Without doubt, the biggest news in the financial planning business over the past two years has been the rise and rise of the consolidators.
Initially, these groups scouring the country for accounting and financial planning practices to buy were treated as something of a curiosity. However, lately, their potency has been recognised by some of the industry’s major players who are worried about losing some of their top financial planners.
Earlier this month, the industry’s fifth biggest dealer group, Professional Investment Services (PIS), admitted it was feeling the heat from the consolidators. PIS decided if you can’t beat them, join them and set up its own consolidator, Professional Accountants Limited. Other dealer groups have not reacted so swiftly but most have been forced to at least consider offering advisers equity in the dealer group or its master trust.
While the industry has recognised the pulling power of these groups, there are those that remain sceptical over the long-term potential of these groups. They point to what they see as structural problems within the whole consolidator concept.
Consolidators are generally listed companies that buy accounting and financial planning practices. They usually pay for at least part of the practice by offering equity in the consolidator group.
On top of attempting to capture economies of scale benefits, one of the key strategies of consolidators is to offer an attractive exit strategy for advisers and accountants. This leads to the first criticism leveled at consolidator structures.
Financial planners and accountants who run their own practices are often very entrepreneurial. One of their key motivators is to build up the value of their business. Once the consolidator buys the business, this motivation disappears and is replaced by incentives to build up the value of the consolidator business. The danger for consolidators is that the key revenue generators in the group, the advisers and accountants, will not be as motivated to further the interests of the consolidator as they previously were with their own business.
Secondly, a large number of the practices being bought by the consolidators are accounting practices. A number of the consolidators have said that the primary value of these accounting practices is their potential as financial planning businesses. This is a dangerous assumption. There is still a large cultural gap between financial planners and accountants. Often a good accountant can make a poor financial planner.
Thirdly, to gain full benefit of economies of scale, the consolidator group must have a sense of unity. As anyone who has ever been through a merger or acquisition would know, this is not an easy task. The consolidators have an even harder task because they are made up of disparate businesses often run by fiercely independent individuals.
Despite these perceived challenges, the consolidators continue to prosper both in the number of practices joining them and stable share prices. Most of them are run by very smart business people with a thorough understanding of financial services. Only time will tell if they can prove their critics wrong.
