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Courting customs

The path of consolidation is littered with the debris of recent IFA mergers. Take the Massow Rainbow Group, which was formed after Massow Financial Services and Rainbow Finance merged in a blaze of publicity with the backing of venture capital. Within a year, the company was in receivership and the former business partners had fallen out very publicly.

Only two months after the merger of Maddison Monetary Management with Lamensdorf to create LM Financial, Mark Howard – who was to spearhead the combined company – quit. He cited frustrations as the reason for his move.

Therefore, it comes as no surprise that Acquisition Mergers and Sales managing director Philip Lyons, a consultant specialising in advising IFAs on mergers, puts compatibility at the top of the list of issues to consider when contemplating a merger. “If you do not know how to deal with one another and cannot work together, it will not work out, however good the basic idea behind the merger,” he says.

Lyons describes mergers as “business marriages” and goes so far as to propose his clients undergo psychometric testing to ensure they will get on after the initial honeymoon.

IFAs considering a merger will want to pay special attention to any factors that could arise in significant future liabilities. Here, IFAs will remember the example of Towry Law&#39s purchase of Advizas and the negative publicity and industry resentment which followed its subsequent call on the Investors Compensation Scheme.

Clawback is another one of the main areas of difficulty highlighted by Bond Pearce partner Tony Woodward, a corporate lawyer specialising in transactions between IFAs. He says the parties need to come to an agreement over whether to open a special reserve account and if they want to secure indemnities for past business.

As no one party calls the tune, agreements can be complex. With only one firm able to be regulated, the parties will need to decide whether one of the firms will become the regulated firm or whether both will be subsumed under a new company.

The nature of the transaction will depend on whether the companies merging are limited companies, partnerships or sole traders. A corporate merger will be more complicated than a simple transfer of assets or setting up of a partnership by sole traders.

Legal costs will vary according to the complexity involved. Woodward says it helps to use a lawyer with experience in financial services, otherwise it will be time-consuming and expensive to explain issues such as clawback and trail commission.

Ownership of the client bank can also be a fraught issue, especially if the IFAs involved in the sale are network members. The Peers Group director David Thorne, a DBS member, is currently looking for a firm to merge with. He describes DBS as co-operative and says he already has an agreement in writing from the network that the client bank is his to sell.

Lyons says networks are quite happy for client banks to be sold but holding on to the files could be another matter. He adds that networks have been hit hard by falling revenue as their members merge. Ironically, he says the seeds for many mergers are sown as IFAs meet at CPD events staged by the networks.

Whether consolidation involves a genuine merger or a takeover is often a moot point. For Thorne, the main consideration in finding a merger partner is not to grow his business or to share the compliance burden but to effect a smooth and responsible handover of his client bank and ensure a post-retirement income stream. Again, compatibility is key for him, not so much in terms of his own ability to get on with his potential business partner, as he intends to retire soon, but the ability of the new IFA to gel with his existing clients.

Lyons set up his business in response to what he sees as a colossal increase in merger activity among IFAs. He says this is driven primarily by the onerous compliance burden and reduced profit margins, to which a merger can seem the obvious answer. Sharing back-office administration and working out of single premises offers obvious cost savings. But difficulties can arise in choosing whose facilities are lost.

Another impetus to the trend of IFA consolidation is the need to specialise. Lyons envisages IFAs of the future being like barristers&#39 chambers, made up of advisers with specialisms in long-term care, pensions, investment and so on. But he suggests another more fundamental reason for IFA merger. In the present, somewhat inhospitable, climate, IFAs can feel rather lonely, which can be allevi-ated by joining forces.

John stones

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