yourself and for your client. Therefore, if you control distribution, that is a massive strategic advantage. That’s why everybody is trying to buy advisors, to integrate them into their own proposition.

{audio:0:18:12} How valuable are these advisors if millennials don’t want an advisor and they want a robo-advisor?

{audio:0:18:23} Unfortunately, for the millennials, at the moment, most of the wealth in the UK is still controlled by people who do want an advisor. At the end of the day, it’s almost like a GP, where you can get online questionnaires, algorithms, that tell you what’s wrong with you but, sometimes, you just want a human that has had to do lots of exams and have lots of qualifications and experience, to tell you, you know what, it’s fine; it’s going to be okay. Don’t sell because the market has fallen 20%. In fact, buy more. Or who can point you in the direction of a good accountant or a good trust person or a lawyer. It’s also that, I help you with your wealth and everything related to it. You cannot get that from a machine, yet.

{audio:0:19:05} If you want to do an ISA and you want to stick £20,000 into a balanced portfolio, by all means do it online. But when you get a bit older and you have family, kids, houses, maybe a business, that’s when you really need a human being that knows what they are doing. That’s why the value of the advisor is so great, because there are only 30,000 of them, so it’s a finite resource.

{audio:0:19:29} What would Betterment say to that? What would be the counterpoint that Betterment would have?

{audio:0:19:33} Betterment would say, instead of paying a human advisor 2% a year, pay us 50 basis points and then whenever you need an accountant or a trust guy, just pay him one grand or two. The ad valorem model of paying 2% a year, for life, that is really under threat and really under attack, by the likes of Betterment or Schwab, that offer you a pay-as-you-go service, or almost like a monthly subscription, a flat fee. What they’re saying is, why would you pay 2% on a million pounds invested, when you can pay £10,000 a year, flat and then if you need more stuff, buy it as you need it.

{audio:0:20:14} I guess it’s the age-old question of, how disruptive could this be and how are consumers going to behave? There’s one argument that the fees that the traditional players charge are very, very high and, arguably, very hard to understand the value of the service.

{audio:0:20:35} The IFA community usually says exactly that about St James’s Place. They charge between 2% and 2.25%, which is not the highest in the market, but it’s certainly not the lowest. What they are saying is, look, we are very transparent with our fees. You pay 2% and, for that, you get advice, a platform, asset management and all the related services. Their clients – of which they have 700,000 in the UK – are, mostly, very happy with that. They get a bundled deal and they get a human that they trust and value and they get a brand that they believe in. As well as a strong balance sheet, a FTSE 100 plc. They’re like, I’m just going to get on with my life and I’m going to pay them whatever I pay them and I’m super happy with that.

{audio:0:21:20} Other people say, actually, if you multiply out the fee drag, over life, asset returns are going to go lower. If equities are going to yield 5%, medium term, I’m paying 2% of that away, that’s not amazing. Those people will actively seek a different solution, whether they will do it themselves or via a low-cost platform or whatever.

{audio:0:21:42} But the SJP clients and the clients of other similar businesses, are very happy to get on with their day job and let that whole structure manage their money, for a fee. Basically, do you go to Aldi or do you go to Waitrose?

{audio:0:21:59} That 30,000 number of advisors in the UK, do you see that being sustainable with those retiring, plus the academies and that growth, potentially, from the big, vertical players, plus the risk of disruption from the robo-advisors. How do you look at that number evolving?

{audio:0:22:18} I don’t think the industry has been very good at communicating to the younger generation that it’s actually quite an exciting, quite a cool thing to do, to be a financial advisor. It’s very flexible and it can be very lucrative; you can specialize and you can do all kinds of stuff. As an industry, we are starting to do much more outreach to unis, work placements, academies to younger people. As the older advice population retires, I think that that number will hold steady, for the short term, but as the younger generation comes through, I’m certainly hoping it will increase, because there is a clear need, in the UK, for financial advice and a slightly younger generation of advisor. I’d say that it will probably grow at about 5% to 6% a year, in the medium term, as the processes kick in and people realize that it’s quite a cool career.

{audio:0:23:10} You think it’s going to be sustainable growth, continually, on that side?

