You’ve heard the roll-up script before, and of course its appeal is often obvious: for example, economies of scale are often very real, and compelling efficiencies can be enabled under the auspices of a larger organisation.
It can also appear to be a kind of ‘natural law’, no matter the industry. In energy, for example, the ‘big four’ now account for well over half the market. In grocery, Tesco alone represents about a third. Even today’s major scholarly publishers are all the product of progressive acquisitions. King Canute himself would doubtless counsel submission to such an inexorable tide.
Why should the IFA market be any different? To all the aforementioned scale benefits, add greater ease of regulatory management, the potential to make services more accessible, and all while offering a lucrative exit strategy for aging advisers. What’s not to like?
Well, stop for a moment and consider the above examples. No consumer cares what kind of electricity flows from their sockets. Neither do they particularly discern between a cucumber from Tesco, or one from Sainsbury’s. And a journal article is the same whether you’re sitting in the Bodleian Library or a student flat in Bolton.
My point is: planning is not an infinitely replicable product. And that fact is absolutely central to the idea that there are natural limits to the value created by consolidation in the advisory industry.
It’s worth reiterating with double force: financial advice is not a commodity. The very best advice a client could possibly receive would necessarily be bespoke.
Benefits of scale obviously exist – I’m not arguing otherwise; I’ve already pointed them out. Rather, I’m also pointing out the very real pitfalls of scale at a certain level (and indeed pace).
One: the depersonalisation of service. The foundation stones of advice firms are the close, personal relationships that smaller firms typically foster. The bigger a firm gets, the more interchangeable these relationships must become – they can’t guarantee that same face, that same voice, every time.
Two: the standardisation of advice. As I’ve previously alluded to, this is the fungibility issue. Truly tailored advice allows for the non-empirical aspects of a client, that are ever-changing – for example, attitudes to legacy, or increasing awareness of a partner’s frailty. The more one-size-fits-all advice that large firms must increasingly offer cannot hope to adequately assess and monitor the unique goals and situations of each client.
Three: the compromising of quality in advice. Leading on from the previous point, as the emphasis inevitably shifts to the maximizing of profits that scale affords, quality will suffer. And from there, trust will erode as clients feel less valued.
At this point, you’re really looking at a different business model entirely. And you’re changing the industry in some quite fundamental ways. Let’s continue.
Four: the loss of local expertise. A student at Oxford is very different to a student at Bolton. Equally, an advice client in Oxford likely faces very different financial challenges to one in Bolton. I’d imagine neither would prefer advice from whoever is manning the phone in London on any given day. Are they really talking to an independent financial adviser anymore?
Finally, five: the atrophy of competition. What do we see in markets dominated by fewer and bigger players? Business as usual. The innovations really needed to close the advice gap will not come from that desk in London. They’ll come from firms who are really thinking about their clients, and looking to grow via quality offered, not attenuation of competition.
For all the reasons I’ve outlined, I believe that mid-sized regional advice businesses really are the sweet spot, and the future of financial advice. They’re firms that can combine the best of both worlds: a strong focus on relational financial planning, with scalable organisational structures that stop at the point that the former is threatened. They’re the firms our clients want us to be.
And so, ultimately, I’m no King Canute. I think the tide of consolidation can be held back – and should be.
Mat Marais, CEO
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