Developing a clear specialisation in the market is more important to building a practice’s profitability than focusing on efficiency through technology and automation, according to a financial advice M&A expert.
Addressing a recent WealthO2 webinar, AZ NGA chief executive Paul Barrett said over the course of the group’s 65 acquisitions in the advice space, he had come to the conclusion that having a niche strategy was the most important ingredient for a firm’s success and growth.
“When I look at businesses today and we go through that due diligence process, it’s a different process to five or six years ago,” Mr Barrett said.
“Back then we would have that traditional M&A lens trying to understand what these firms’ futures might hold – now we do those things but what we are looking at is capability first and foremost, we are trying to understand what that company is good at.
“We’ve formed a view that generalist practices who do a bit of everything are going to find the future a bit harder than those practices with some form of capability that is deep and narrow.”
Mr Barrett said a business with a specific niche – such as two of AZ NGA’s recent acquisitions that focused on UK expats and pharmacists respectively – was more likely to survive in a fee-only advice world and generate consistent organic growth.
“Most general practices are struggling if you look at their performance over the last three years – you can see a downward trend, because it’s hard to stand out and justify fees to consumers when you’re not truly mastering something,” he said.
“In the long run organic growth is always a good sign and a telltale sign of the quality of a business. And how do you get organic growth? It’s much easier if you’ve got a deep and narrow capability.”
Mr Barrett was also somewhat dismissive of firms’ efforts to improve their profits through automation, saying practice principals often spent more money on technology projects than the expenses that such projects were saving them.
“A lot of people overcapitalise [on technology] – they spend too much on trying to get good at efficiency, they try all sorts of IT projects and bog their small companies down with projects,” he said.
“You've got to work out what’s going to move the needle and what’s not, and sometimes you have to say ‘no’, which doesn't come naturally to entrepreneurs.”
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