The UK IFA M&A Market: Trends, Regulatory Process, and Key Challenges

Apr 1

The Independent Financial Adviser (IFA) sector in the United Kingdom is experiencing significant consolidation, driven by regulatory changes, demographic shifts, and private equity interest. This article examines the current state of mergers and acquisitions within the IFA market, the regulatory processes involved, and the challenges faced by both buyers and sellers.

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Current Market Activity and Transaction Volume

The IFA sector has seen accelerating consolidation in recent years, with acquisition activity showing a notable upward trend. As of December 2024, 9% of IFA firms reported having acquired other businesses, marking a steady increase from 5% in February 2024 and 6% in September 2024[1][2]. In contrast, mergers have remained relatively stable at 5% of firms, showing no significant change since September 2024[1].

This consolidation is reshaping the market landscape, with smaller IFA firms increasingly exiting. Data shows that 17% of sole traders have sold part or all of their business in the past 12 months[1][2]. The broader market reflects this consolidation trend, with the number of IFA firms declining 8.1% in 2023, leaving 4,654 firms operating in the market.

Specific transaction data from NextWealth revealed 133 publicly disclosed acquisitions in 2023, with 25 occurring in the first quarter[3]. While 2024 began at a slower pace, several notable large-scale acquisitions have occurred:

· Titan Wealth acquired Prism Financial Advice, adding £630 million in assets under advice

· Söderberg & Partners bought a stake in Fidelius

· 7IM acquired Eastcote Wealth Management, overseeing £430 million in assets[3]

A new trend is emerging where platforms are making acquisitions to grow their distribution capabilities. Companies like 7IM and Wealthtime (formerly Novia) are exploring this approach, with the latter announcing plans to acquire for distribution as part of a longer-term project[3].

Regulatory Process for IFA Acquisitions

FCA Change in Control Framework

The Financial Conduct Authority (FCA) mandates a stringent regulatory process for any acquisition or increase in control of a regulated IFA firm. This process is governed by Part 12 of the Financial Services and Markets Act 2000 (FSMA)[4][5].

Any person or entity seeking to acquire or increase control in an FCA-regulated firm must:

1. Submit a written notification to the FCA (known as a "Section 178 notice")

2. Obtain explicit approval before proceeding with the acquisition[4][5]

This notification obligation falls on multiple parties:

· The buyer (referred to as the "proposed controller")

· The seller of the shares or business

· The target firm itself[5]

Assessment Timeline and Process

The FCA has up to 60 working days from acknowledging receipt of a "complete" notification to assess a change in control application[4]. However, this timeline can be extended if the regulator requests additional information, which pauses the assessment period[4].

Real-world data reveals that:

· The FCA takes an average of 1.5 working days to acknowledge receipt of a "complete" notification

· For "incomplete" notifications, acknowledgment takes around 3 working days

· Approximately 51% of applications are deemed incomplete upon submission[6]

Despite these potential delays, data shows that 91% of non-consumer credit change in control notifications are determined within 60 working days of acknowledgment (whether of a complete or incomplete notification)[6].

Evaluation Criteria

The FCA evaluates the proposed controller's suitability based on various factors:

· Financial position and soundness

· Reputation and experience

· Potential impact on the target firm's ability to meet regulatory requirements

· Governance arrangements and group complexity

· Potential conflicts of interest[5]

Common Challenges for IFA Acquirers

Due Diligence Issues

Acquirers face numerous due diligence challenges when purchasing IFA firms:

1. Revenue Recognition: Issues surrounding revenue recognition are perhaps the most common reason for transactions falling through. It's crucial to verify whether revenue recognition policies comply with UK GAAP, as adjustments can potentially reduce both revenue and EBITDA[7].

2. Maintainable EBITDA: Verifying the true maintainable EBITDA presented by the seller is critical, as any negative adjustments discovered can significantly impact valuation multiples and potentially make the transaction financially unviable[7].

3. Cash Flow Assessment: Since many IFA transactions involve debt financing, lenders set covenants based on cash flow metrics. Insufficient free cash flow may prevent lenders from supporting the transaction[7].

4. Change of Control Provisions: Some contracts contain change of control provisions requiring notification and consent from other parties. This is particularly important for leases and significant customer or supplier contracts[8].

5. Undisclosed Liabilities: A key objective of due diligence is testing the completeness of liabilities. Post-acquisition discovery of unexpected liabilities after the previous owner has departed can be problematic, as claims under warranties and indemnities can be difficult to pursue[7].

Integration Challenges

Post-acquisition integration challenges include:

· Financial and IT systems integration

· Cultural alignment between organizations

· Organizational structure harmonization

· Employee retention

· Maintaining regulatory compliance

· Managing ongoing risks related to warranties and indemnities for past professional advice

For regulated IFAs specifically, there are additional risks requiring longer indemnity periods (typically 5-7 years) and possibly ongoing professional indemnity insurance requirements.

Common Challenges for IFA Sellers

Business Valuation and Deal Structure

Sellers face significant challenges in determining appropriate valuations for their businesses:

1. Valuation Methodology: The market has seen a correction in valuation multiples. The average multiple for prices based on recurring income has reduced to 3.3X from 3.5X in 2023 and 4X in 2022. Profit valuations based on 'Adjusted EBITDA' have decreased from 8X in 2022 to 6.7X for the first quarter in 2024[9].

2. Deal Structure Complexities: Sellers typically receive 50-75% of the purchase price upfront, with the remainder tied to performance over 2-3 years. They must negotiate warranty periods (typically 18-36 months) and financial caps on claims.