{audio:0:23:15} I genuinely do. There’s quite a lot of wealth in the UK. Despite our government’s best efforts, I think it’s still the fifth largest economy in the world. That wealth needs management. The tax rules are getting more complicated. Tax and trust rules and pensions and all that stuff is getting harder and harder to understand for the average person and so they need advice. I think there will be a push, from the market, to get more advisors trained and into work.

{audio:0:23:45} How do you look at the implications of the growth in platforms, like Hargreaves Lansdown?

{audio:0:23:51} In many ways, Hargreaves are one of our biggest indirect competitors. Do you get it managed or do you go to Hargreaves and buy a top 50 fund? They’re a phenomenally successful business, running a hundred billion of stuff. I think they’ve got a 40% market share of direct share dealing, in the UK, which is just mind-blowing. They’re a great business if you want to do it yourself and, in fact, many people choose to. If you’re going to put your money with a Fidelity fund, you might as well do it yourself.

{audio:0:24:22} Some people use the new tech-enabled ones, like AJ Bell and IntegraFin; all these new platforms are coming up with really clever propositions and good pricing. Some people aren’t comfortable doing it on their own. Some people still want a human to do it. I’m very happy that they’re out there, because it gets people investing, it gets people excited about putting money into the markets. But I don’t think it’s a threat, per se, to the advice model. For example, in the global financial crisis, in 2008/2009, a lot of these people that were invested in Hargreaves, their own funds, lost quite a lot of money. They decided, you know what, I’m just going to go and get it done by a human pro and all that money went to SJP, so it exploded in those two years because people just said, I’d rather not lose that again. I’d rather have a human being to scream at, if it happens.

{audio:0:25:18} Do you think the platforms are in a better position, if there was some disruption in the UK, from robo-advisors or technology, that they would be best place to benefit from the younger customer base or the type of funds they deal with?

{audio:0:25:32} I think that one of the key advantages of having a human distribution force is that it’s very hard to pull money in blocks. Each client has to call his advisors and say, I would like to cash out. The advisor is going to ask, why would you want to do that? It makes no sense; stay with us. If you’re in a platform, if you’ve got a couple of hundred thousand invested, click, cash. Then the next day, it’s somewhere else. That money is much more flighty. If a robo-advisor convinces you that its proposition is better and cheaper than Hargreaves, then there might be a risk to the platforms, from the robos. However, it doesn’t really feel as if the platforms and the robos are yet competing for the advised AUM. The short answer is, probably not yet.

{audio:0:26:16} So the vertically-integrated players, such as Quilter and St James’s, have stickier funds under management than Hargreaves, for sure?

{audio:0:26:25} You do and you also have that client contact. Imagine in March, when the markets went down 25% to 30%, there were MiFID loss notes flying around everywhere, and clients were asking, what’s going on? You get a phone call from your advisor saying, look, it’s a short-term thing; central banks are going to step in. In a couple of months, this will only be a blip. In fact, if you’ve got 20 grand on the side, it might not be a bad time to buy something. If you’re in a robo-advisor, with an algorithm, or if you’re directly invested, you are just going to look and say, I had 100 grand yesterday and today I have 70 and that’s going to make you feel pretty bad about life. Again, there is definitely value to a human.

{audio:0:27:05} Humans add value, I guess. Looking in more detail at the human distribution network, let’s say that I run a small IFA business, hundred million funds under management, for example. What would be the process that St James’s would take, in onboarding or purchasing my business, or the funds?

{audio:0:27:33} This wouldn’t be just St James’s Place, but any kind of acquirer, firstly, of course, you would want to understand the reasons for the sale. You would want to understand why the advisors were looking to cash out or join you, because that’s a slightly different thought process. If they were looking to just cash out, it would be very transactional. You would say, you have 100 AUM; we are going to get some specialists to have a look at that book. Let’s say, 80% maps directly across into our funds. Our funds have a better performance and a slightly lower fee, so there’s not going to be any issues about transferring them. 20% is either in stuff that is amazing or cheap or liquid, so you almost do a gold, silver, bronze rating on your AUM. You’d have a look at the clients. Again, do I want these clients? Are they my kind of clients or are they all 75 with a pension pot of 100 grand and maybe they are better suited somewhere else?

