Mergers and acquisitions are continuing to drive change in the financial advice sector but acquirers are increasingly looking at consolidation, not aggregation, according to a new study.

NextWealth’s Consolidators and Aggregators Report published today showed a rapid tailing off of acquisitions since the start of the year.

However, NextWealth said it believed there were a significant number of deals waiting to be announced over the next few months.

Heather Hopkins, managing director of NextWealth, said: “Many major acquirers told us they have healthy acquisition pipelines with a number of deals under way. Fresh PE investment in some acquirers is also a vote of confidence in the model. From what we’ve learned from our latest research, our estimates suggest the pace of consolidation will remain about even with 2023.”

The report showed that since the start of 2021 there have been more than 300 announced deals. But while the pace of acquisition increased from 2022 to 2023, it was not as substantial as previous years.

Meanwhile mounting pressure on firms to boost revenue and profit led more firms to look to consolidate assets to in-house investment solutions and in some cases platform/custody solutions.

The report suggested that the change is leading to the death of the aggregators model, meaning it’s less likely that acquired firms will continue to use their previous investment and platform solutions.

The report highlighted several factors driving the change:

• Mounting cost of doing business, in particular regulatory costs.
• Pressure on the on-going advice charges.
• Rising cost of borrowing.

Integration was one of the most cited areas of friction for acquirers. Data migration is challenging because there are no common data structures.

Heather Hopkins said: “Some firms are employing technology specialists to data mine the systems before new processes and operating structures are shared with advisers and operations staff. This can result in friction and, in a number of cases additional cost and a lengthening of the whole process. Additionally, training advisers to properly use systems adds additional costs and time. Good clean data will be an important factor for businesses looking to sell.”

Regulation also served as a catalyst for consolidation but was a risk for acquiring firms. The report said Consumer Duty contributed to the rise in firms looking to sell with acquirers are increasingly conscious of the impact of acquisition on the end client.

Heather Hopkins said the impact of Consumer Duty is only beginning to be felt. "The recent news that SJP was setting aside £426m for potential client refunds for clients that complain about not receiving on-going advice has been a stark reminder to consolidators of the risk in their books."

• The results presented in the report were based on: NextWealth analysis of public transaction details over the last three years; interviews with 20+ acquiring firms; acquisition data from 69 individual firms covering 299 deals; surveys of financial advice professionals; NextWealth knowledge and insight based on on-going work in the retail wealth market.