3. Transaction Type: There has been a gradual yet consistent shift away from asset purchases toward share purchases. In 2017, asset purchases comprised over 55% of transactions, but this has declined to around 30% in recent years[9].

Client Retention

Client retention presents a significant challenge, particularly in asset sales where clients need to sign with new advisers. A comprehensive transition plan is essential for business continuity and to maintain the value of the business being sold.

Regulatory Approval Delays

Sellers face potential delays in the FCA approval process for change of control, which can extend transaction timelines and create uncertainty. Despite the statutory 60-working-day assessment period, real-world data shows longer timeframes, potentially causing issues for sellers with time-sensitive exit plans.

Demographic Drivers of Market Consolidation

The IFA sector's consolidation is significantly driven by demographic factors:

· The average age of an IFA in the UK is 58, with one in five advisers planning to retire from the industry within the next five years[10]

· Only 5.7% of advisers in the UK are under 30, according to Financial Conduct Authority data[10]

· Over the last two years, the number of younger advisors under 25 has dramatically fallen, while advisors over 60 have grown in number[11]

· Approximately 17% of financial advisers are over 60, and three-quarters of IFAs are approaching retirement age

This aging advisor population directly drives consolidation as older advisers look to sell their businesses to fund retirement. Simultaneously, the lack of young talent entering the profession exacerbates succession challenges, with advisers under 25 comprising only 0.6% of the profession (having decreased by 60% in recent years).

Regulatory Constraints and Implications

Capital Requirements

Recent and proposed changes to capital requirements significantly impact IFA M&A:

1. Personal Investment Firms (PIFs) potentially need to increase capital to £55,000[12][13]

2. Former CAD exempt firms may need up to £75,000 by 2027[12]

3. When forming or expanding an Investment Firm Group through acquisition, firms must demonstrate ability to meet higher capital and liquidity requirements[13]

The FCA consultation paper CP23/24 highlights the disparity between PIFs and former exempt CAD firms, despite them carrying out similar activities. This creates additional market complexities, potentially affecting which businesses are viable acquisition targets[13].

Non-Compliance Penalties

The consequences of non-compliance with the FCA's change in control regime are severe:

1. Criminal Offense: It is a criminal offense to acquire or increase control without FCA notification and approval, or to proceed before the assessment period ends[5][14]

2. Financial Penalties: Offenders face fines that can exceed the statutory maximum on conviction on indictment[5][14]

3. Restrictions on Shares: The FCA can impose restrictions on improperly acquired shares, including limiting voting powers and dividends[5]

4. Forced Divestment: Most severely, the FCA can issue restriction notices and apply to court for an order forcing the sale of recently acquired shares[5]

5. Seller Obligations: Sellers also commit an offense by failing to notify the FCA before disposition[14]

6. False Information: Providing false information to the FCA constitutes a separate criminal offense[14]

M&A Success and Failure Rates

Despite high transaction volumes, M&A success rates remain concerning:

· 70-75% of M&A deals fail, according to a 40-year study of 40,000 transactions[15]

· Over 60% of transactions destroy rather than create shareholder value[16]

· 70-90% of M&A transactions fail to achieve their investment thesis[16]

Common failure reasons include hubris and bias, inadequate diligence, poor integration strategy, leadership challenges, poor communication, lack of clarity, and weak implementation[16].

Private Equity Influence

Private equity has become a dominant force in IFA acquisitions, with approximately 35-40 PE-backed consolidation firms currently operating in the UK. Major examples include:

· Charlesbank purchasing CBPE Capital's stake in Perspective Financial Group[3]

· Titan Wealth's acquisition of Prism Financial Advice[3]

· Söderberg & Partners' investment in Fidelius[3]

Industry experts at the NextWealth Live panel expressed optimism about the ongoing trend of consolidation and the benefits of private equity involvement[3]. Despite some market headwinds like rising interest rates making funding more expensive, the IFA sector continues to attract PE interest due to its resilient business model with strong recurring revenues.

Conclusion

The UK IFA M&A market exhibits robust activity driven by demographic shifts, regulatory changes, and private equity interest. However, participants face significant challenges including complex regulatory processes, due diligence issues, and high failure rates. As consolidation continues, both buyers and sellers must navigate these challenges while ensuring regulatory compliance to achieve successful outcomes in this dynamic market.

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References

1. https://www.professionaladviser.com/news/4408945/acquisitions-rise-2024-ifa-firms-exit-market

2. https://www.financialplanningtoday.co.uk/news/m-a-activity-in-ifa-sector-speeds-up

3. https://nextwealth.co.uk/the-great-consolidation-wheel-keeps-on-turning/

4. https://www.fca.org.uk/firms/change-control

5. https://www.irwinmitchell.com/news-and-insights/expert-comment/post/102gdsd/how-is-the-financial-conduct-authority-fca-relevant-in-an-ma-context

6. https://www.fsreg.com/fca-change-in-control-applications-and-freedom-of-information-request-what-we-have-learned/

7. https://www.buzzacott.co.uk/insights/5-key-due-diligence-issues-which-can-derail-a-search-fund-transaction

8. https://www.birkettlong.co.uk/insights/business/understanding-due-diligence-mergers-and-acquisitions

9. https://ifamagazine.com/gunner-co-business-valuation-multiples-see-market-correction-after-experiencing-a-notable-spike/

10. https://www.professionaladviser.com/feature/4056596/advisers-ageing-industry-clients-grey-hairs