The acquisition of 100% of BPAM shares for an initial £1.73m has been approved by the Financial Conduct Authority and could rise to £4.2m in the event of BPAM’s annual revenue equalling or exceeding £1.6m over a three-year period. Of this, 90% will be paid in shares and the remainder in cash.
As a result of the deal, Walker Crips’ assets under management will amount to more than £2bn – up from £1.8bn – while assets under management and administration will hit £3.5bn. BPAM’s AUM as of 28 February was £229m, £192m of which was discretionary-managed.
Five BPAM advisers will make the transition to Walker Crips, including managing director Geoff Wright and chairman Pat Barker. The group also expects to see a number of cost synergies as a result of the action.
The acquisition follows numerous changes to the firm over the past few months – including the expansion of its York office and the opening of a Truro branch alongside various personnel additions – and is in-line with the firm’s intent to move away from commissions to fee-based income.
Rodney Fitzgerald, Walker Crips CEO, outlined the firm’s ambition of an increased discretionary market presence while retaining an advisory foothold.
“This is an important step in our continuing quest for growth, increasing the capacity of our London stronghold alongside our ongoing regional expansion,” he said.
“In the traditional advisory business you tend to get ups and downs with the equity cycle – we are very keen on fee-based advisory business as opposed to commission, as there is more stability and revenue.
He continued: “We would like shift the balance of our revenue streams more towards discretionary and away from advisory, but we will still take on new advisory business.
“The next rung of companies above us are tending to reduce their roles in advisory – advisers and clients are subsequently looking for new homes and we are positioned in the right space for that.”
David McCann, equity research analyst at Numis Securities, explained that a widening advisory market gap is open for capitalisation.
“Increased regulation is pushing up fixed costs for everyone, which is making more and more businesses either uneconomical or marginally economical,” he said. “It is pushing forward the rationale to merging or taking over other businesses in order to bulk up assets.
“For those that can make advisory work, there is the opportunity to snap up some of the old teams and assets from other businesses that are still kicking around.”
But why is there a trend of companies choosing to make the move from advisory to discretionary?
“On average, the pay in the advisory business is around half of that in the discretionary industry,” McCann explained. “You have to work a lot harder for half of the money, and you also have to get individual client consent for trades, which is far less efficient.
“Advisory tends to be dominated by commissions, and commission income has been very weak for most companies because of the lack of volatility in the last two years. Discretionary tends to be driven by fees, and because it is higher quality you tend to get higher multiples for it.
“Also, the market tends to give much bigger valuations to companies with recurring income as opposed to those with transactional income.
“Finally, the regulators seem to be hot on advisory rather than discretionary, particularly on suitability. It is a risk that some firms just don’t want to take anymore, particularly given the marginal economics.”
