Stockbroker Durlacher has released a report into the IFA industry, which concludes that despite gene...
Stockbroker Durlacher has released a report into the IFA industry, which concludes that despite generating £1.6bn in value, most IFA firms will cease to be independent within the next three years because of intense consolidation pressures.
The high risk of business failure and the fact firms are not a "must have" for investors, mean that the best investment plays will involve companies that may become subject to takeover bids, Durlacher says.
Even the "big three" listed IFAs – Inter-Alliance, Berkeley Berry Birch and Millfield – remain risky investments.
What could push share prices higher, and provide the additional capital needed to survive the industry shake-up, would be if a provider or bancassurer makes a strategic acquisition.
"This could trigger a 'scramble for distribution' and lift valuations sharply," Durlacher says.
Lighthouse remains Durlacher's favoured investment because of cash holdings sufficient to tidy it through the expected turbulent period.
To survive, IFAs with fewer than 500 staff will have to find successful niches, or add value by "white-labelling" products, as Berkeley Morgan has done, Durlacher says.
Buying additional IFA businesses may not be enough: "Nearly all are relying on the recruitment of advisers with high productivity (£100k+), although there are relatively few of these IFAs available."
"The sector is heavily loss-making. Market demand is weak, firms have little revenue visibility and break-even points are high compared with current performance. This is partly because overheads are high."
"Intrinsic valuations of quoted IFAs are currently high. These are not justified by operating fundamentals but are sustained by acquisition activity. Buyers include product providers, bancassurers and the 'big three', which will themselves become targets in time. Most of these are currently concentrating on acquiring private advisers, but will probably start buying smaller/weaker quoted players this year."
Valuations will rise as the rate of acquisitions is stepped up, Durlacher adds.
"Bankassurers and product providers may also inflate prices and a repeat of the estate agency bubble in the 1980s should not be ruled out. This is one of the main reasons for investors to be active in the sector."
The average annual income of the 28,000 registered individuals quoted by Durlacher is £58,000 based on its "best guess" that IFAs capture 4% of the £13.9bn market in regulated products sold by them.
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