Advice market sees ‘unprecedented’ M&A activity

AZ NGA CEO Paul Barrett and Forte Asset Solutions founder Steve Prendeville believe the Hayne royal commission (RC) left “huge craters” of opportunities for mergers and acquisitions in the financial advice landscape.

On 14 December 2017, the landmark Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry was established. Over one year later, it concluded on 4 February 2019 when the final report was publicly handed down by Commissioner Kenneth Hayne.

Its principal objective was to “restore trust in Australia’s financial system”, following unearthed cases of misconduct, fraud and “fees for no service” scandals in the banking system.

Five years on, the exit of the banks from advice and the introduction of higher professional standards have presented an attractive opportunity for firms to undertake M&A.

Paul Barrett, chief executive of AZ Next Generation Advisory, said the departure of the banks led to the biggest change in the advice marketplace.

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Approximately 85 per cent of small-to-medium enterprises (SMEs) in the advice sector were tethered to an institution five years ago, he noted, leaving these businesses to fend for themselves following the overnight departure of the major banks from advice.

Barrett said: “They exited so fast and left these huge craters in all the CBDs where the wealth businesses once stood. They're not there anymore, and so these SMEs were all dispersed to fight for themselves.

“Now firms like AZ NGA are coming into the space and saying, ‘We can help you’.

“The departure by the big end of town is the single biggest driver of change and opportunity in the sector at the moment because of the consequences on SMEs. Then there’s this re-entry now of well-capitalised players looking to help them, so that’s the biggest trend.”

He described the activity of M&A as “unprecedented”, particularly as higher education standards from the RC have improved the quality of advice being offered in Australia.

“I think people are now viewing advice margins as the real deal, whereas when we started nearly nine years ago, that wasn’t the case. There’s no doubt that financial advice is now in and of itself a valuable product, and that's why capital has appeared to come in and buy it,” Barrett continued.

“I’ve never seen the market more buoyant and confident about [M&A]. There’s so much going on.”

Prior to the RC, financial advice was viewed as a means to an end for product distribution, Barrett reflected, whereas now it is an end in and of itself.

“That is why [advice] is now valued, why it’s attracting capital, and why firms like AZ NGA are buying advice firms.”

The CEO added that AZ NGA has never been more active in the acquisitions space, with its M&A appetite remaining “very, very high”. Since 2015, the advisory group has completed 135 transactions. In 2023, the firm executed 17 transactions: 13 by its member firms and four by AZ NGA directly.

Barrett’s comments were echoed by Forte Asset Solutions founder and director, Steve Prendeville, who was also largely expectant of continued M&A activity and further consolidation in the advice industry as firms seek out the benefits of size and scale.

“People have a lot more confidence in the marketplace and have been re-engineering their businesses and have built better businesses. We expect 10 per cent of businesses to transact during 2024 as they hadn't been able to do so previously with the RC, [adviser] exam, COVID etc,” the founder told Money Management.

“We are moving back to a more normal turnover of businesses and more minority shareholders, which is part of the ongoing professionalism of the industry and retention of key employees.”