Sid Ludlow and Ian Hemingway of Ludlow Wealth Management Group have their sights set on a target of £1bn in assets under advice and are beefing up the adviser team accordingly to take on more clients.
Ludlow Wealth Management Group is a growing giant of financial advice, with £580 million assets already under advice and 1,450 active clients. Chief executive Sid Ludlow and managing director Ian Hemingway have built up the firm through a number of acquisitions and repeated segmentation.
At one point the two were also writing 70% of the firm’s business themselves. Now they are putting an expanding workforce of employed advisers and support staff to the test with an ambitious target of £1 billion of assets under advice.
The first firm Southport-based Ludlow acquired was in nearby Lytham in 2008 called Philip Gill Financial Management. After that it developed a strong appetite for geographical expansion. It has now taken on 12 firms in total and has four satellite offices in Lytham, Preston, Blackburn and Liverpool.
As a result Ludlow has developed a complex structure. It began as a sole proprietorship called Ludlow & Co. Then Ludlow and Hemingway formed Ludlow Insurance Services because for a short time they offered general insurance. They stopped doing that after a couple of years but kept the name until rebranding the firm Ludlow Wealth Management Group a year ago.
The group currently operates as four separate companies to get around the capital adequacy rules’ pitfalls.
Hemingway says: ‘If you buy a client bank, whatever you pay is added to your balance sheet as goodwill. When you are doing capital adequacy, the Financial Conduct Authority (FCA) report takes goodwill off your balance sheet. You have to be careful when doing acquisitions that you can afford to have that much goodwill on your balance sheet.’
Batting off trouble
Over the years the group has attracted its fair share of complaints, the vast majority of which it has successfully contested, which is perhaps surprising for a firm of its size with a general insurance history.
‘We have had a couple of complaints, but our track record is good,’ says Ludlow. ‘We have never recommended anything so far that has become an issue, so we don’t have any [failed property funds] or any esoteric investment products. They have been on our radar, as in "don’t go near them".’
Hemingway says the firm avoided exposure to the Keydata investment, which has troubled so many advisers. A 2011 list of firms liable to claims from the Financial Services Compensation Scheme (FSCS) relating to Keydata polices, complied by law firm Herbert Smith, included £5,785 for Ludlow Insurance Services, but Hemingway explains: ‘On one of the acquisitions, the first one we did, had one client who had a Keydata ISA and we didn’t buy his liabilities; we bought his client bank. When [the FSCS] first wrote to everyone, they wrote to us and we said we were not that adviser.’
SID LUDLOW CV
1993-present: Ludlow Wealth Management, chief executive
1988-1993: Wallwork Ludlow IFA, managing director
1987-1988: Canada Life, branch manager
Growth and segmentation
Ludlow started the business as a general IFA in 1993, and it grew gradually by referrals from clients and professional connections. Hemingway joined in 1998 and became managing director in 2005. Together he and Ludlow realised further growth was limited by the fact that they were writing the majority of the firm’s business themselves so they put in place a comprehensive set of strategic changes six years ago.
They started moving Ludlow’s model towards recurring fee income based on assets under advice. It has now reached 60% recurring income on a total income of almost £3.5 million.
With guidance from consultant Brett Davidson of FP Advance, they segmented their client base according to wealth and put in place a client service proposition to match each segment. Since then, the firm has segmented its client bank several times, again using wealth as the main criterion.
‘We did it about half a dozen times to get it right,’ says Hemingway. ‘For example, for us to justify charging a fee of up to 0.75% of funds, [we set a minimum of] £100,000 for an active client. Below that, we have a transactional service if the client wants it.
‘Above £100,000, we did a lot more segmentation behind the scenes. For example, as the portfolio gets bigger, investments become more complex or diverse, so there is more frequency of contact. Our largest clients might receive monthly valuation or phone calls.
‘We have over 100 clients with more than £1 million of investable assets, so it is important to understand who they are; for example, so we can target them subtly for personal referrals.’
Bespoke solutions with risk control in mind
Ludlow creates bespoke investments for clients by blending a range of solutions.
It uses Quilter Cheviot for its full discretionary fund manager (DFM) service, Standard Life’s MyFolio and Aviva’s Multi-Asset ranges, and SEI’s Strategic Portfolio fund range. In addition, it uses Standard Life Investments’ Gars and Invesco Perpetual’s Global Targeted Returns funds as low volatility, medium-term investments.
Another solution the firm uses is structured products, and it currently likes Société Générale’s range of defensive Stepdown Kick Out plans. ‘They pay a potential return of 6% and clients are comfortable with that,’ says Hemingway.
