‘Over-rewarded’ scale driving consolidation leads to broking’s ‘worst practices’

Biba 2021: Consolidation within the broking market has led to scale being “over-rewarded”, which can cause “worst practices” to creep into broker services, said Phil Barton, chief executive of Partners&.

Speaking on day one of trade association Biba’s annual conference on 12 May 2021, Barton explained that although he does not “have any issue with consolidation per se”, he does “have some concerns about the fundamental reason why consolidation is happening” as potential motivations behind M&A can detrimentally affect brokers’ services for clients.

“At the heart of too much of the consolidation that takes place in our market is a scale play,” Barton explained.

“Frankly, this industry has got to a position where scale is dramatically over-rewarded. And when scale is over-rewarded, available capital comes in with the sole intent to buy and build, to stack asset upon asset upon asset, leverage the supply chain and create a notional value and that notional value can then be realised for the capital house.”

This approach, however, can lead to the “worst practices we see in the marketplace” entering brokers’ service.

Barton continued: “When scale is over-rewarded, the price of assets escalates and the large consolidator [that] is driven by scale wakes up after the deal has been done and realises that they’ve paid too much and that they have a deal hangover and have to undertake some pretty serious financial re-engineering in the asset that they’ve just acquired to make any sense of the financial model.

“That’s when you get some of the worst practices we see in the marketplace coming to the service.

“You get narrowing of placement strategy, you get premium finance being a profit stream rather than a service for clients. You get administration fees that only go up and they don’t really reflect the administration that is placed on the broker. You get commoditisation of the proposition. You get a dumbing down of the advice, frankly. You get claims services being diminished.

“In my view, too much of the value is being created at the expense of clients rather than serving them.”

When asked by session chair Ashwin Mistry, executive chairman at network Brokerbility, about broking leaders who sell their businesses and then re-enter the industry at a later date with a new venture, Barton said this is often because the acquirer has destroyed the value of the original broker.

Barton described the broking market as “a dangerous place now”.

Industry ‘dirty word’

However, Ian Donaldson, chief executive of broker Atlanta Group, part of The Ardonagh Group, urged online delegates to “not let the word ‘consolidation’ become the new dirty word of our industry”.

Speaking on Atlanta’s approach to M&A, for example, he said: “The consolidation that we do, it’s very targeted, it’s very precise – we go after businesses that will either increase our footprint in an area we’re already very successful in, or we may see opportunities where we are weak within our arsenal and therefore we go after an acquisition of a business or a brand that can improve us in that said area.

“I see us not as a consolidator and somebody that just comes along and gobbles up businesses. I see us genuinely as a growth enabler for some of these businesses.

“Some of these businesses want to get to that next level and can’t – we help them to do that. Some do just want to retire and hang up their boots and pass everything over to us and we can also deal with that. And we can be somewhere in the middle of both of those variables.

“The biggest thing that I always say is when we’re acquiring businesses, brands and people, we do it on a very personal [basis]. We accept the values and the cultures – that’s a huge thing.”

Barton also conceded that he doesn’t “think there’s necessarily anything inherently wrong with consolidation” itself.

He explained: “Acquisitions which aim to develop the proposition for clients, to grow a specialism, or extend your reach, I don’t think necessarily are bad.

“At its best, [consolidation] can deliver better resourced advisory businesses that deliver better services for clients, better learning and development, better talent development. It can deliver better technology, better working environments, better cultures, better benefits.

“I’m not sure consolidation should be the bogey word of the industry as such. Our market, after all, still remains fairly fragmented, even if the mid-market is somewhat bereft of assets.”

Carl Shuker, A-Plan’s group chief executive, added that the mantra of consolidation is that businesses need to look after their clients, colleagues and partners throughout the process.

The seminar session, which was themed around the future of broking, also featured Julie Page, chief executive of Aon UK.