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The consolidation game

By Justin Modray, published 10 September 2019.

Not a week goes by without stories appearing in our industry press detailing the latest acquisitions by so-called adviser consolidators.

These consolidators buy up advice firms striving to make 1 + 1 = 3, often promising an improved service and investment proposition for clients along the way. In my opinion, it’s often more about greed and clients’ best interests seldom get a look in.

Consolidators usually have their own investment management service/platform from which they pocket tidy annual fees. Their business model tends to involve buying an adviser then shoehorning as many clients as possible into their own investment service to boost profit margins. The acquired advisers are often financially incentivised to make this happen.

The acquired adviser wins provided they sold out at a reasonable price and want to retire or continue working in a larger firm. And the consolidator wins provided they get their maths correct and enough clients move across to their investment service.

But what about the clients? I fear that all to often they end up losing as their welfare is a distant consideration when the adviser and consolidator strike a deal.

Let’s suppose Mr & Mrs Bloggs are clients of Adviser A, paying 0.75% a year for advice, 0.80% for investment funds and 0.30% for a platform, making a total of 1.85% a year. High by our standards, but fairly typical in the world of advice.

Adviser A sells out to a consolidator, receiving hundreds of thousands or even millions of pounds depending on the size of their business. A meaningful proportion of the purchase price will be contingent on Adviser A ensuring most of their clients are transferred into the consolidator’s own investment service. The adviser quickly gets to work convincing Mr & Mrs Bloggs that transferring their investments (which the adviser assured them were fine just a few months prior) into the shiny new investment service offered by the consolidator.

As a result, Mr & Mrs Bloggs might now end up paying 0.75% a year for advice, 1.00% for the investment service and 0.80% for the funds within that service, a total 2.55% a year. The manoeuvre has ended up costing them an extra 0.70% a year, making a significant difference to their investment pot over time. Meanwhile, the adviser is sitting pretty on a nest egg and the consolidator can collect healthy investment fees for as long as the Bloggs’ remain clients.

The exact figures will obviously vary in practice, but from my experience the above are reasonably representative. Some consolidators use portfolios of low cost tracking funds to try and mask their own high investment management fees.

The moral of this story is that if your financial adviser is purchased by another firm, be wary. And if your adviser subsequently recommends transferring your investments, question how you will benefit and the change in costs – it will probably prompt an awkward conversation.