Editor’s note: The author, Brian Spence is managing director of Harrison Spence Partnership, a firm of independent consultants to the independent financial advisor industry. Among the areas he focuses on is advising IFAs thinking of selling or buying businesses, a process that has come under increasing focus due to the regulatory and cost pressures of UK reforms. In particular, the merger and acquisition trend within the IFA industry has accelerated due to the Retail Distribution Review programme of reforms.

Strategic choices

One thing that is increasingly evident to us is that, post-RDR, those IFAs left standing will have to choose between one of two routes.

Route A is providing truly independent advice. IFAs could give guidance on products from across the whole market, covering hundreds of investment, pension and mortgage providers.

Their sales pitch may be compelling, but the research burden will kill them. And the necessary fees are likely to be prohibitively high for all but the wealthiest clients.

Route B involves restricted advice. This is likely to be the real breadwinner and may be the only way to make a living.

It’s simpler to manage, more cost-effective and is likely to be much closer to what IFAs are doing already. In our opinion, there’s only one way to sell this to clients: let them make the choice.

Smart IFAs will offer both propositions, but with a fee structure that makes it clear to clients the high costs involved in providing truly objective guidance on a very wide range of products.

Perception of worthlessness

A number of IFAs, particularly smaller ones, seem to feel their business is “unsellable”, particularly if they’ve got large books of business focused on insurance and mortgages.

The reality couldn’t be further from the truth. While most of the practices we’ve helped sell over the past year have been high-quality, well-structured businesses, this is not where there’s greatest demand from acquirers.

Instead, they want businesses that are not RDR-ready and where profits are not as high as they could be.

Here, acquirers will see an opportunity to shape the business into their own mould. There’ll be greater scope for the buyer to add value than in a firm that’s already maximising revenue.

Put another way, even for practices that are chaotic and poorly run, there’s still likely to be an interested buyer.

Making money from minnows

Every IFA has clients who are too small to serve profitably. Often, it’s well into the first meeting before an  IFA realises the couple in front of them has little more than a couple of ISAs.

This can be a great burden on time and resources, and IFAs are beginning to explore the opportunities created by white-labelling and outsourcing. A number of providers are offering telephone and web-based solutions. These help clients make guided decisions, and can be white-labelled if needed to suit an individual IFA practice.

For IFAs, this provides them with a professional option to present to otherwise unprofitable clients. For the clients, they get the benefit of some form of help, even if it’s not as comprehensive as that given to wealthier individuals.

Achieving a sale with certainty

One thing that deters many IFAs from selling their practice is the lack of certainty about whether the money due from a sale will be received in full.

Typically, only around one-third of the sale value of a practice is paid up-front, with the rest conditional on the selling IFA meeting pre-agreed targets. These usually relate to transferring clients onto a new platform, or into new products.

This creates a dilemma for the IFA. What if clients don’t like the new firm? Or simply decide to leave, through no fault of the IFA? Currently, only one large and active acquirer has recognised this problem – and is willing to bear the risks itself. Provided the IFA passes due diligence, the acquirer will pay the full value of their practice, with no strings attached.

However, while this can be an appealing offer, the trend in the market is shifting in favour of buyers and, over time, we expect business sales to come with more conditionality and for payments to be stretched over ever-longer periods.