Infocus’ proposed takeover of Madison is in many ways a sign of the times in the business of financial advice.
First, it underlines the significant re-rating of perceived value in the market over recent years in which once-mighty licensees are now in many cases considered inferior businesses to the seemingly smaller businesses operating under their licence. At a headline offer price of $2 million, Madison is worth less than many SME advice businesses around the country (including, presumably, some within its own network).
Second, it shows the continued frenzy of M&A activity in licensee land, which will be a key focus of the upcoming Professional Planner Licensee Summit. The proposed Infocus-Madison deal follows Count’s takeover of Diverger, WT Financial’s acquisition of Millennium3 and Fortnum’s deal with Australian Unity to take its advice business Personal Financial Services, all of which occurred in this last financial year alone.
Given their target market of registered financial advisers has been diminishing for years, economic theory would suggest they have little choice but to pursue mostly inorganic growth, paying up for cheap, troubled or retiring rivals to bolster their ranks. Plus, dealmaking can be the fun stuff of business, at least for the victorious party.
But dealer group bosses should be under no illusions about the ability for these deals to paper over deeper fissures in the business model. While the case for scale is sound, commercial history is littered with examples of businesses viewing M&A as a panacea and coming unstuck.
For a recent case study, the advice community need look no further than an organisation many of them will have known well: Perpetual.
The company earlier this month announced it would sell its private wealth and corporate trustee businesses to KKR along with the blue-chip Perpetual brand, while its asset management division would be rebranded and continue to operate as an ASX-listed business.
The effective demise of Perpetual as it was known is a sad outcome for many who care about the history and business of financial services in Australia. As controversial journalist and former Australian Financial Review columnist Joe Aston noted in a recent podcast with Professional Planner, the firm’s equities team played a storied role holding company management and boards to account (cheered on no doubt by their clients in the advice profession).
The story again provides a signal that advice itself and not the financial product manufacturing apparatus is now seen as the more desirable part of the chain, given it is the private wealth advisory business, and not asset management, that KKR wanted.
But it also provides a cautionary tale for M&A enthusiasts. Over a six-year period under the tenure of CEO Rob Adams, Perpetual went on a global shopping spree, picking up assets including Texan fundie Barrow Hanley, ESG advisory business Trillium and – most spectacularly – its longstanding Australian equities archrival Pendal (formerly BT Investment Management).
The deals more than doubled Perpetual’s assets under management, but also caused more problems than they may have solved. While the company undoubtedly achieved scale, it also took on an unsustainable amount of debt. And, more importantly, none of these M&A achievements was sufficiently powerful to paper over the deeper secular trends causing issues for the business of active asset management – namely the rise of low-cost passive investing and internalisation of investments by big institutional clients such as the Australian superannuation funds.
M&A activity by licensees risks a similar conundrum. Scale may help create efficiencies for licensees but it cannot overrule major secular trends, such as the rising regulatory cost of providing advice and shrinking pool of advisers.
Moreover, some licensees still seem to view asset management – or services that look and smell a lot like it, albeit under different names – as part of their growth plan. But Perpetual’s demise should also be instructive here, alongside a slew of challenges faced by asset managers around the world.
None of this is to say that M&A is not worth doing or that the future of licensing is necessarily bleak. Indeed, there are even some secular trends finally going licensees’ way. The decline in adviser numbers is predicted to have bottomed out, and is possibly even tracking the other way, raising the spectre of organic growth. And, while mired in political mishandling and delay, the Quality of Advice Review reforms may provide some relief from the red tape burden, while also opening up fresh revenue streams from digital advice or even “qualified” advice (as Treasury has dubbed unqualified advice).
Done right, M&A can be a lever to invest in new value-add services that can enhance the overall proposition for advisers within a licensees’ network and make them more competitive. To be fair, Infocus boss Darren Steinhardt indicated that was part of his rationale for the Madison bid.
“It’s our objective to grow, not for growth’s sake, but for the commercial and risk management benefits that additional scale brings to each and every stakeholder within our business and our community,” he said in a LinkedIn post on Monday.
Wise words that might have come in handy at Perpetual.
