Small is beautiful? Bigger is better?

Beauty, as they say, is in the eye of the beholder. There are good reasons why adviser firms choose to partner with big or small discretionary firms. These decisions appear to be a function of resource, service and location.

Corporate activity

Stability and longevity will also come into the equation. We have seen a lot of press recently that is suggesting that there are many smaller discretionary firms that are susceptible to mergers or takeover and that there is likely to be a rash of corporate activity.

True, there has been corporate activity in this area over the last year, but we would question whether or not the level of activity is any greater than usual. Big or small, we would suggest that if the fit is right and the terms are acceptable to all parties almost all operations are potential sale or merger targets.

The fear seems to be that smaller firms are more susceptible. However, we have to remember that many of these smaller firms have been around for decades. The chances are that if they do not make progress in the adviser market they will simply retreat back into the private client and institutional world. This is one of those areas where a judgement has to be made around commitment to the market and why engagement with firms is essential before selection is made.

Why choose big or small

So, why would you choose a small firm over a large one (or vice versa). I think the reasons one may decide to go for a large firm are fairly obvious. Larger firms would tend to have more resource. This manifests itself in bigger investment teams, proprietory investment analysis, national coverage, possibly a recognisable brand and potential budget for proposition development. There would inevitably be a well-embedded process which is consistent and repeatable,

For smaller firms would argue that they are more fleet of foot in their decision-making, perhaps with only one team who not only make the investment decisions but also formulate the house view. They would also argue that large investment teams are not necessary – the investment managers are specialists and analysis in other areas is bought in from third parties.

There will be a perception that smaller firms can be more flexible in their approach to the adviser market, partly driven by their desire to attract assets and partly because they can still remain in control of ‘special’ arrangements because of their size.

With smaller firms it is much more likely that you will be dealing with a senior member of the firm and if not, our experience is that the executives and senior investment team are much easier to approach. When doing due diligence, access to investment managers is an area that needs to be investigated.

Of course, with a smaller firm the fear of losing a client will be much greater than with a larger firm and this does put a little more leverage in the hands of the adviser.

There may be reasons of location for choosing a smaller firm. Advisers and their clients may or may not prefer the idea of a local firm.

Finally, it is worth noting that in the platform space, those firms that have disappeared from the market have not been the smaller operators. AMEX and Macquarie both withdrew from the platform market and they were clearly part of much larger organisations, where one would imagine resource was not an issue, This underlines again that a judgement on commitment to the market through engagement is essential. 

Small isn't necessarily beautiful and bigger isn't necessarily better

This has been based solely on AUM and you can see that there is no right answer to the question, or in simple terms the answer is 'that depends'.

In the end it's usually the preference of the adviser acting on behalf of their clients who decides on the kind of discretionary firm that they partner with. There are several influences on this decision and equally there are several potential consequences that need to be taken into account before taking the decision.

The RDR has, intentionally, slowly but surely greatly reduced the influence of the bigger product providers on the adviser market. The end goal was to remove all provider bias so that clients will receive fair market comparisons. In this respect, the adviser community is experiencing a new-found freedom in their provider choices, not having to worry about levels of commission and the ability to pay them. This does not necessarily lead to the selection of smaller discretionary firms but it does bring them more into the mix.