There really has been no better time for making acquisitions.
The fragmented nature of the financial advice market, increasing regulatory costs and demographic factors have helped create an industry where AFH Financial, widely known as a consolidator, can flourish, according to chief executive officer Alan Hudson.
Since it listed in 2014, AFH has made 38 acquisitions and Hudson expects to add to that number this year. The company currently has £24 million in cash to spend on deals, including £17.5 million it raised in equity in November 2017, and is eyeing up a ‘strong pipeline of possible acquisitions’.
‘I’m one of those people that the older I get, the more ambitious I get,’ Hudson explains. ‘Health permitting, I see myself doing this for the foreseeable future.’
Hudson started AFH Financial in 1990, after he acquired the Birmingham office of his last employer Target Life, now part of Abbey Life. Over the 28 years, the company has grown to have £3 billion in assets under management.
‘We have a three to five year aspiration to have £5 billion in AUM, £75 million in turnover and a 20% Ebitda margin,’ he says.
‘We are on target to reach our five-year target and will likely increase it once we reach it. We think the market is polarising between investment management-led and financial planning-led wealth management models. We want to be the number one financial planning-led wealth manager in sector.’
Hudson’s growing ambitions are in part thanks to the increasing capabilities of his company.
AFH Financial has 165 independent financial advisers (IFAs) who are self-employed and 200 ‘pure protection’ advisers who look after critical illness cover, income protection and non-investment life insurance. They are supported by around 300 members of back office staff.
However, Hudson explains that self-employed advisers are reaching capacity in terms of the number of clients they can handle, which has accelerated his recruitment drive.
In the last 12 months, as the company looks to future-proof the business, it has been recruiting new advisers it can train up. It has added 16 in total,
tying them in on an employed basis as part of its long-term strategy.
With a number of advisers whose client books AFH acquired also coming up to retirement, Hudson says he may hire up to 30 more employed IFAs in 2018.
The acquisitions have helped AFH grow its business, but it has not changed the culture of the company says Hudson, something that he is very proud of.
‘Although we are acquirers and are seen as a natural fit for many companies, we will only continue to acquire as long as it makes financial sense for the business and that we don’t destroy the culture that we have in the business,’ he says.
‘We make sure that, as a part of every deal, the clients we are acquiring are the right sort for us and that the advisers fit with us culturally and will fit in their new environment once they have joined us.
‘When we buy retiring advisers, the process is slightly different because we don’t have an adviser coming over to us; but it’s still simply about trying to look after the clients the way we do with the rest of our clients.
‘We help reduce attrition by meeting with every client. Financially, we model attrition of 5%, but in actuality it’s a lot lower than that.’
This is also reflected in the fact that the company’s recurring income has increased from 50% in 2014 to 60% currently.
The firm reported pre-tax profits grew by 83% over the 12 months to the end of October 2017 on revenue of £33.6 million.
As well as regular due diligence, AFH’s in-house acquisitions team makes sure that any company they look at has the ‘right cultural fit’, explains Hudson.
The team, which is headed by commercial lawyer Claire Spillane, was set up to handle everything from contracts, through to post acquisition administration such as the importing of client data and revenue into the main business.
The acquisition process, which includes a dedicated portal where IFAs can apply to sell their business, has been remarkably successful, says Hudson.
‘Periodically we stop making acquisitions to make sure that everything that we have acquired is properly embedded in our company culture and systems.
‘Because of the care we take, we are right now paying 90% of targeted deferred considerations. Bearing in mind that as we are paying 50% upfront, we are therefore paying roughly 95% of the expected consideration on all the deals we make.’
The company also hiked its dividend to 4p in 2017, an increase of 33% year-on-year, to help attract and retain institutional shareholders that are key to its growth plans.
‘Everyone is pleased with the progressive dividend strategy and everyone likes the idea of a growth story. We think that the combination will prove attractive to institutional investors.
‘It is the case that as we get bigger, the incremental effect of buying smaller IFAs will become less. That doesn’t mean that we will stop doing that and we remain interested in the smallest IFAs.
’We are now in a good position with our institutional shareholders, all of whom are very supportive of our strategy and growth plans, so that we can entertain substantial deals.’
Among its shareholders are well known fund houses like Slater Investments, BlackRock and Polar Capital.
While this support is gratifying, for Hudson the most satisfying thing about the company’s recent fortunes is that his colleagues’ shareholdings have also increased.
‘Over years we have had about 80 financial advisers and staff buying shares in the company and we now have advisers whose shareholdings are worth well over a million pounds and staff who have substantial holdings and this gives me just as much pleasure as I get from the overall business,’ says Hudson, who himself is the largest single shareholder in AFH.
Despite the polished acquisition process it now employs, AFH’s first IFA buy was a favour to a friend, he recalls.
‘I was approached by a local accounting firm I had business dealings with that was acting on behalf of a deceased IFA’s widow.
‘I did a deal and we didn’t have any money at the time, so it was on a revenue share basis. Now this was about 10 years ago and I’m still paying her now, probably making it the most expensive deal I’ve ever made, but it worked really well for us.’
The deal was eye-opening for Hudson, making him realise that acquiring established IFAs could be cash generative from ‘day one’.
‘That deal made me realise that we could generate more revenues from acquiring these businesses than from any marketing budget. It was a result of that acquisition that we started on the path we are on today,’ he says.
The growth from £400 million to £3 billion in AUM over the last four years makes the company well positioned to deal with the changes in the market as well, according to Hudson.
‘The beauty of being a larger business is that we have an internal project management office that helps make strategic plans for things like Mifid II, GDPR and the SM&CR.
‘We’ve spent an extra £80,000 a year on software to ensure that we are Mifid II ready, because we feel that these areas will have far reaching effects in the advice business.
‘While the rising cost of adviser-led discretionary fund management is a worrying trend, our offering is extremely cost-effective in that we provide the investment management service within the cost of our ongoing advice fees.
‘So we don’t charge separate discrete amounts for investment management and advice. Nor do we take a margin from platforms like some other businesses are now doing.
‘We are really mindful that investment returns in the future are probably going to be lower than they have been historically and for clients to have sufficient returns on investment net of charges to meet their financial objectives, the client proposition must be cost effective for them.’