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IFAs can beef up profits through outsourcing

IFAs should look to outsourcing in order to increase their profits, says threesixty.

The support service provider says more adviser firms are outsourcing internal tasks to improve their operating profit in order to make their businesses more attractive for sale.

It says wraps and multi-managers will particularly benefit from the trend, which is responding to a leaner economic environment.

The trend has been influenced by buyers of IFA firms taking a more critical look at the actual profitability of IFA firms before acquiring them. Historically, IFA businesses have been valued as a multiple of recurring income, regardless of profit.

But threesixty partner Phil Young says many corporate advisers place more emphasis on profitability as a cornerstone to an IFA businesses value, rather than just income, especially where larger sums are involved.

He says smaller firms will continue to be valued as a multiple of income as their key assets, the client bank and renewal stream, will be stripped out and the firm shut down. If larger sums change hands, however, it is more likely that the buyer will want the IFA business to run profitably for some time into the future.

Young says: “More and more valuations of IFA businesses are focusing on profitability in part if not in whole, especially where larger sums are concerned. Difficult market conditions are forcing IFAs to look at the areas where they are profitable and ask some hard questions about how cost effective it is to run certain services in-house.

“If IFAs can outsource their administration to platforms or investment decisions to multi-managers and third party portfolio managers then it avoids expensive in-house resource, reduces risk and frees up time to concentrate on nurturing close client relationships, which is where the goodwill really lies. Controlling these activities in-house can increase turnover but without significant critical mass, they are not going to increase profits or materially improve client retention, or, ultimately, the final value of their business.”

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