The financial advice market in South Africa could be set for a UK-style M&A shake-up.
In May 2021, International Adviser published its own survey which found 70% of advisers in South Africa said they have or will enter into an M&A deal.
The industry has been hit with regulatory changes over the last few years. Currently, the National Treasury is on the second draft of the Conduct of Financial Institutions (Cofi) bill, which aims to strengthen the regulation of how the financial services industry treats its customers and is a key pillar in government’s Twin Peaks financial sector reform process.
But firms have also had to deal with South Africa’s economic turmoil and the ongoing effects of covid-19, which saw the country coping with one of the world’s strictest lockdowns.
Could consolidation be a way to solve their problems?
Why?
IA spoke to several industry players to discuss why there seems to be an uptick in interest to be part of M&A deals in the South African financial advice sector.
Mark McAllister, senior partner at Holborn Assets, said: “Firstly, there appears to be a real shortage of top-level qualified skill in the industry. Clients are seeing through that in larger and larger numbers and are looking for alternative solutions provided by the best in class globally focussed advisers.
“Secondly, the age profile of a typical adviser in South Africa is skewed very much towards late 50s and so many are now fast approaching retirement and looking to realise maximum value for their books of business.”
Craig Featherby, group chief executive of Carrick Wealth, said that financial advice firms in South Africa “have six fundamental problems that they must overcome to thrive”, which include:
- The cost of administering a practice;
- The ever complexity and cost of compliance;
- Systems and technologies;
- Marketing and brand positioning;
- Access to great asset management; and
- Exit strategy.
He added: “The value of distribution is a valuable commodity. If you own the distribution, more and more ‘product firms’ are wanting you to distribute their product, but now we are seeing these firms acquiring opposed to paying high levels of commissions.”
Derek Smorenburg, chief executive and founder of South African Independent Financial Advisors Association (Saifaa), said that firms may turn to M&A deals because of the “impact” of the Broad-Based Black Economic Empowerment (B-BBEE) act.
According to Norton Rose Fullbright, “it is a government policy to advance economic transformation and enhance the economic participation of black people (African, coloured and Indian people who are South African citizens) in the South African economy”.
He added: “The majority of IFA practices are owned by an aging white sector of our population, [which] will no doubt be tempted to move on towards some form of retirement by trying to sell their IFA practices to some of the larger product provider companies.”
Rumour mill
IA’s survey also found that 71% of advice firms are looking to buy other companies.
If there are that many businesses eyeing up M&A deals, then there must be a lot of talk in the industry about firms wanting to expand.
Featherby said: “Most certainly yes, well at least those firms who not only have managed to survive covid but thrived.
“I would imagine we will see one or two significant acquisitions within the sector, however this space is going to be driven by consolidation and a series of smaller deals.”
But Holborn Assets’ McAllister has not had the same experience.
He added: “We’ve not heard about many SA firms wanting to expand, if anything the opposite seems to be true as covid has resulted in large number of policy lapses and businesses scaling back.
“Perhaps it’s misconstrued in that a large number of firms have realised, perhaps too late, they are too heavily focussed on domestic solutions and products and clients are voting with their feet in pursuit of good quality, global wealth management solutions.”
Who can afford to buy?
South Africa was not in the best economic state prior to covid-19.
Money is not floating around as easily as other countries, so this may mean only a small number of firms can afford to carry out deals.
Carrick Wealth’s Featherby said: “Firms that are looking for distribution, as distribution is the very key to success in this business and firms that are seeking assets for some future private equity calculation and their very own exit.
“There is plenty of money in the market for acquisition, especially when one considers cash is close to zero. Raising the finance is not the issue, the issue remains finding the right synergies to compliment your existing strategy.”
Opportunity
IA also asked Holborn and Carrick whether they are in the market to complete M&A deals in South Africa?
McAllister said: “We are fortunate that our organic growth has seen our head count increase by over 200% in the last three years as numerous top flight advisers have joined our business, driven by clients actively looking offshore – as such a potential acquisition may fit into that growth strategy for those advisers who don’t think they can pivot to this new offshore capable advisory world alone.
“Holborn Assets is planting its flag solidly in the ground, South Africa is a key market for us globally and our message is come and talk to us if you want to know what those options are as an individual, high-calibre adviser or a practice owner.”
Featherby added: “Most definitely not to be acquired as we are now entering a significant growth phase but certainly to acquire for the reasons above, but also it remains an assets under management game, and if there are opportunities to grow both organically and non, then we are interested.”