{audio:0:28:32} After that, you would say, actually, from that 100, 80 is perfect; 75% of the clients are fantastic. Therefore, I’m going to give you 1.9% of AUM, do a bit of a haggle, here’s a check for £2 million, £3 million, whatever it is. If the advisor wants to join you, you would think about it in a slightly different way. Number one, do you want that advisor to join you? Again, culture, are they perfectly clean, is there any kind of misconduct history? If you say, yes, great, I’d love these people to join, you would almost carry out a similar AUM analysis, but you would say, how much of that can you, Mr Advisor, bring across, in how many years?

{audio:0:29:16} It’s almost like a cash flow model and that becomes almost a business acquisition, instead of a book of AUM acquisition. You’d probably pay them 60% of that £2 million or £3 million today, because obviously, you want them to feel pretty good about it. But then they’re still part of the deal and they’re still working and monetizing their assets and there will be deferred consideration, at the end of it, once the migration has been completed.

{audio:0:29:52} The fact that it’s deferred, reduces the risk, as well.

{audio:0:29:58} For us, absolutely. For the advisors that you’ve just acquired, it heavily incentivizes them to perform, as promised. Otherwise, it’s very easy to say, yes, all my clients are going to come across; no problem; there’ll be zero loss. Then they get their check, off you go and, in fact, only half the clients come across. It’s specifically designed to reduce the projection and business case risk for me, a little bit and that we are all aligned on getting this across, as agreed.

{audio:0:30:29} Do you look at the different types of funds, whether it’s a SIPP pension or ISA stuff or whatever type of funds it is?

{audio:0:30:37} You would look at the wrappers, absolutely. The important thing is that you would want the wrappers to be compatible with your own. Again, everyone has ISAs, most people have SIPPs, most people have retirement plan products. But, for example, if we were looking at an advisor and they had 40% of their book in VCTs or EISs or some other weird and wonderful stuff, in a Cayman structure of some kind that we can’t hold, or don’t even want to hold, that would be a massive no-no.

{audio:0:31:09} But usually, if you buy traditional UK wealth management’s books, they would be in those typical wrappers and they would, typically, be in unit trusts or UCIT funds. Then you would go and look at the asset classes and then you would say, they have a UK equity fund; so do we. Ours is better and, therefore, the transfer isn’t going to trigger any issues. When you transfer stuff, you have to prove that you’re not disadvantaging the client. You can take them from something amazing and cheap into something terrible and expensive. You have to do that really in-depth, bottom up, AUM client analysis.

{audio:0:31:48} In terms of the IFA, take a typical 100 million funds under management, what is the typical fee that an independent IFA would charge on that?

{audio:0:32:06} Again, it varies quite a lot. They would, maybe, charge 85 basis points, ongoing. That’s your fees on AUM but you would also charge an initial advice fee. Just to give you a really rough number, it’s 3% initial, 1% ongoing. Obviously, there is variation up and down on both. If it’s a big case, you discount. Some people prefer a bigger initial and a lower ongoing, or vice versa. It depends a little bit on how you run your business. But 3% and 1% is a slightly outdated way, but a very simplistic way of thinking about it. I think both numbers may now be lower, in practice; maybe 2.5% and 0.8%, because of pressures.

{audio:0:32:47} Let’s say one million, for argument’s sake, in ongoing income, what’s the fixed overheads or fees that they have to pay, on that amount?

{audio:0:32:59} You’d have to pay, obviously, for office space, so let’s say, 50 grand for an office. You’d probably have to pay 20 to 30 grand for your indemnity cover. You’d have to get some kind of compliance, risk, oversight function. You can usually cater that in from one of the platforms or networks, but you might have to pay off 10 to 15 basis points for that. So 100 grand goes away on all of this stuff. You’d obviously have to pay membership fees to your networks; you might need a PA; there might be two of you working. So the P&L is that of a small business. In some cases, you would have to pay for your access to market, your infrastructure, your platform and all that stuff. Typically, the funds would be charged on top of that, to the client, so the cost of investment. From that million pounds, 200, 300, 400,000 is probably your fixed, absolutely can’t touch costs. Then there’s probably two of you running that money, unless you’re properly high net worth, and then you’re making a couple of hundred grand each, which is not a bad living.

