‘Everyone’s a winner’ in Australia’s PE advice landscape

The rise of overseas private equity (PE) players in Australian wealth management is helping advice practices achieve growth ambitions on their own terms, rather than taking a controlling approach.

Offshore PE firms taking a stake in Australian financial advice and wealth management businesses is a key trend defining the landscape.

On a local level, groups such as AZ NGA and WT Financial’s joint venture with New York-based capital partner Merchant Wealth Partners are accelerating the growth of smaller businesses.

Speaking with Money Management, Ben Marshan, director of Marshan Consulting and former FPA general manager for policy and advocacy, said the round of PE money being injected in Australian wealth management this time is about expanding practices, rather than prompting a takeover or sale event.

“You look at the AZ NGA model and the Merchant Wealth model, and what they’re trying to do is invest in the practice to try and provide capital to build efficiencies, new delivery models, improve the process, to make it more profitable,” he explained.

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With both PE companies and advice practices mutually benefiting from this growth, it means “everyone becomes a winner”, Marshan said.

“The private equity [firm] gets the benefit of that growth and the practice gets the benefit of that growth, and everyone becomes a winner. What I would say is positive about that story is that this is growth in private equity – it’s not coming in and buying practices that would otherwise be closing down.”

As previously discussed on a Morningstar webinar, the culmination of several trends – such as pricing power, rising client numbers, and growing client wealth – makes the advice sector an attractive one to invest in.

The director continued: “It seems to be that there’s constantly rumours of new pools of money coming in.

“There’s US capital and there’s European capital that’s being attracted by advice businesses because of this unmet demand, the opportunities to create efficiencies and to grow these practices and make them really profitable, which is a great story.

“The actual underlying figures are showing significant growth in client numbers, the advice fees being charged, the profitability that’s coming off those advice fees.”

While AZ NGA chief executive Paul Barrett doesn’t expect the demand from foreign investment companies to last forever, Marshan believes the rising profitability of advice practices will continue capturing PE firms’ attention.

“If [advice practices] have got better returns coming in, that’s going to create a bigger pool of money for them to keep reinvesting into either these practices directly, or we’ll look for other practices to invest in.”

The missing middle in advice

Another key trend that has redefined the advice profession has been the near-exit of major players, such as AMP and Insignia Financial, which previously held the two most dominant positions in the market. This has subsequently led to a long tail of licensees with 100–300 advisers.

According to Lee Iafrate, Australian Wealth Advisors Group executive chairman, the next stage will be M&A activity among these smaller players.

“Small- and mid-cap advice firms are well in play; once one domino falls, then the others will go quickly. There is more movement out there than is being understood by the market because there is a strong rationale for consolidation in financial advice,” he said.

While practices on the smaller end of town will always have a role to play, WT Financial managing director Keith Cullen said the newly announced joint venture is providing an opportunity for those who are seeking to scale up.

Combining multiple smaller practices into one large one creates a “much easier pathway” to grow compared to how much they could grow on their own, as demonstrated by its first deal to merge a trio of advice firms. 

He unpacked: “There will always be an opportunity for boutiques or single-adviser firms that they can run from home or a small office, and a lot of people are attracted to that.

“But for those that are looking to grow, they definitely need scale to do so. The more scale you have, the fewer distractions you have from working with your clients because you apply technology and you get more efficient. We are helping those in our practices that want to buy and those that want to sell, but they also need capital and [the Merchant deal] is the perfect solution.”

Following a difficult few years of regulatory upheaval and an adviser exodus, Marshan said the entry of PE players reflects a healthy sign for financial advice.

“There is a really positive opportunity at the moment where capital injections can significantly accelerate the growth and the opportunities for practices, if that’s the direction they want to go in. Finally, after all these years of struggle and regulatory change and negativity, to hit the fast forward button [is] great to see,” he concluded.