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Is the price right for IFAs?

What is an IFA worth? That is the question that many investment analysts, life offices and IFAs themselves are exercising themselves with as the dash for distribution gathers pace.

Institutional investors want pure investment returns wher-eas life offices are making valuations complicated by the added value they hope to get by securing distribution in a depolarised sales environment.

Lighthouse last week reversed into Berkeley Wode-house, whose network has 199 members in 150 firms, in a deal worth £2.1m. The week before, Millfield paid £2.2m for employee benefits specialist Moncur Jackson, which has only three RIs but a solid client list and a healthy balance sheet. This deal came just six months after Millfield paid £10m for Heritage with its 135 advisers.

Pricing an IFA in the current market is not a straightforward matter. Tenet Group chief executive Simon Hudson says: “It is an immense puzzle that everyone is toying with. Distribution power can be assessed in terms of numbers of individuals and turnover as well as multiples of earnings. With people targeting distribution as they are, there will be scarcity value as there are fewer businesses left to buy.”

Assessing the value of IFA firms listed on Aim on the basis of profit is difficult because, of the seven firms listed, only IFG, listed in Dublin, and Kingsbridge Holdings are currently showing a profit.

Inter-Alliance chief executive and chairman Keith Carby says: “There is a J curve that many firms are finding themselves on – it takes a while to earn a profit. Inter-Alliance has taken its pain. The assets of a business are its advisers and valuations should reflect what profit they can expect to bring in, and should not be priced because just at the moment IFA firms are attractive because of depolarisation. Life offices&#39 interest in IFAs is a temporary feature.”

Falcon Group chief executive Allan Rosengren says: “My gut feeling is that valuation depends on the size of the company&#39s turnover. For firms with up to £2m turnover, values are up to one times turnover or a multiple of profits by 10 to 12 times or three times repeat revenue.”

In reality, there can be no simple rule of thumb as there are a number of extra factors that will complicate the sums. The level of any pension misselling liability, turnover per RI and persistency rates will all affect a firm&#39s price.

Some sector analysts believe only firms with substantial adviser numbers, woven into a successful business, will attract investors on Aim. Berkeley Wodehouse had stated its own intention to float on Aim, but has since merged with Lighthouse. Institutional investors seem to be prepared to invest further cash into companies that have already floated, but analysts predict the bar has been raised for unlisted firms wanting to make the jump.

Inter-Alliance got an £18m cash injection from its institutional investors earlier this month, much of which will have come on the back of Carby&#39s reputation. Lighthouse managed to raise a further £2.2m at the same time as its acquisition of Berkeley Wodehouse but City cash is less available to the sector as a whole than it was a year go.

Bell Lawrie analyst Ian Macarthur says: “IFA valuations are all about scale. We are seeing no smaller IFA firms going to the market.A few smaller IFAs have tried floating, looking for fanciful valuations and have not got away with it. The challenge is high as many of the IFA businesses are yet to prove profitable in their own right.”

But Rosengren reckons money will become available for the right business. He says: “You have a marketplace undercapitalised to a very significant extent compared with providers. This is not a market for start-ups but for businesses with pre-existing capabilities Aim listing is possible although current equity levels are not at their best point.”

Providers have a natural interest in taking stakes in intermediaries. Life companies are not going to apply the same formulas for assessing the value of distribution firms as City analysts as they will assess how much of their own product they can shift through the channel.

But buying distribution has its pitfalls in the present state of flux.

With the better than best rule still in place, no one can afford to buy an IFA they do a lot of business through and yet life companies do not want to miss out long term. Hence, Norwich Union&#39s strategy of buying stakes in a lot of IFAs and in Assuresoft, an approach that we could see more of in the coming months.

The other big imponderable for life companies buying up distribution is whether the outcome of the FSA&#39s polarisation review will allow the ownership of a distributor to guarantee distribution.

The FSA made it clear last week that its understanding of multi-ties would require the adviser to sell the best product available, which might not be that of the multi-tie&#39s owner.

How many IFAs decide to remain independent, become authorised financial advisers or take the multi-tie route will depend on which channel is economically most attractive – and that could yet see a lot of further developments.


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