Financial advice aims to help individuals prudently plan for the future. Historically though, most international advisers have completely missed the opportunity to plan their business for themselves to their best advantage.
Rather, they have sacrificed the substantial value they create merely for initial commission. Recent M&A activity where entire financial advice businesses exchange hands for no cash at all – but simply let the owner escape their liabilities – demonstrates the unrealistic hopes and flawed business models within our sector.
Built-in benefit
Whether the adviser is the owner of a larger business, a network appointed representative or an individual adviser practice – the ultimate purpose of the business is income generation, career satisfaction/development and – the bit which is usually neglected – a profitable exit. For advisers who are largely self-employed and hence have no access to conventional long term incentive schemes, such an exit is only realistically possible through the creation of an embedded capital value with the ability to easily sell it – commonly known as a practice buy-out.
A practice buy-out is so called as, while most advisers control their client relationships, they technically and legally do not own their clients: the clients are aggregated under the regulated agency of a larger network or business. A practice buy-out delivers to both the organisation and the adviser an effective strategy around which to build their respective businesses in a risk-managed way. Instead of the adviser either leaving a bank of orphans (or churning through broker agencies), it makes far more commercial sense for the adviser and agency to create a mutually beneficial solution which ensures clients continue to get serviced, revenue is generated and both the agency and the adviser are paid for their respective labours in creating the practice.
While there are a number of drivers and detractors to this value, the one thing a potential buyer of an adviser’s business wants is profitable recurring income (money in, minus gross cost in its collection). The monetary value for the adviser from a practice buyout exit is dependent on a multiple of this recurring income.
Factors such as an easily serviced client bank, created along with ethical, client-based principles together with a good investment process, IT, regulatory top cover, PI cover and a clear and a compliant advice process enable the right purchaser to gain a greater profit through ongoing servicing and sales, which will enhance the goodwill value of the sale, and therefore the amount payable to the adviser for the business at the exit.
Identifying your goal
To create this value an adviser needs to begin his business with the ultimate end in mind, by planning strategy for exiting his business right from the outset. This means creating a detailed business plan and stating the desired buy-out figure, considering both when and what the adviser wants to happen when ready to leave that business and also who the likely buyers are. It is then simple to work back from these figures to decide the strategies needed to achieve it.
In most cases the first stage is to simply build turnover in a sustainable and profitable fashion. The second stage is to maximise the assets that have been built along the way – increasing the asset value, so for the same turnover there is a much bigger selling price.
One of the hardest things to do with any financial advice business is to identify a future buyer, who will definitely buy that business at an agreed price – another IFA, a larger advice business, an asset manager, or outside investors. A guaranteed buyer is worth their weight in gold, especially if they can also agree at an early stage a minimum set of criteria on which to determine value, allowing the adviser to know exactly what he needs to do in order to get the value he wants at the time of the sale.
Dream it, do it
The success of these schemes in large UK and US firms demonstrates how effective they can be at aligning underlying client, adviser and organisational interests. As a young business that focuses on creating positive change within the international marketplace, the ability for AES to deliver clear, transparent and contractually agreed practice buy-outs over the next few decades, is key to our strategy of exporting successful onshore practices into the cross-border marketplace.
As Johann Wolfgang von Goethe said “Whatever you can do, or dream you can, begin it. Boldness has genius, power and magic in it.”
