Right now, there are roughly 40 private equity roll-up strategies systematically buying adviser firms with one clear thesis: extract more profits from the same client relationships through scale advantages. The perfect target? An adviser approaching retirement whose client base is rich, but not too old. An adviser who charges high fees, and isn’t brilliant with company valuation. One that PE can get on the cheap.
Post-acquisition, the playbook is predictable: asset migration into an in-house investment proposition to internalise margins previously paid to third parties. It’s efficient for the acquirer, but it fundamentally changes the client relationship.
These changes are challenging enough, but a potentially bigger industry problem, driven by generational change, is looming on the horizon: fee transparency.
Some firms are very clear on what their fees are, but most clients don’t understand the impact of compounding costs over time. If they did, they would challenge paying £6,560 per year for life on a £400,000 portfolio.
Sadly, many PE-backed consolidators make their fees incredibly difficult to find online. They refer to fees as percentages, and not in pounds and pence, because 1% sounds small, but £6,560 doesn’t. This obfuscation works brilliantly until clients start asking awkward questions. I believe the FCA must outlaw this kind of fee obfuscation, though the industry will resist for as long as it can because transparency shines too strong a light on what people are actually paying.
But clients are starting to ask those awkward questions. The £7 trillion UK generational wealth transfer that is now happening slowly, but soon to rapidly speed up, is moving money to Gen X and Millennials who grew up with the internet; they can quickly work out what good looks like. Many friends of mine signed up with advisers in their early 30s when 1% of nothing truly was nothing. Twenty years later, they’re paying £10,000 per annum and when they do check the bill, what do you think they will do?
But here’s the IFA’s competitive advantage: people come to you for support, knowledge, trust, validation of their ideas. It’s a fundamentally human service. They’re choosing you because you’re you. I see little difference in the investment products themselves – 30% in the S&P 500 is a complete commodity, but the relationship with someone who helps navigate this complex thing called life? That’s irreplaceable.
From all the customer interviews I’ve personally sat through though, I know one thing: most people are highly skeptical of financial advisers. They assume they are somehow “on the make” and know nothing about RDR. So rather than this being an advice gap, I believe it’s a trust gap. People simply don’t want the product. Until the industry opens its mind to this possibility, I think the “advice gap” will remain. So what to do?
I think the right answer is to recognise the changing generational mindset and embrace radical transparency: get ahead of both the transparency curve and the regulatory pressure. Put a fee calculator on your website. Convert percentages into actual pounds and pence, explain how the whole value chain works; don’t hide it. Build trust through honesty. If people see value in a service, they will be willing to pay the price. The advisers who embrace radical transparency, before they’re forced to, will thrive; those that do not will not only lose the next generation, but also their businesses.
This article was originally published on IFA Magazine.