Indian Advisory Market: Merging, consolidating and collaborating to fight another day

Erik Hon

In our annual summit last year, we discussed the trends in the Indian advisory market, and where the next big opportunities for independent financial advisers (IFAs) will lie in the coming 10 years. Two forecasts resonated with our audience:

1) The market will see an uptick in consolidation of practices;

2) Corporate, institutionalised advisers with Rs 1000 crore-plus in assets under advice will be ubiquitous.

This year we have seen the trends start to play out already, with at least two fairly large-scale mergers of multiple IFA practices being reported. Importantly, with these developments, merging or corporatisation of IFA practices has finally come into its own as a business growth strategy.

Scaling up to Survive

Even as recently as five or six years back, the only time an IFA would look for another adviser to merge businesses with, or sell out to, was when s/he was considering retirement and did not have a family member in place to take over. Seen purely as a succession planning move, merging or selling businesses was akin to losing one’s identity as an independent adviser, and control over one’s customers. External forces are driving a change in this view. With regulations pushing down distribution revenues on the one hand, and necessitating extensive investment in compliance and scalable business management infrastructure on the other, IFA margins are under severe pressure. Also, competing successfully in today’s advisory market requires a fair amount of spending on systems for client services, research and marketing, all of which require deeper pockets than what an individual adviser has.

IFAs are now waking up to the fact that scaling up their businesses is no longer an option, but an imperative for long-term survival and growth. A bigger AUM base helps improve margins, as costs become more efficient, and gives them access to better talent and technology. And with all of these in place, advisers can finally achieve an improved customer experience that allows them to compete with larger entities such as national distributors and private banking firms.

In our experience, based on the relative sizes of the partners involved, advisers are looking at the following options to scale up their practices:

- Mergers: Two or more IFAs merge their businesses to form a new entity under a new brand name

- Consolidation: A larger business absorbs a smaller one, in return for a stake and executive role in the merged entity, or monetary consideration in case the IFA is retiring

- Collaboration: The individual businesses retain their identities, but work together to share expertise and possibly, systems, in a bid to improve offerings while sharing costs

Consolidation Challenges & Best Practices

The starting point will be to look for partners who share the same value system, business model and vision for growth. Of course, it’s never easy to let go of full control of a business that you have built from the ground-up. Merging with another entity is a fairly significant business risk, and should be a well-considered decision. Of the highest importance is ensuring continuity of services to customers without any significant change in experience. Ensuring this has tangible and intangible aspects to it, as everything customers are used to, from the online interface, to the person managing their relationship may change. Not surprisingly, customer retention is one of the key success parameters of any consolidation activity. Another big challenge is that India doesn’t yet have standard approaches to valuing an IFA’s business, and negotiating for the optimal price for your business may feel like a stab in the dark at most times.

These challenges can be addressed with a well-planned approach to consolidation. Our experience in helping IFA businesses merge or collaborate has shown us that there are some types of businesses that command better valuations than others, or find it easier to find good quality, larger practices to take an interest in them. We learnt that a few preparatory steps before putting your inorganic growth strategy into play can go a long way in improving your chances of success. Let’s look at the most important ones.

Digitise your business: An advisory business with digitised records of customers, transactions and compliance is not only easier to value, but will often fetch higher valuations because there is also less compliance risk with better record management. This is because transitioning a digitised business is smoother where most information is transparent and available, with less client disruption, and therefore with a much better chance of retaining clients.

Build a sustainable business with predictable revenue streams: The fee-based advisory business model is gaining ground, and the trends are clear that India will follow the trends of developed markets, with regulations playing a big role. Commissions are under pressure due to regulatory changes and are not expected to increase over time. This makes the commission revenues unpredictable. Therefore, it becomes difficult to value your business. A fee-based practice that offers predictable revenue across market cycles where the adviser is in control of the fee structure and revenue streams, has more stable and transparent client relationships, proven compliance and regulatory alignment makes it an attractive bet for the long term.

Plan early and allow time to find a good match: Finding a partner or successor who complements your expertise and values, and is also a good fit in aspects such as geographical reach, can take years. Starting early gives us the scope of finding a good match and personally transitioning clients, leading to much better continuity. It is also important to be clear on the terms of exit if the marriage does not work out.

The scaling up and consolidation of advisory businesses is a positive trend for the Indian market. Advisory businesses will become more professional, licensed; and, with better governance, investors will get greater reliability and better service, and the market itself will mature in the process. We now hope to see greater numbers of mergers and collaborations amongst IFAs, as this will help the practices involved in the consolidation of advisory businesses to improve. Valuations will become more predictable, networking to find suitable partners will become more structured and IFAs themselves will learn to be better prepared for the process ahead. It should mean some exciting times ahead!

(The writer is MD, iFAST Financial India Pvt Ltd)