Speaking to ifa, Steve Prendeville, director of Forte Asset Solutions, explained that while mergers are always really attractive due to the benefits of synergy, unfortunately not a lot of mergers experience success.
“There’s always going to be a dominant culture that’s pervasive. So often a merger will actually turn around, and quite often be an acquisition that’s just presented differently,” Mr Prendeville said.
Mergers, he noted, have been increasingly popular in financial advice because of the diminishing profitability many firms have encountered over the last several years.
The largest amount of activity, Mr Prendeville shared, is taking place among firms with revenue below $500,000.
“Immediately by a merger, one party is saving, or both parties are saving on rent. All of a sudden, costs can be shared on labour,” he said.
“A need for optimising profitability is probably industry-wide. I think we’ve seen a couple of examples in the last couple of years, where it’s almost going back to the future of super agencies.
“Where multiple people come under a single roof licensee, but they own their own books. But they’re sharing costs. I think that’s a natural movement in these times, where we’ve got so much pressure coming through on costs, and then obviously down to the bottom line,” Mr Prendeville explained.
As such, he expects the number of mergers to continue to increase.
Ultimately, Mr Prendeville advised those exploring the possibility of a merger to retain their own assets rather than proceed to merge them immediately.
“If anyone is looking at a merger, my standard advice is, live together for at least 12 months before there’s actually an equity event. Ensure that the culture is right,” he concluded.
The advice industry is not really scalable, and the larger businesses are simply the same number of clients being managed by the same number of advisers, with more being joined together to appear as a larger businesses. They are ignoring the Bermuda Triangle of Management principle, where these mid-size firms are simply not operating at a sufficient scale to generate any meaningful long-term cost savings and just adding more costs and complexity.
It is my experience that advice firms are very scalable, however this is only true if they use a system that is itself scalable. The truth is people aren’t scalable, systems are. With the right systems task specialisation and ultimately mastery is possible. At subscale, resources must either be underutilised (a highly qualified person doing admin tasks) or highly inefficient – people spending considerable amount of time on tasks they aren’t very good at. Scale gives you the opportunity to hire “talented” people in each key role and keep them working specifically on tasks they are very good at. Without scale however, some compromise is inevitable and so profitability will suffer, as will the quality of what can be produced. As with all businesses, the key is system, then the best people to operate it.
Well stated Steve, there is no doubt your understanding of the needs of a buyer, a seller, and then separately again those looking to merge the sum of 2 parts in to one entity is the reason why so many in the industry call upon you for advice and the structuring of such outcomes.