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Zurich equity stakes are high for multi-tie

Zurich’s decision to offer advisers equity participation in a multi-tie business it plans to launch in the New Year has refocused attention on ways of incentivising intermediaries.

Zurich is offering advisers joining its forthcoming multi-tie business equity stakes in the company which it plans to sell or float it off after three years. The business will be 75 per cent owned by its advisers, with a view to becoming completely independent of Zurich after the sale or flotation.

In a move bearing striking similarities to Misys’s decision to give Sesame a neutral brand, the new business will not carry the Zurich moniker, although the actual name has not yet been decided.

Valued at 50m at launch by Zurich, the Swiss-based group will back it until either the trade sale or flotation which it estimates will net 300m. So the group hopes the prospect of a 75 per cent share in this profit will both retain and attract top names.

Its launch follows Zurich’s decision to split its manufacturing and distribution arms. The business will absorb the Zurich Advisory Network franchise, which currently comprises just under 3,000 salesmen, and external appointments are ongoing. It will be headed by chief executive Stephen Leaman with ZAN sales director Andy Ferns taking a similar role in the new entity.

Advisers’ stakes in the business will be determined by their current turnover and assets under management, with bonus shares being dispensed annually based on turnover and persistence of sales. This share entitlement provides a business valuation for each individual adviser providing them with an exit strategy if they wish.

The business valuation, dubbed market capital value (MCV) by Zurich, is carried forward from existing ZAN franchisee’s business valuations and forms a major part of initial share allocations in the new enterprise.

The initial or founder units, as they are dubbed, will be distributed on a one unit for every 10,000 of turnover in 2004, and additional units for every 10,000 of MCV. Annual performance units will also be doled out every year until the sale or IPO, with the first in January 2006.

The new franchise-based business will aim to be within 10 per cent of the cheapest providers in all product areas and will launch with a 2,000 strong salesforce in the second quarter 2005.

As such, Zurich believes the new concern will be well placed to compete in the market on both quality of advisers and price.

Few other major IFA businesses, whether groups, nationals or networks, offer similar levels of equity participation.

Destini is one such group though, being 70 per cent owned by it advisers. The decision was made to offer equity, again as an incentivisation tool but also as currency, when it kicked off its acquisition campaign in November 2002.

Destini group managing director David Collett says: “Zurich is following a similar model to Destini and any model that allows the people at the sharp end to receive equity is a good thing. The reasons are clear and reflect the pressures of retaining advisers in the multi-tie world. The key difference is we did it to attract people, they are doing it to retain people.”

The value of such shares is, of course, not guaranteed and given the demise of Group300 recently, not necessarily a sure bet. The flotation route in particular provides a flexible exit strategy but a potentially volatile one.

Sesame was set to float in July but postponed this due to perceived poor market conditions. Its members which number around 3,500 firms are set to receive a 10 per cent share of the price achieved at flotation. This, based on independent analysts’ 200m value for the firm, would equate to a 20m pot to be shared out between them, working out at a cut of 5,700 apiece.

Misys Life and Pensions chief executive Patrick Gale says: “We are going to dwarf competitors that have already floated and offer advisers 10 per cent of a valuable business which will be cash in their pockets.”

Tenet Group managing director Simon Hudson says his firm looked at such strategies but found them difficult to structure, so as to be attractive to all parties decided against it.

Hudson says: “If they are providing guarantees and a proper exit strategy then it could be a good deal. It has been done before – sometimes very successfully – but it is difficult to get the components right. We have looked at it in the past but have not seen it as something we have, so far, wanted to do.”

Whether the Zurich offer will be attractive enough to lure IFAs remains to be seen but Norwest principal Harry Katz is not convinced the multi-tie model will appeal to many.

He notes both the Institute of Chartered Accountants and Law Society will only make referrals to independent financial advisers, so a switch to multi-tie would be damaging to business flows. Aside from this, many IFAs enjoy being their own boss, he stresses.

Katz says: “Joining a network makes sense for some people but not for me and many other IFAs. I do not want to be told what to do and believe going multi-tie is committing professional suicide.”

A Zurich spokesman says: “The new company will be positioned as the leading, directly authorised multi-tie business in the UK.”

The more IFAs opt for such deals as the Zurich offer or who join other multi-ties, the fewer independent advisers competing for these referrals. Which route proves most lucrative remains to be seen.

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