Gold rush

21 December 2009 8:00 am

Chris Gilchrist

In my last column, I said that small IFA businesses would never be worth more than a row of beans but nevertheless ought to be goldmines for their owners. (IFA gorillas are a bad joke, www. moneymarketing.co.uk).

Any IFA trying to sell their business recently will know there is no pot of gold at the end of their rainbow. A typical deal is where the retiring IFA agrees to work for a year or two transferring clients to the acquiring IFA and the payment he receives is based on the success of the transfer.

Ah, but, you may say, these are old-style IFAs. The new model IFA, collecting 1 per cent annual fees on lots of assets, has a higher-quality income stream. Surely, they should be valued more like fund managers at, say, 2 per cent of the assets under management?

If only. Has any private- client stockbroker ever collected that sort of money? The more personal the service, the less value there is in the company. If you have a close relationship with your clients, they will follow you - IFAs are more like hairdressers than Harrods.

The new model will not change that. If anything, it will strengthen personal relationships between IFAs and their clients.

If I am buying an IFA firm, that means I need to buy the adviser more than I need to buy their business. This is entirely the wrong way round for creating economies of scale.

Legendary fund manager Peter Lynch defined the ideal business to invest in as the one where a junior manager says: “Any idiot could run this joint.” “Great,” responds Lynch, “because sooner or later, some idiot will be running it.”

The banks have tested the idiot principle to destruction and it does not look a great model for IFAs.

IFA firms, like most personal service businesses, do not give much scope for economies of scale, which are a major reason for the premiums people pay for businesses.

So I don’t see any good reasons why people will want to buy up new-style IFAs and the bad reasons (more commission, control of distribution) are history.

So, there is your row of beans. Now, where is that goldmine? For this, you have to stop thinking about your IFA business as having value to a third party. Instead, think about building its value for you and your family.

Your son/daughter/ nephew/niece leaves university with an arts degree and struggles to find a job. Sell them the new model IFA proposition. The pitch is this: “Son (etc), I don’t have much but I do have a goldmine here that can provide you with a lifetime income of £80,000 a year if you work at it.”

This is followed (quietly) by: “All you’ve got to do is pass a few more exams” and (even more quietly): “And earn a pittance while you learn.”
Yes, it is back to the future. It is about building long-term client loyalty across generations. Older and richer people are more conservative, so give them what they want: John Smith, Sons & Co.

Suppose you create an opportunity for number one son to earn £80,000 a year. That must have a value of at least £1.5m. Managed right, your business can produce perpetual income for your family. The old-style IFA’s business dies when they retire. The new model IFA’s business should live on.
Instead of complaining that nobody wants to pay the right money for your golden goose, get it to lay more eggs. Then you can adopt Warren Buffett’s view - if you know you’ve got the value, why should you care about the price?

Chris Gilchrist is director of Churchill Investments

 

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