He says he likes SEI because it is ‘less well-known and does not market itself much. The minute something becomes popular, it ceases to work as well as it did. We like its specific volatility target and close correlation between risk and return in each fund.
‘The same is true for Standard Life and Aviva. Standard Life is more process driven; Aviva is more dynamic and takes bigger asset allocation decisions based on its views. So those two complement each other.’
When three of the Gars team moved to Invesco Perpetual to help set up the Global Targeted Returns fund, Ludlow Wealth Management Group seized the chance to diversify managers by allocating some of the money it had with Gars to the new Invesco fund from inception in September last year.
‘The new fund will do well in the first few years because it is small and they can take positions that perhaps you perhaps can’t in a big fund,’ says Hemingway.
The SEI Growth fund, one of its ‘strategic portfolios’, beat the MSCI World benchmark in 2011 and 2012 but lagged behind it in 2013 and this year to the end of May. ‘The primary focus of the SEI Growth fund is to provide clients with a well-diversified investment solution that participates strongly over the long-term in equity market growth but that should not incur the drawdowns of a 100% equities portfolio,’ says Ludlow.
‘The portfolio’s 19.8% exposure to fixed income means that in short-term, aggressive equity bull phases it may lag (for example, 2013), but over the longer term it makes the portfolio achieve its objective without an excessively high cost in terms of risk.
‘The cumulative impact of our diversified approach has been strong risk-adjusted returns since launch. This is illustrated in particular by the Sharpe ratio of the SEI Growth fund (0.74) relative to that of the MSCI World index (0.65). A higher Sharpe ratio shows an investment provides a better return for the same level of risk,’ he says.
The average Ludlow client portfolio total expense ratio is 0.75%, excluding wrap and adviser charge. Ludlow charges up to 0.75% ongoing.
The firm’s 16 client-facing financial planners are divided into three tiers of consultants by experience and ability. These are then generally matched with client segments based on wealth.
Ludlow’s advisers have always been employed. ‘We like that discipline,’ says Hemingway. ‘Most of our recruits came from banks or building societies. They have good backgrounds of training and compliance and we don’t have any mavericks.
‘The downside to recruiting that type is they are not so good at developing their own connections. They have been fed clients. To run it better, the two of us had to look after a lot fewer clients, so we started cascading clients to other advisers.’
IAN HEMINGWAY CV
1998-present: Ludlow Wealth Management, latterly managing director
1994-1995: Hesketh International Fund Management, investment director
The next stage was to hit the acquisition trail. All the vendors were single business owners with a similar client service ethos.
‘For the volume increase we wanted, acquisition made sense. Southport is slightly remote and people tend to visit but live somewhere else,’ says Hemingway. ‘We found the majority [of firms] via word of mouth and our network of connections. Once acquired, we would spend three to six months integrating clients, looking for 100% client retention.
‘We only kept the advisers who were as good as our own. Some we made redundant and the business owners all went immediately as part of the deal. Our way of working is fine for employees but doesn’t work for the business owners.’
Hemingway says all the deals have been successful in that 98% of all clients they wanted to keep have been retained.
‘When you buy a business, the important thing is to start from the top and engage or disengage the right clients. We are constantly cleansing the client bank,’ he says.
However he says real success lies in less tangible factors, such as being able to run the business better than the vendors. ‘We can’t measure that as an exact science,’ he says. ‘But, for example, there might be a number of clients who trust that adviser, but not enough to give him all their wealth.’
As Ludlow is a much larger firm, clients may feel more comfortable investing more and reveal extra assets, says Ludlow. ‘So we hope the seller doesn’t have perfect information on his clients.’
Income and profitability
The purchase price has always been based on a multiple of recurring income, although profitability is becoming an important factor, says Hemingway.
‘We are increasingly looking at pure profitability; how much cash will this acquisition throw off,’ he says. ‘I prefer a multiple of cash because that is what pays the wages. Net profit, depreciation and interest etc [are more complicated]. I like to keep it simple.’
He says retail distribution review (RDR) concentrated many advisers’ minds on leaving the profession. Resulting acquisitions have helped the Ludlow nearly treble its assets under advice, from £200 million in 2010 to £520 million today.
This has presented challenges however, including that of having the right number of advisers trading at the right level to cope with the volume of work. Staff numbers almost doubled between 2010 and 2012, but growth has decelerated since then.
‘The team works very hard,’ says Hemingway. ‘One or two have said it was too much, but another consultant recently said he was working twice as hard as he ever had done but was enjoying it twice as much as well. That’s because we have a plan and he bought into it.’
