Supporting the entrepreneurial spirit of IFAs in a market ripe for disruption

Independent financial advisors (IFAs) who have built successful businesses tend to possess a strong entrepreneurial drive. To create and grow a thriving practice in South Africa’s challenging business environment, these leaders demonstrate grit and the ability to generate and execute multiple innovative business ideas.

While many bankers and other professionals are sponsored to pursue astronomically expensive MBAs, this path is typically out of reach for most independent wealth management practices. Instead, their leaders are shaped by the “school of hard knocks”, where entrepreneurial lessons are learned through hands-on experience, often at great personal and business costs.

I find it surprising that many wealth aggregator models fail to harness these strong entrepreneurial foundations as an asset. Instead of empowering IFAs to innovate and maintain autonomy, these models impose rigid frameworks that stifle their entrepreneurial potential.

Having worked closely with leading IFA practices, I’ve seen firsthand that no two businesses are alike. Each firm has its own growth ambitions, succession plans and unique challenges. Some struggle to attract clients, while others face the opposite problem of growing too quickly. Some firms grapple with complex family dynamics, while others are dominated by ageing advisors or, conversely, an inexperienced team. Whether they are seeking to evolve their service offering or partner with others for effective scaling, these businesses are dynamic, living entities. As such, their support needs to be carefully tailored, not addressed with one-size-fits-all solutions.

Yet, traditional wealth aggregator models often provide a generic business template, failing to account for the diverse needs of their IFA partners. Just as financial advice must be tailored to the unique needs of individual clients, offering a uniform approach to growth and succession is far from optimal.

A common thread among fiercely independent IFAs is their unwavering commitment to offering uncompromised advice to clients. While capital is readily available from product-led vertical integrators and life company-owned consolidators, structurally independent funding remains scarce. Many IFAs feel that selling to one of these aggregators equates to “selling out” their clients, as it introduces a degree of compulsion.

Banks are also reluctant to fund transactions without physical assets or involve deals under R50 million. Some IFAs have urged asset managers and DFMs to develop funding solutions to support their businesses. However, these mechanisms often risk compromising the independence of their advice by making them reliant on the managers of the investment solutions they support – solutions that should be chosen on merit and client need, rather than due to a funding relationship.

Looking at other markets, we see where many consolidator models are headed – and it isn’t encouraging. A prominent UK consolidator, employing one in eight of the country’s 38,000 financial advisors, has faced significant pressure on both its share price and net flows since the introduction of Consumer Duty regulation. This regulation, aimed at raising consumer protection standards, has brought into question the firm’s opaque, costly fee structures, steep product exit charges, and a business model that prioritises sales over client outcomes. For the firm to survive, a significant overhaul is likely required.

Additionally, in the UK, aggregator models that tie IFA business valuations to the shifting of client portfolios into in-house products have come under regulatory scrutiny, raising concerns about the continued claim of independence by advisors who sell their practices in this manner.

In summary, we have a market of highly entrepreneurial, independent IFAs, each with their own unique business goals and challenges and a commitment to offering unbiased advice. However, there is a clear disconnect between these factors and the succession and growth solutions available to them. As we’ve seen in other markets, unsuitable consolidator models are coming under increasing pressure. This paints a compelling picture: the South African wealth consolidation market is ripe for disruption.