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Value judgement

I was intrigued by Allan Rosengren’s comments in Money Marketing on January 17 and wanted to add my support to the views expressed in terms of elevated multiple purchases.

There is a clear and desirable sea-change taking place in the IFA community with regard to exit planning and strategy development.

We have witnessed the latent appetite that has sat within the community moving to disparate, but in some cases desperate, actions.

It is entirely logical thatthe higher levels of “passive” income sought by many IFA firms will have a direct and positive impact on ultimate valuations. The increasing adoption of platforms is clear evidence of this appetite to action shift that is driving many practices.

Platforms lend themselves to the “technology-centric and ongoing advice” focused approach being adoptedby many advisor firms and this is a trend that onecould reasonably expectto see develop.

Another factor that may have been a catalyst for change is the RDR, whose initial publication caused many practices to consider shortening the time horizons for their exit planning. The well-signposted potential improvements on certain elements of the proposals in the discussion paper have relaxed the immediate sense of pressure but nonetheless the seeds had been sown.

If the average age of an IFA is indeed 55,then the above noted considerations are both laudable and well timed. However, I believe there are some drivers for action which in my view are significantly more question-able and, in some cases, are encouraging IFAs downa route where the ultimate consequences of their actions may be the complete antithesis of those intended.

There appear to be two types of “projectile promise” schemes emerging. I have significant misgivings about both and would implore IFAs to consider the complete proposition of who they may align themselves to before making a decision weighted heavily based on one element of that proposition.

I do not understand how any scheme can promise predetermined multiples at undetermined points of time in the future. Enticing IFAs with such promises feels intuitively inappropriate.

Valuation multiples of IFA practice vary significantly, dependent on a vast rangeof individual properties anda significant number of environmental and chronological influences.I would never wish to predict, or even less guarantee, the exit multiple for a single practice, and would certainly not advocate doing so fora collection of such practices. The economic structure ofa business making such guarantees in the future would also be a source of great interest to me and will,I suspect, also be so for any interested participants.

The other type of arrangement that seems to be enticing a, thankfully, small subset of IFAs is that which offers a perceived value in “equity” participation and/or homogenised aggregation. Again, I neither understand or endorse the efficacy of such schemes. The essence of an IFA practice is its independence and internal entrepreneurial spirit andI fail to see how these elements can be satisfied, or value enhanced, by coming together in an amorphous mass whose collective value at a single (undermined) point in the future will be greater that the individual sums of the parts that constituted that collective.

I struggle to see who would buy such a collective andwhy they would considera leveraged valuation. The only circumstances in which that may be the case is if the individual elements become “homogenised” to the degree that they lose their individual identity – but surely that destroys the essence ofbeing an IFA.

I believe passionately in the value and the brand of the small to medium-sized IFA and think that directly regulated independent status is a prize worth attaining and cherishing, while at the same time recognising that appointed representative and “national” models deliver valuable service and benefit to those for whom it isan appropriate model.

I also believe that each firm should plan and structurean exit route to achieve maximum value but have the proceeds determined by their own efforts, planning and timing, supported by professional independent resources where appropriate. In my opinion, the reliance on extraneous forces isa path that should be trodden with caution.

Peter Mann is chiefexecutive of Bankhall

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