When valuing an IFA’s business, the levels of renewals and trail income and the value, if any, attaching to up-front commission must be considered.Up-front commission is important to the IFA but what value is it to a buyer who is looking for repeat business and long-term earnings’ potential? Ironically, the IFA’s most valuable asset – clients – is given a low priority in the valuation chain. The reason is that many IFAs do not focus on total client worth and portfolio advice so there is little record of, or monitoring of, consolidated client assets. They are just not visible. Instead, IFAs tend to view their business as advice leading to commission from product sales, with less incentive to look after the business once on the books. Commissions are paid by the product providers and, as a result, clients may view the IFA as an agent for the provider rather than their adviser. The impending payment menu system will make these commissions and charges visible to clients but it will only go some way to addressing the shortfalls of this product-led approach. This is the massive value gap in an IFA’s business. Ironically, in the whole investment chain, it is only the IFA who can consolidate their client bank and see its value. A product provider can know the value of a product sold to a client but any one client is likely to hold products from a number of providers. Any one client may know the value of their own portfolio but does not know the value of the IFA’s other client portfolios. Despite popular myth, fund supermarkets cannot offer a solution here as again, they are product-centric with no facility for the IFA to put their clients on to the platform. This is the power of a wrap, which is designed to hold an IFA’s clients and the whole advice and investment process provides much greater security of earnings for the adviser – regular portfolio reviews and much greater client engagement brings client satisfaction and retention. The wrap charging structure is transparent. Clients will not mind paying for a service that they can see and value. A wrap enables the IFA to replace a world of product sales with a holistic client advice and investment process with earnings derived from the total client portfolio. A buyer of that business would find this very attractive. A central strategy for an IFA whose holy grail is to build capital value in their business should be migration to a wrap. Evolution rather than revolution is the secret to minimising disruption to income throughout the process. The following, admittedly simplistic, example illustrates how this might work – let us assume an adviser today with the following annual turnover (see figure one above). A buyer valuing this business might well only value the ongoing trail commission. On a multiple of, say, two, this implies a capital value of just £120,000 on a turnover of £150,000. Wrap can change this forever. First, the adviser can begin to leave behind the up-front commission treadmill. Second, the true potential value of the IFA’s business is reflected in the client assets that the IFA will seize control of. Let us assume a three-year transition on to a wrap for our adviser (see figure two below). In year one, our adviser remains reliant on up-front income but also works to transfer an average of 146 clients on to the wrap, each with an average portfolio of £100,000 and their annual income is maintained. Crucially, it is immediately visible to the adviser that they are now in control of assets of around £15m – a figure that they were probably unaware of before. This article does not underestimate the work involved in transferring a book of clients on to a wrap platform and the potential drain on income that can result. However, having gone the hard yards, the realisation of ben- efit can be seen to take place fairly quickly. In year two, our adviser’s dependency on up-front income is already less, replaced by annual income from client assets of £100,000. The adviser has added just an average of 25 more clients and nurtured all his clients to increase all average portfolio balances to £125,000. The real value driver – the assets under the adviser’s control – have increased to around £22m. This gradual evolution continues into year three. Reliance on up-front income has gone. Average clients have risen to 200 and all average client balances have been nurtured up to £150,000. The adviser is in control of £30m of client assets. Even if the adviser builds no further, the following year their client bank will ensure an ongoing income of £150,000 a year. A returning buyer of our adviser’s business can now look at it entirely differently. The client assets rather than an individual IFA are generating the income and in many ways our adviser’s business can be viewed as a fund-based business and valued as such. This would typically be a percentage of the funds under advice. Even assuming a modest 1.5 per cent valuation, this represents a value of more than £400,000 – a fourfold increase in just three years. On a 3.5 per cent valuation, our adviser has created a business worth more than £1m. Not bad for three years’ work.