{audio:0:34:17} An average advisor manages about £25 million, £26 million, if you look at the big businesses. A hundred is quite an operation, so there might even be three or four advisors and a couple of paraplanners, a couple of Pas. If you are not high net worth, that million pounds gets chopped up very, very quickly.

{audio:0:34:37} I’m just trying to back out the pure, free cash flow or cash flow multiple that a big player would actually pay, for a small player.

{audio:0:34:50} You wouldn’t necessarily do it on free cash, because obviously, your costs, as a little guy, are going to be very different from mine.

{audio:0:34:57} You might work out the synergies that you could save?

{audio:0:35:00} Exactly; so I would do that. I’m going to close your office and I’m going to fire the people that I don’t need. I’m going to get rid of the board of directors, I’m going to get rid of all that stuff. I’m going to put you onto my insurance policy and, all of a sudden, that 400 grand has just gone to 100, because I’m at scale.

{audio:0:35:17} Going back to the 100 million, which might be a bit larger than typical, but if you can cut out half of the 400,000 in fixed cost, then you’re almost paying five or six times, post-synergy cash flow, which is pretty good; it’s very cheap.

{audio:0:35:42} There are obviously risks involved and money can walk out the door and you can get investigated by the FCA or somebody complains, so there’s a little bit of risk around that. But as you correctly pointed out, you can, effectively, buy a decent cash flow for five, six times. That’s why, at the moment, if you tried to find a business at around £2 million, £3 million, £4 million, to buy, exactly the business you described, managing 100, it’s almost impossible; there’s a queue of people looking to buy them. I don’t want to say it’s quite a cheap entry, but it’s quite a good business to buy, for not a lot of money.

{audio:0:36:17} How do they look at who they sell to?

{audio:0:36:21} Some people just want to sell to the highest bidder. If I want to cash out, I don’t particularly care who buys it. Some advisors are, obviously, quite attached to their clients, so they want to make sure that it goes to the proper place. Again, assume that it’s table stakes, those ones wouldn’t care. The ones that sell to combine, to merge, that obviously, is all about culture and systems and how closely your advice processes are and so on. But if you just want to cash out and buy a boat, you don’t care.

{audio:0:36:53} I’m just thinking of the other options they actually have.

{audio:0:36:57} Apart from selling? Obviously, you can sell the book, you can sell half your book. You can give a book away to a younger guy, to manage, and you just take a cut out of it. You can sell to a consolidator or sell to us. Or you can sell on an earn out, where you still remain with the business and you get paid money and, at the end, you get that little balloon payment. There are all these little ways you can structure a deal but, typically, especially when you look at a retiring advisor, they just want to get paid and leave.

{audio:0:37:28} The big players clearly have an advantage to bid higher than others, because as you said, they can cut out half of the fixed costs of the smaller player?

{audio:0:37:40} Sure, but then we have shareholders and finance directors and everybody else who might say, I’m not entirely comfortable paying this multiple because that’s going to be in the papers tomorrow and the shareholders will say, hey, why are you splashing money around? In a way, the private equity guys, that are unlisted, they can and usually do, go higher. Their play is that they buy all these little businesses. Even if they overpay here and there, at the end of it, once smashed together, it is suddenly a 200, 300 advisor proposition, with a really good asset management function; tech and everything is perfect. Then that becomes a much higher multiple, to somebody like us.

{audio:0:38:29} Are they offering them a better deal, as well, in terms of earn outs or salaries?

{audio:0:38:34} They can do. This is a world that I am not 100% familiar with. I’m not entirely sure how the PE deals would be structured. Frequently, when there are deals out there, they just overpay. You go, fine; have it. Obviously, there is a limit at which you have to stop too.

{audio:0:38:55} What’s overpaying though? We just said that you can get them for four, five times cash flow?

{audio:0:39:01} Maybe they go higher; seven, eight, whatever that number is. I understand why they do it and good luck to them, but there’s some deals that you just can’t do.

