“There is actually a client at the end of the fee”: A wake-up call for the advice industry

Recently, Citywire published a tremendous piece of investigative journalism that should give pause to everyone involved in the advice industry. In a nutshell, the piece centred around the revelation that UK advice consolidators have amassed an eye-watering £3.4 billion of debt, with over two-thirds of that held offshore.

As the CEO of a firm specialising in both equity and debt funding to advice businesses, I found the picture they painted both vindicating but also, of course, concerning.
For the uninitiated, our heritage at Vertus is as a debt funder for small to mid-sized financial advice businesses throughout the UK, typically enabling small acquisitions or management team buy-ins.

Demonising debt

Whilst it’s very easy to characterise it as bad, even dangerous, debt in itself is a normal part of everyday life – what is a mortgage, after all? Without the debt we’ve provided, young financial planners would not have been able to take a stake in their businesses, or purchase small client banks from other local firms. And without these loans, business owners looking to retire would have no option but to sell to a large firm which often has no real connection with the clients or locality.

Ironically, the funding for the equity purchased by these large businesses, as the Citywire article reveals, is debt. But in recent years, as these businesses have become ever-more highly leveraged, interest rates have risen as high as 21.7% in some cases – you’d have to conclude that the sustainability of this model is questionable at best.

When loans underpin rapid expansion, you better make sure you keep growing revenues because those debt obligations are not going away. But available deals will eventually dry up, and we are in the throes of environmental change in terms of cost of capital – zero or near-zero rates are a thing of the past. Debt can easily start rising faster than revenues, necessitating further borrowing to service it. This is already happening – listed companies are announcing new debt facilities at double-digit rates in order to service existing obligations. It’s not hard to look a bit further down the line to a point where firms viability as going concerns might be questioned.

However, we are very keen to avoid debt becoming demonised in general. Yes, we all know how easy it is to distress a business by allowing debt to get out of control. But there are important points of differentiation to bear in mind, both in how debt is offered and how it is managed over time.

Our own approach to lending has been conservative, and hence we are fortunate to have experienced no defaults. Our loans have always amortised, so repayments are made each month. We have never allowed capital and interest to roll up and get out of control. This means we have necessarily restricted our market reach, and only attracted borrowers with strong cashflows who reflect our conservative approach.

Our numbers are of course small beer compared to those in the Citywire report. But ultimately, our philosophy has served us well over time, and given us the platform to establish Vertus Equity in 2023 to provide equity funding as well as debt, under the Vertus Alliance brand.

The client at the end of the fee

Let’s face it, though: the consolidatory landscape would not exist if it were entirely devoid of advantages. The fact remains that for many PE backers, the returns on offer for rolling up advice businesses can be very attractive indeed.

But if you are part of the advice profession then it’s important to consider the second-order implications of this feeding frenzy. Ultimately, as Stephen Harper, chairman of Attivo, aptly notes in the article, it’s critical to remember: “There is actually a client at the end of the fee.”

The reality is that the juiciest returns in the roll-up game are achieved when goals are aligned, i.e. everyone is focused on working towards a sale – which is ultimately the only way of extracting value from a business in this model. Hence, the focus on vertical integration and white-labelling – the business’s imminent valuation is the goal, not great service for clients.
Furthermore, businesses that are hobbled by escalating interest payments are not going to be investing in themselves in either a long or short-term sense. That’s not good news for clients.

Under this model, advisers themselves run the risk of increasingly becoming less financial planners, more salespeople. Also not great news for clients.
And for every success story that will create exceptional value for PE shareholders, it’s likely – looking at the figures the piece cites – that some will implode. Who’ll be left holding the bag? The industry needs to ensure the answer to that is not clients.

I said at the outset that as well as concerned, I felt vindicated. That’s because I think the piece constitutes a validation of our own approach to investing. When we enable succession deals, we prioritize stability and sustainable growth over rapid expansion at any cost. We prefer minority stakes at outset – we want to ensure the management team remain motivated because they hold a significant equity stake in their own business. We believe a model that relies on constant acquisition and growth to service its debt burden is a weak one, and does not have clients’ interests at its heart.

This Citywire investigation should serve as a wake-up call for the financial advice sector. It’s time we moved towards a more long-term, client-focused model of growth, because – one more time for the people in the back – there’s always a client at the end of the fee.

Matt Marais, CEO