Technology - the scaffolding behind M&A scaling

Scale used to be all within the wealth management industry. And acquiring other companies to get that scale has become increasingly popular in recent years, with activity heightened in an industry that is disjointed and probably in need of some consolidation in the first place.

The idea is that the bigger the company, the easier it is to acquire more clients, grow assets under management, invest in tools to provide efficiency, and support an economy of scale, thus growing the business. This still holds true.

But scale is not all. In the post-pandemic period of rapid technological and digital acceleration, the quest is to leverage technology to get the best operating model possible. In doing so the firm enables the adviser to provide an enhanced client experience. Of course, that also lends itself to scale as operational efficiency, combined with client and adviser retention, promotes growth in assets under management (AUM), which supports scale and growth for the company as a whole.

What is true is that it is becoming increasingly critical for companies to deliver key digital and technological capabilities, such as digitally-enabled advisers and client experiences, while also leveraging technology to the end of operational and process efficiency and, thus, cost savings. Firms cannot do everything at once, and yet everything is important!

Hence needing good technology will increasingly form a part of the rationale behind mergers and acquisitions. Firms can acquire such capabilities by merging with others who want the scale that merger brings in order to fund growing demands for technological innovation. This will be a key theme going forward in an already consolidating industry.

The recent Rathbones/Investec deal is a good example of this. The deal will bring scale benefits and the ability to invest in technology; Rathbones has been embarking on a technology transformation journey since 2021, and the scale the deal brings will help to fund that going forward.

At the time of the announcement Fani Titi, Investec Group’s chief executive, said: “The bigger you are, the better you can invest in these capabilities, the more you can fight for talent in the industry, and generally, you are able to operate more efficiently.”

As for scale, the deal will bring together approximately £100 billion of funds under management and administration. The deal is expected to generate cost savings and increased income of £60 million per annum (pre-tax), which will take at least three years to come into effect. Of that, £18 million will be generated from consolidating technology platforms and operations. The group expects net income to increase by £19 million as a result of bringing Investec’s clients and cash onto Rathbones’ platform and banking license.

This is clearly a deal worth doing and is not the first for Rathbones. It bought financial planning firm Saunderson House in 2021 and also acquired Spiers and Jeffrey, a Scottish wealth management firm, in 2018.

Other notable examples of synergies along these lines include the Royal Bank of Canada (RBC)/ Brewin Dolphin deal last year. RBC bought Brewin Dolphin to access more than 30 offices and assets under management of £59 billion as of December 2021. Brewin now provides RBC with a platform to transform its wealth management business but gains the ability to provide clients with a broader range of products and services and expand its distribution channels through RBC’s global presence.

And last year, Aviva acquired Succession Wealth Management in a bid to match its own scale and capabilities with the expansion of Succession Wealth’s leading client and planner proposition.

Other deals in the recent past include the acquisition of Charles Stanley by Raymond James. Quilter has also been busy acquiring smaller players such as Lighthouse and Charles Derby.

It is not just the bigger players that are seeing action. Consolidators are growing in number. In this model, wealth managers are often backed by private equity firms to buy up smaller firms to create a whole that is greater than its component parts.

The market offers rich picking with over 5,000 IFA firms making for a highly fragmented sector. Many of the owners of those IFA firms are nearing the end of their careers and want to sell out or to pass on responsibility. This is amplified by the spiralling cost of compliance and the lack of resources to deal with that, or indeed invest in technology to modernise the business and deal with inefficiency.

Verso Wealth Management is an excellent example of this, backed by Cairngorm Capital private equity.

Miles Joseph, Head of Transformation at Verso Wealth Management, comments: “As a consolidator, we acquire IFA firms and work with them on their advice and investment proposition, operating model and technology, and integrate them into a single firm. The idea is that the value as an integrated business is greater than the sum of acquisition and integration costs. Since many IFA owners are looking to exit, and we have a differentiated proposition that serves their clients well, there is no shortage of pipeline.”

He explains that having a central investment proposition and operating model creates value and drives efficiency, providing individuals with better tools to do their job and delivering better client outcomes into the bargain.

“The firm has a standard platform, CRM, and investment solution for all, and we are bringing in a digital spine to that as well. Our plan is that each acquired firm will use the same systems, but when it comes to process, for say onboarding, we have looked at how each of the founding firms approached it, and by taking the best bits from each of them, have built a new combined process that delivers best practice to our clients,” Joseph says.

“Efficient and effective client servicing is something that small firms often struggle with. They may not have the resources to deliver, or can lack the know-how to make informed decisions around the improvements that technology could bring,” he continues.

The scale is created by acquiring such firms and bringing together the assets. But that scale is supported by technology which then enables further growth and scale.

“Technology is fundamental to our success. It is the way that we drive efficiency and support new processes that allow for growth and scale. By creating standard processes on the same set of tools, we help everyone do business better and drive better outcomes for our clients,” says Joseph.