{audio:0:39:12} Do you think, at seven, eight times cash flow, that it’s too risky because you might see people leave, pull their money?

{audio:0:39:21} There’s always integration risk. There’s a risk of money and advisors coming across. Clients might say, actually, I’m going to pull it and stick it in Hargreaves. The advisor might not fit culturally. There’s all these risks that can dramatically increase the integration period. We still have internal hurdle rates; we have an IRR we have to work to; NPV has to stack up. You still have to get a business case. PE guys are a little bit more aggressive and there’s more cash sloshing around at the moment so, in some cases they do have an advantage and they can be massively geared up. They play a slightly different game. We’re obviously buying to grow advisors, mainly, or add quality AUM. But those guys can do a clean-up operation. They can buy at slightly different deals.

{audio:0:40:16} It’s almost the perfect space for private equity to roll up?

{audio:0:40:19} It absolutely is and they’ve been doing it extremely successfully now, for three to five years, at scale. If you look at AFH or all those other consolidators, such as Succession, those guys are doing great and they can integrate the business in under 12 months, where a big wealth manager can take up to three years. They have super-efficient teams and processes, to get them in and the wheels spinning.

{audio:0:40:47} Do you think that’s a risk to the big players, like St James’s?

{audio:0:40:51} St James’s Place is by far the biggest one, by advisors. It’s got 4,300 advisors, £120 billion AUM, a wonderful brand name, FTSE 100 balance sheet. Are they really going to be threatened, directly, by a consolidator? Probably not, because SJP have done the same thing for 25 years; they just do it 1% better every year. It’s very hard to compete with. If you look at people like Schroders Private Wealth, those are probably, in my opinion, more credible competitors. They do a very similar, high quality, advice led proposition, at a slightly cheaper fee and they’ve got the brand name of Schroders.

{audio:0:41:36} But the consolidators are doing very good business and making lots of money, so fair play to them.

{audio:0:41:44} How are Schroders acquiring advisors for distribution?

{audio:0:41:47} With the Private Wealth initiative, I think what they are trying to do is to aggressively recruit them from other firms. Whether they are promising the equity or massive salaries, that I don’t know. They’ve managed to get 300, 350 advisors, up to this point, from a reasonably standing start. They had systems issues last year, but they now have a very credible, quite attractive, advice proposition.

{audio:0:42:15} I think St James’s has forecast 6% to 8% annual growth of advisors. With 4,300 today, it gets incrementally harder to grow that amount of advisors, year on year. Do you think this is likely? How do you look at that forecast?

{audio:0:42:33} You’re absolutely right. There are 4,300 advisors, growing at, let’s say, 6% to 7% a year but also, don’t forget that there are 3%, 4%, 5% that are naturally retiring or quitting, so there is a natural attrition. The gross growth rate is, actually, 10% or 11%. That’s why today, they have four academies. They have one in Asia and a couple in the UK and they have a next gen academy which is, effectively, grooming the kids of partners, to take over the business. They’re spending £10 million a year, or whatever it is, on these academies and the whole point behind them is that you might want to get 250, 300 grads a year, pumping out of the system, which goes a long way towards your growth target.

{audio:0:43:19} Obviously, a grad is not as efficient as a seasoned IFA; it takes two to three years for them to become 100% effective. But it reduces the need to go out and buy 400, 500, 600 people, a year, or recruit them from other competitors. Organic growth is very important and that’s why I think, for them, it is still an achievable target.

St. James's Place & UK Wealth Management

The segmentation and growth drivers of UK independent advisors

How regulation has driven industry consolidation

Comparison of the vertically-integrated model versus indepedent advisors

How private equity funds are rolling up advisors to challenge incumbents

How to value FUM when acquiring independent advisors

Impact of the gestation period of funds on future cash flows

St. James's Place & UK Wealth Management

Current Head of Strategy at Quilter and Former Corporate Strategy at St. James's Place

inpractise.com/articles/st-james-place-uk-wealth-mgmt

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Executive Bio

Alex Bogdanovskij

Current Head of Strategy at Quilter and Former Corporate Strategy at St. James's Place

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St. James's Place & UK Wealth Management(July 8, 2020)

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