Nearly one-in-five (17%) IFAs believe that doing defined benefit (DB) pension transfers will make it more difficult to sell their business because of liability issues.
This was revealed during a Canada Life survey of 178 UK financial advisers, which looked at the future of IFA businesses.
“Anything that represents risk and potentially increased future liability or affects today’s cost or availability of professional indemnity cover, will impact firm valuation and therefore M&A activity,” Keith Richards, chief executive of the Personal Finance Society, told International Adviser.
“This is currently impacting financial advisers with a back book of DB transfer business.”
While AJ Bell senior analyst Tom Selby has not “heard this specifically”, he told IA that “significant DB deficits would be a factor to consider in any M&A deal”.
Consolidator
Standard Life’s financial planning arm, 1825, has been rather active in the M&A space in the UK.
It recently agreed to buy the wealth advisory arm of accountancy business Grant Thornton for an undisclosed fee.
IA asked 1825 if it had avoided businesses if they offer DB transfers?
A spokesperson for the firm said: “We value firms based on a range of metrics which differ for every firm, as no two are alike.
“The key metrics used for valuing firms are assets under advice, recurring revenue and profitability. We don’t have any standard multipliers or specific criteria we measure on – each deal is considered on its own merits, and we spend a considerable amount of time with a business before we reach a valuation.
“Businesses that do high levels of DB transfers versus low levels of DB transfers may not necessarily affect the price we would pay, but it may influence our decision to acquire a firm based on our view of the level of potential risk in high volume businesses.”
Due diligence
The Financial Conduct Authority has been increasing its scrutiny of the DB transfer market since the British Steel Pension Scheme (BSPS) scandal.
In June 2019, the UK regulator said it was disappointed with the number of advice firms recommending people to transfer out of DB pension schemes.
Simon Taylor, partner at pensions consultancy firm Barnett Waddingham, said to IA: “If we are talking about M&A activity between IFA firms, I should think that there could well be some transactions that are scuppered by the target firm having carried out significant amounts of DB transfers in the past.
“This is especially where these transfers were carried out using processes now frowned upon by the FCA.
“Due diligence is key here.”
