While the influx of foreign capital into the wealth management sector has changed the game for a lot of local groups, this could create a challenge for small, independent firms down the line.
Speaking at the FSC’s Shaping Advice Summit in Sydney, AZ NGA group chief executive Paul Barrett suggested that small advice businesses are likely to miss out on foreign capital opportunities.
“They’re not interested in small; they’re interested in scale,” Barrett said on a panel.
“These investors are not interested in buying small businesses. Okay, they’re just not. There’s a handful of smaller private equity firms trying to do roll-ups that are going and buying individual financial planning firms. It’s a hard thing to do, and it’s a long, long road. So, that’s a challenging thing to do. What they really want is to come in and get their hands on something large with scale.”
Also appearing on the panel, Matt Fogarty, executive general manager of advice partnerships at infocus, said the restructuring of the advice sector in recent years has only made the industry more attractive, but this hasn’t made small businesses any more attractive to the big capital firms.
“They can see the consolidation theme happening, they know that the margins are going to be attractive. We’re in a structural growth phase. We’ve moved largely through the regulatory uplift that we’ve all gone through.
“It’s reasonably stable, and so that structural growth of supply and demand, the way it is at the moment, is not going to rectify itself quickly. The bottom line of it all is, what I think they’re really after, is to capture scale to grow client.”
With this in mind, his advice to small businesses is to “join an advice platform”. While smaller firms – which make up a large portion of the current ecosystem – may be able to survive and even prosper now, Barrett believes that this could change in just a few short years.
“Fast forward two or three years, it’s going to be very, very difficult for a generalist financial planning practice in the suburbs to compete with what the advice platform is going to offer because they’re going to do deals on price, they’re going to have better tech, they’re going to have better client experience, client engagement, better brand.
“This is a point in time right now. The industry is going to look so different in five years. In 10 years, it’s going to be crazy different.”
While there are several contributing factors to the heightened capital interest, Barrett said investors are also seeing an opportunity to take a stake in a sector that is still in the early stages of its growth period.
“The thesis that most private equity bring to the table is, ‘We want to get closer to the client’. Now, in the UK and US, this aggregation advice platform evolution is a thing. There are some incredibly impressive organisations in those markets and the valuations in those markets are going one way,” he said.
“Now that capital is coming here, there’s also this opportunity for investors to come to this market at its infancy in the evolution of advice platforms and buy low and sell high, so it’s not just demand supply. There’s a bunch of factors.”
As for those who do manage to secure capital backing, CoreData founder and principal Andrew Inwood said the process of forming such a partnership, as well as maintaining it, presents its own issues.
“The challenge is that there’s a lot of capital, but it’s extremely tricky to manage, and it’s hard to get. And once they once you’ve got it, they demand a lot of attention.”
Barrett added: “It’s not easy to get. Once you get it, the demands and expectations that are placed upon you, they’re not the same as the demands and expectations that you have placed upon you when you’re in that banking environment, or in the self-owned business or the licensee, it’s quite different.”
AZ NGA is a professional services advisory group that provides strategic investments into Australian financial services businesses, as well as providing support through operational services. The group itself also receives capital backing from US investment firm Oaktree Capital Management and Milan-listed asset manager Azimut.
Despite the added pressure, Barrett said the growing interest of foreign capital investors in the sector has been critical in bringing advice into a new phase.
“Net net, though, that’s a very positive thing because we’re turning what was, once upon a time, a family cottage industry, a distribution business, into a fair dinkum powerhouse. And advice platforms are emerging and standing in the craters that were left behind by the banks’ exit from the sector, and they’re only just warming up.
“Fast forward a decade from now, and these advice platforms are going to be multi-billion-dollar enterprises. They’re going to hire thousands of people, and you want to think about what private equity sees in that.
“[AZ NGA is] probably the largest aggregator of financial planning firms in Australia. We’ve got three per cent market share, right? There’s huge upside for private equity, and that’s just the basics.”