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Chris Haines

Buying an IFA means buying something that is in essence intangible. While it might be difficult to put a price tag on the goodwill of clients, there remain many things to be carefully evaluated when buying an IFA practice.

The specific nature of IFA business means the contract between the parties is something that has to be drawn up with care.

The important thing to remember is that agreements never need to be tested unless they go wrong and if the agreement is not robust it will collapse. The most common reason for the agreements failing is that they are too wide-ranging.

The commission split is a contentious area. The agreement needs to be specific and include how long the commission sharing is to be. The question of how existing introducer agreements are going to be handled also needs to be handled carefully. I know of an IFA being sued by an accountant bec-ause he is after a fifth-generation commission split.

Of course, when there is a dispute, it is the client that is the loser. Apart from the unedifying spectacle of being argued over by fellow professionals, the client could also be the main witness if it comes to court. Agreements should have a clause covering what happens if things go wrong, which I think should commit the parties to binding arbitration.

Agreements typically allow for a commission split of between 20-30 per cent. The best one I can remember gave the vendor 50 per cent of commission “forever”. At the opposite end of the spectrum, a widow of an IFA got no more than 20 per cent and that was only for the first 12 months. All agreements are unique. However, a common arrangement is a lump sum of around one and a half times the last year&#39s renewals phased in over 18 months, with between 20 and 30 per cent of ongoing income.

Given the scandals of the last decade, buyers will want to pay special attention to anything that could arise in significant liabilities. Liabilities have ramification beyond inconvenience and public relations. Any business with significant liabilities is going to be valued considerably lower.

IFAs might therefore not want to buy the entire client bank. For instance, they may not want to buy those parts which have significant exposure to contentious areas such as income drawdown, which might result in misselling claims in the future. Pension misselling liability will reside with the adviser of the time but any incremental business will draw in the new adviser. The purchasing IFA needs also consider what liabilities he might be buying in the way of clawback.

The IFA must ask him or herself what they are buying – is it only a pile of paper and goodwill? The client bank needs to be scrutinised carefully. What are the client profiles, have they been individually prospected or did they come as a job lot? What products have they been sold and how much future potential is there? What percentage has come from introducers? What cancellation rate is there? How can the seller demonstrate value?

But remember, different IFAs in the same market can be markedly different. One could be making £50,000 from the same conditions from which another will be making £500,000. And introducers might not be happy to continue what can have been a personal relationship.

Additionally, the providers will not want to deal with two IFA firms and the way they handle transferred business will have to be smoothed and perhaps dealt with contractually. It is important to get a lawyer who has experience in the area and sometimes it pays to come to an agreement whereby both parties can share the costs.

Chris Haines is business development manager at DBS

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