One of our clients is looking to buy a Financial Advice business that comes with regulatory permissions to both Advise on Investments and to Management Investments. The essential difference between the two is that with the latter one can offer a Discretionary Fund Management (DFM) service, which in turn provides an extra source of revenues. If a firm offers Financial Advice, how much extra should a buyer be willing to pay if that business also has a DFM service?
In a recent survey by Accenture, they estimate that across Europe & Asia, every year over $1.5tr is up for grabs as the process of succession planning unfolds. For this reason, as Wealth Managers look to retain the next generation of clients, staying relevant is now more important than ever. As the ‘digitization’ of the Wealth Management industry continues apace, this is seeing an increasing number of firms looking to optimize their business model. While some firms are looking to purely re-focus on offering financial advice and outsourcing the DFM role, others are buying into the vision of a WealthTech world that would see their business compete in areas once considered out of reach.
What does the future hold for these two key components of a Financial Advisor’s business? For all the headlines about Robo advice, more than a fair share of them are neither fully automated nor offer financial planning advice. Most of the activity in the field of buying and selling IFA practices is centred around the idea of consolidation, invariably based on the view that only through scale can one unlock the cost and benefits. It might be fair to say that Robo platforms have left the door open for real life advisors to push against. Yet ironically, in a world of hyper-personalization, many clients now want more for less. Consequently, the real challenge lies in one’s ability to harness technology in a way that delivers both personalization and automation under a single framework.
While financial planning as a service routinely involves real people, this is less true when managing investments. This may explain why financial advice fees are under less pressure than DFM fees. However, let’s not forget that when managing the wealth of high-net-worth individuals the expectation is different from the case of small retail investors. Even in a world of fixed management fees, it may not be considered good value for money to offer a 100% algo driven investment service.
To this we can add that with the onset of the increased interest in passive funds and ETFs, the boundaries continue to shift and DFM fees continue to remain under pressure. And likewise with the decreasing fees associated with active funds, once could be forgiven in thinking that being an investment manager is a mug’s game.
What about the skill factor, surely that’s worth something? Maybe low-cost Model Portfolios still need a subject matter expert to put them together, and similarly when selecting active funds. Given that over 80% of fund managers fail to beat their benchmarks, then this begs the question: it is possible that over 80% of Discretionary Fund Managers are algo doing a poor job when looking to deliver returns?
Well, if investment management is a lot harder than it first looks, then think how hard it will be for DFMs to address the twin challenge of delivering a personalised investment service while looking to deliver a good performance.
This all leads back to the very first question, how much more should I be prepared to pay for a Financial Advisor firm if they also have a DFM service as part of their business? Having a client base is one thing, but to remain relevant and being able to hold onto the next generation of clients on succession planning is the real challenge the industry faces. That number will not be easy to discern when studying the revenues of a Financial Advisor’s business but going forward will be the key ingredient that drives success. What’s clear to me, innovative technology is the only way this challenge can be met.