Choosing the restricted route
The RDR also concentrated the minds of the Ludlow directors, who had to decide whether to remain independent or take the restricted route, which is what they did.
‘We debated this at length, both at board level and with our consultants throughout 2012,’ says Ludlow.
‘The conclusion we reached was that there was going to be no disadvantage to our clients by being restricted. In many instances it was felt that the issue of being independent was in the minds of our advisers and not our clients. Our experience since 1 January 2013 has certainly vindicated this view with every client being completely comfortable with our restricted proposition.’
The restrictions include investment trust savings schemes, investment trusts and exchange traded funds.
Gearing up for more growth
Over the past 18 months, Hemingway and Ludlow have been working to ensure the business structure can cope with the next growth phase towards £1 billion under advice.
The firm has bolstered its team by hiring a new head of compliance George Ramsden and a non-executive director Colin Dickie, and plans to hire another five or six advisers and five or six administrators.
Hemingway says it helps to have scale in the post-RDR environment. ‘It is difficult to do everything you need to do now. The smaller you are, the more bespoke all of those bits are. For us to have a dedicated compliance head is cost effective because we can spread him across 16 planners.’
The acquisition strategy required some bank finance in the form of term loans in addition to company cash, and Ludlow and Hemingway plan to keep rolling over the debt facility to support further acquisitions. However, they will proceed with even more caution than before.
‘Visibility and certainty of income is not what it was,’ says Hemingway. ‘Prices are still a bit high.’
They anticipate that half the £400 million they are pursuing will come from acquisitions and half from organic growth. ‘This is acquiring at a similar rate to those we have acquired already,’ says Hemingway. ‘We think about 30% of advisers are over the age of 55, so there will be plenty more retiring.’
The firm has two joint ventures with solicitor firms and one with a care provider, but there are no expectations of rapid growth from these quarters.
‘They have been successful but our expectations have been low,’ says Hemingway. ‘It is a slow burn relationship. We are not expecting large volumes to come quickly. They are more about overall offering and profile, not the main driver of that £1 billion target.’
Nevertheless, he is confident of reaching the target. ‘With our recent senior appointments, we are turning into a medium-size business from a small business. Sid and I have both been in the business for a long time, so it is useful to have an outside person challenge us.
‘Also many of our top clients have been at board level or equivalent in their own businesses, so they will expect us to have a non-executive director to manage our own risk; and it adds to their perception of us.’
Among their other plans, Ludlow and Hemingway are aiming to hold a regular client ‘investor insight’ conference.
‘We anticipate around 250 attendees for the first one in Liverpool,’ says Ludlow. ‘We will have four speakers from investment companies, followed by a nice lunch. It also gives clients a chance to meet each other, or hopefully introduce others and build [our] presence.’
Hemingway says another ambition is for the business ‘to function with less involvement from the two of us, and eventually without us. Over the next five years, we want many of the systems and processes to be able to run without us.’
Ludlow says: ‘We would sell if the right deal was presented to us. But we want to get to a position – and we are getting there – where we don’t need to exit.’
Life after work
‘Outside work I play golf,’ says Ludlow. ‘Ian mostly spends time with his family. But I don’t let him away from his desk too often! It is a big business and requires a lot of time and effort. But if you enjoy your work, then it’s not work.’
Hemingway sarcastically describes himself as ‘fun, relaxed, laid-back, easy-going, and happy as Larry’. Ludlow adds: ‘We are fair but we are demanding.’
More seriously, Hemingway says: ‘We use a training company called Longley Academy to help people understand the psychology of sales; not about hard sell but just about understanding people and personality types and styles. It helps when talking to clients and colleagues as well.
‘My type comes out as a "driver, analytical". Sid is more the "amiable, expressive" type. So we are a good combination.’
Ludlow says: ‘When we started, we would never have envisaged being as successful as we have been. Fifteen years ago, we talked about how fantastic it would be to have £500,000 recurring income; now it is £2.4 million. The size is beyond any expectation and we are quietly chuffed with that.’
Hemingway says the next five-year target is scarier. ‘Previously we kept our plan to ourselves; now it’s all published. But that has been very good because it engages people externally and internally.
‘You can feel it in the conversations with the consultants and the back office team; everyone is working together. People love the fact that they are part of this business they have helped to shape.’
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Five top tips
Clients are the most important part of the business.
Create the right team, ensure all staff know the company’s goals and objectives, and that their rewards are aligned.
Never stop trying to improve what you do.
If a client has to chase you, you have failed to provide the service you promised.
- It is better to set your goals too high and fall short than too low.