When Succession launched around two-and-a-half years ago, we were one of the few companies talking about the need for IFAs to “corporatise their business”. Many commentators thought we were being unnecessarily patronising and few understood the financial implications of not corporatising their business. As we enter 2012 with little under a year to go before RDR is implemented, the concept of corporatising the business is one that most now understand.
Succession’s proposition has always advocated the service-led model as opposed to a purely transactional model. Generating ongoing fees for that service is not just an academic exercise but a commercial necessity and IFA businesses, like all privately-owned firms around the world, need to create income and capital and also have to have a succession strategy at the heart of their business plan so that client servicing can be continued, even when the adviser decides to retire or capitalise his position.
Today, Succession has 40 IFA businesses that joined us because they were attracted by the proposition of achieving a capital event. Importantly, a capital event need not be an exit from the business. Indeed, many potential acquirers will want the existing team to remain in place – it will simply be an opportunity to realise some capital in return for the hard work involved in building the business.
Acres of print have been devoted to IFA business valuations and, in particular, the relationship between valuation and recurring income. Key to achieving stable, good quality recurring income is a client bank, all of whom are fully engaged in objective-based financial planning. It would follow, therefore, that the recurring income from that advice would seamlessly link into a healthy valuation for their business.
However, the real world of IFA consolidation has moved on. While the simple formula of multiple or recurring income may have been of some comfort to businessowners of old, potential acquirers are now looking for more from an acquisition than an excel sheet with current income streams.
It is not simply the volume of revenues that are critical in a valuation but the sustainability of those revenues. It has happened to many acquirers in the recent past, where a valuation has been agreed and money duly paid, only to discover that the very revenues acquired dissipate in the months and years following the deal.
Why? Either the clients drift away or disenchanted advisers move, taking “their” clients with them. In other professions, the corporate-to-client relationship is second nature -clients of lawyers, accountants or indeed stockbrokers among others all consider they are clients of the firm first and of a particular adviser second.
Quite simply, if it cannot be demonstrated that revenues are embedded within the corporate entity and not controlled by individual advisers, then the risks associated with those revenues means its associated capital value is at best reduced, at worst it is worthless.
One of the key risks being picked up by potential IFA consolidators is that clients are very dependent on the adviser relationship. If for any reason that relationship is disturbed, it should be no surprise to anyone that the client moves. There are two key issues here. First, clients quite often do not understand that there is more to the advice process than the adviser who looks after them and, second, in transactional businesses, the client is buying a commodity, whether it is a policy, the product or the fund. There is a huge risk that the transactional client will simply transact that commodity elsewhere.
Therefore, part of corporatising the business will involve implementing a strat egy to install systems and processes that reduce the significance of any one individual – adviser or support staff – by clearly separating the responsibilities of the various elements of the client process. This could be the new business function, the construction of the financial planning solution and the ongoing service and admin proposition.
The conclusion to this will be clients with a range of relationships across the overall business, with members of the business understanding their clear responsibilities and accountability – more importantly, advisers who concentrate on client relationship management and not on administration. Clearly, a client engaged within the brand and not just by an adviser is much more likely to stay with the brand of the business.
It is time we grasp the opportunity and focus on redefining our industry. This is not the time to gripe and moan about the fairness or not of change. The reality is that change is inevitable and if you grasp the opportunity, change is good.
Simon Chamberlain, founder Succession