Advice M&A consultants are pointing to the margin created by managed discretionary accounts as the reason behind a surge in larger ‘big brother’ advice businesses buying up and bolting on smaller advice practices, with the cost synergies gained in scaling up being augmented by revenue synergies for mid-sized advice groups.

According to Greg Quinn, whose Private Corporate Advisory consults on advice business mergers and acquisitions, 90 per cent of the transactions he’s completed in the past 12 months have involved a larger party buying up the smaller party.

This is a fairly common dynamic, he says, but it’s the thinking behind it that’s new. Instead of a pure advice margin, acquirers have also got their eye on the capacity to make margin on managed discretionary accounts through both scale and managed account fees.

“The cost synergies involved in big brother transactions are clear,” Quinn says. “Larger scale acquirers can often outstrip some duplicated costs like office rent, licensee fees etc so that the acquired profit post acquisition increases 10 to 15 per cent.”

More important than the cost synergies, however, is what these deals can do for revenue.

“The larger acquirer often has better platform and product pricing arrangement than the smaller selling business due to their scale. This often enables the acquirer to transition the clients and save the clients money, whilst charging a managed account fee or lifting their own ongoing advice fees at the same time,” Quinn explains.

“Large scale acquirers have become the masters of transitioning what was once traditional platform and product margin to higher ongoing advice fees, whilst at the same time also reducing the overall ongoing costs to clients.”

According to John Birt from Radar Results the trend to managed accounts has “definitely” pushed acquirers of advice businesses to seek more ‘bolt on’ deals. Cost savings are a big part of that, naturally. “You can get the management expense ration down to about 0.15 per cent now, which is insane,” he says. “It’s virtually nothing.”

Again, however, it’s the opportunity to find margin and glean revenue synergies that the consultant believes is driving the deals. Even for smaller advice groups, the revenue synergies are attractive.

“We’ve got very good client with us, in two and a half years they’ve purchased nine smaller advice businesses through us and two or three through someone else. His formula is to just put them on the MDA, he uses HUB24 and he loves it,” Birt says.

While there has been some contention around the viability of managed account fees, with ASIC said to be looking at the issue as part of its suspended managed accounts project, Birt makes the point that they have regulatory approval to this point. “I don’t think it’s conflicted at all,” he says. “ASIC’s approved it so far.”

 

 

 

 

One comment on “‘Big brother’ advice acquisitions surge with MDA margin shift”
  1. Avatar

    MDA’s were originally developed in the broking industry and spawned into the advice framework before being overtaken if not swamped by Managed Accounts with external managed portfolios managed by 3rd party professionals.

    The real issue for MDA operators who are advisers is whether they are able to demonstrate competitive advantage for clients compared to sourcing other professionals who have balance sheets and focus 100% of their time on investments. Logic suggests that someone can’t do better using (say) 40% of their time.

    ASIC noted when starting their failed review that few, if any adviser firms completed comparable analysis against peers or whether any internal attribution analysis was done on the investment portfolios. (a pre requisite in a professional money manager).

    One suspects it’s a matter of time before we have another example of client best interest being questioned by a new Rowena Orr in times ahead – and advice per se’ and advisers will be under the spotlight again – because many advice led MDA operators (not all) have their noses in the trough for the wrong reason – some even taking fees from investment transactions which is the ultimate conflict. It’s done on platform so looks legit and is really hard to find because of the legal language. So the proposed model in the article is is easy…buy smaller business’s argue lower cost and the client is better off compared – but maybe not when compared to best alternatives.

    Question for the debate – What does an advice MDA operator do when they review a portfolio and find a superior alternative in the market – sack themselves and issue an SoA recommending another provider? Industry funds have lower costs good returns sound governance and financial security….I imagine it’s a consideration for at least one client in the practice.

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