Back in 1990, I was playing golf with an estate agent and we got into a deep conversation about the effectiveness of restrictive covenants. After all, that is what you talk about when the golf is of a low standard. Suddenly, he asked me for the use of my mobile phone and disappeared into a thicket of trees.
He emerged from the trees with a wide grin and I resolved to check that my cellphone could not access premium-rate numbers. He then informed me that his solicitors had agreed that the covenant on him, after he sold his business to a bank, was likely to be ineffective. He subsequently resigned from the firm he had sold and opened up across the road. This meant that the £1m he received was pure profit as his business's biggest asset was himself and not the premises.
I mention this tale because, whenever I have attended any gatherings of IFAs since the publication of CP121 the talk has been, without exception, of selling out to the insurers but on the premise that the IFA is holding all the cards. This presumes that providers have forgotten the lessons of estate agency purchase.
As many of the providers are now owned by the very companies which bought estate agency divisions for millions and sold then off for as little as £1, I think not.
If stakeholder had never happened, then it might all have been so different. But it did happen and providers are more switched on to the need for a return on capital and the necessity of being very cautious in the pursuit of businesses where the only significant assets have legs.
Personally, I think now is possibly the worst time to sell a business, especially where there is a history of very slender profit margins. This may have been good tax planning but it does not make the business attractive to the third party which is considering buying the business.
Recently, we have been lectured to by many about the need to add value when charging fees. This reminds me of the words of a well known writer on financial planning in the US, Nick Murray, who wrote: “Your price is only an issue when your value is in question.”
Separating advice from execution, as CP121 and Sandler seem to favour, only serves to focus the client's attention on the part of the process where he or she cannot easily detect the value. Unless we quickly become more skillful in communicating the value of our advice, the numbers left in the IFA sector could be close to 10 per cent of the current IFA population, as some in the FSA have predicted.
Some may argue that I have a bee in my bonnet for process. This is probably due to my consultancy firm being involved in a number of due diligence projects where my contribution has been in assessing the robustness of the existing processes and how safely advice has been dispensed in some of the key risk areas. To date, we have been hired by the prospective purchasers but I can see us being brought in to tidy up firms for sale, as more firms understand the need to present a well-organised business.
Perhaps CP121 will be remembered as the point where IFA firms moved from being eponymous reactive operations to branded collectives where IFAs can concentrate on what they are best at – giving advice.
I do not believe that providers will rush to overpay as they did in the past during the pursuit for estate agents and, in any case, how many of you out there want to report to someone in a provider's head office?
If we have as much sense as the providers are now beginning to apply to this situation, then we too will take our time to assess fully what selling out means in terms of control and, for those not ready to hang up their boots, what it will mean in terms of future job satisfaction.
As I recently said to a well known adviser, would you employ yourself?
Robert Reid is principal of Syndaxi Financial Planning