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Sitting comfortably

Advising on phased retirement is second nature to many IFAs. But away from their clients&#39 pension and investment needs, what advisers do to ensure their own slow and comfortable passage into retirement is not always so clear-cut.

The high average age of advisers and low capitalisation of firms has been a persistent concern, leaving IFAs in a trap of wanting to sell their businesses but finding it difficult to do so.

Tenet Group chief executive Simon Hudson says that, as is so often the case, people do not practice what they preach.

A typical IFA will be in his or her fifties and will be renting their work premises, so selling this business can be less than straightforward. The value of the business is unlikely to be in assets such as bricks and mortar. As a consequence, the value of an adviser&#39s business is based on his or her relations with their clients and the income stream from exis-ting business.

A solution proposed by some of the networks and national IFAs is for a sale of the firm to be negotiated in such a way as to retain the services of the existing adviser if only for a few years leading up to retirement.

Falcon Group chief executive Allan Rosengren says managing relationships with clients is the most important thing for IFAs. The handover, therefore, is crucial and best enabled by the existing adviser.

Hudson says: “People are loyal to individual advisers and not firms and a client who is personally introduced by their existing adviser is much more likely to stay.”

He says the close, even pastoral, relationships that advisers build up with clients over the years mean many will also want to ensure the future care of their clients.

Not all income streams are viewed in the same light – fund-based renewals are likely to be more lucrative than renewals coming for endowment, term or pensions, which in turn affects the intrinsic value of the business.

Hudson describes sale agreements which are provisional on the services of the vendor IFA. An initial up front payment for the business is followed by the balance in instalments over the next three years.

The amount of the inst-alments depends on the renewal income and strength of the client bank post-sale, which provides a clear incentive to maintaining the value of the business.

The IFA who has sold his or her business can either work as a self-employed adviser or become an employee if the structure of the business they are selling out to allows for that possibility. As a national IFA, Falcon is in a position to facilitate the latter. Rosengren says IFA business tend to be sold as entire businesses or just the renewal bank.

While from the purchaser&#39s view, it can be attractive to retain the services of the outgoing adviser to continuity and preserves good will, there are also problems inherent.

Wills & Trusts Financial Planning principal David Batchelor says many IFAs will be very wary of the regulatory burden and consequent exp-ense of employing what is in effect a new member.

He has recently bought a practice from a fellow local IFA who was retiring and wanted a clean break, so there was no post-sale involvement. While legal safeguards can be put in place, Batchelor believes the transaction basically dep-ends on trust.

Batchelor disputes that IFAs have close relationships with most of their clients. He says the majority of clients are “customers” and the close relationships are with a small min-ority. He says the success of his purchase was founded on the fact that the firm he was buying was only seven miles away.

Instead of having the clients of the purchased practice personally introduced, Batchelor relied on mailings with follow up phone calls.

Finding a purchaser is not the only problem. As Hudson points out, many IFAs can simply not afford to retire.

He explains that once you retire as an IFA, you lose your authorisation and can no longer get renewal income. But recent case law means an IFA remains liable for the advice given before retirement and needs to obtain PI run-off cover.

This leaves an IFA having to finance the cost of PI without an income stream. Additionally, pension review costs have also meant IFAs have had to continue working longer than they might have anticipated or desired.

In smaller firms, typically sole traders or partnerships with less than four members, succession planning is not always straightforward. Limited companies have a structure that allows easier succession planning.

But succession requires people coming into the sector as well as retiring from it.

John Stones


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