Acquisitive national advice firms such as Standard Life’s 1825 and Ascot Lloyd are extending financial incentives beyond owners to rank-and-file advisers. This comes in a bid to spread the benefits of being taken over and incentivise staff to stay on.
It is a common feature of the way big firms make acquisitions that payments include a deferred element, payable only when certain targets are met. For example, the full-year results (to 31 October 2017) of AIM-listed consolidator AFH, stated £3.2 million had been paid in deferred considerations for acquisitions made in previous years.
However, New Model Adviser® has discovered a new trend for retention payments to also be distributed to the non-shareholding advisers at the acquired firm. 1825 has adopted this model.
New Model Adviser® has learned 1825 sets aside ‘retention pots’ when it acquires firms. Advisers are awarded retention payments over a number of years to try to ensure they do not leave during that period.
1825 has good reason for implementing this as some firms it has bought have suffered a spate of departures following the takeover.
Since its inception in 2015, 1825 has acquired six advice firms throughout the UK, providing it with a presence up and down the country.
The 1825 retention model
One former 1825 adviser, who wished to remain anonymous, said when the takeover of his firm was announced a retention scheme was introduced. Advisers were to be paid in instalments over a three-year period to discourage them from quitting, however there was a catch.
‘It was initially dubbed to be a retention bonus,’ he said. ‘But it became increasingly apparent it was more a retention and performance bonus because it was only 100% payable if certain criteria were achieved.
‘It was not just a case of sticking around for three years to get this money. You needed to stick around and fulfil all these objectives.’
The size of these retention pots varied depending on the firm 1825 bought. For one advice firm New Model Adviser® understands 1825 looked to set aside a pot of £1.2 million, while for another firm a pot of £600,000 was planned. Sums from these pots would be paid out to employees over a three-year period post-acquisition. (But payments would not necessarily amount to the full value of the pot.)
The trend for advisers to leave recently acquired firms is well established. In September 2016 six Almary Green advisers left 1825, just a few months after the deal to buy the Norwich firm was announced. The deal, however, was broken off not long after our report on the departures.
There were also several departures, which included former directors, from 1825’s north-east hub (previously Pearson Jones), following the takeover.
New Model Adviser® understands that, in December 2016, these departures prompted 1825 to produce a plan to hand out payments of £10,000 to 18 financial planners at the north-east firm. These payments were on top of the three annual retention bonuses for advisers and were an incentive to prevent further departures.
More than cash?
John Metcalf, a former Pearson Jones director who left the firm in June 2016, said: ‘I was aware Standard Life was planning to put in place some sort of scheme over and above “normal” remunerations packages to help retain staff.’
Further suggestions any retention payments have not been enough to keep advisers at 1825 comes from Baigrie Davies. Earlier this year its managing director Ian Howe left the firm along with senior financial planner Lee Westley, an 1825 spokeswoman confirmed to New Model Adviser®.
Although these payments may not have been enough to keep all the advisers at the businesses 1825 has taken over, many IFAs feel this structure is a sensible approach.
James Wetherall (pictured above), director of Manchester-based IFA Wetherall’s, said a retention programme made ‘perfect commercial sense’ for consolidators, particularly as shareholders are often the real victors from these deals.
‘I am not familiar with what 1825 is doing but I think some sort of retention package is a really good idea. Advisers are the custodians of those client relationships and we all know about restrictive covenants,’ he said.
Restrictive covenants have been used to try to tie advisers to an acquired firm. But national advice firm Towry Law, now itself absorbed into the Tilney Group, proved that trying to enforce such contracts can be a costly waste of time. Towry took advisers from acquired national firm Edward Jones to court in 2011 but lost and ended up on the hook for the best part of £1 million in costs to the defendants.
If the stick does not work, the carrot is the better option for acquirers. But non-shareholder incentives will be of wider interest too, as the practice could give more advisers a stake in the consolidation trend.
‘It is all very well if a few equity partners or shareholder-directors make a packet from selling their business and they are on a two-or-three-year earn-out so they will be incentivised,’ said Wetherall. ‘But [retention payments] are a really good idea for advisers who have suddenly been subject to real instability, are concerned about their job security and worried about how it might affect their clients.’
A spokeswoman for Standard Life said incentive packages played an important role at 1825 but stressed they were never based on flows into Standard Life’s own products.
‘Attracting, developing and retaining talent is a key part of our strategy of growing 1825 into a national financial planning business. Having the right remuneration in place is an important part of that,’ she said. ‘Our approach to each acquisition reflects the distinctive nature of each business. We would never comment on individual arrangements.
‘We align any reward and remuneration we put in place with our clients’ interests. A key principle for us is that no-one in 1825 is rewarded based on flow into 1825 investment solutions or Standard Life products.’
What do other firms do?
One of 1825’s biggest competitors is Old Mutual Wealth’s Private Client Advisers, which has made a steady stream of acquisitions in recent months.
Dominic Rose (pictured above), director at Old Mutual Wealth Private Client Advisers, said the firm did not distinguish between advisers who joined through acquisition or organically. He stressed both ‘receive a remuneration package that appropriately incentivises adviser retention for the long term’.
He added: ‘We agree a competitive remuneration package for the role staff will perform post-acquisition. By ensuring that we recognise the value an employee brings to the firm, we can achieve high levels of staff retention.’
Old Mutual-owned network Intrinsic has a different remuneration structure. It provides an ‘allowance’ to advisers who join the network. This would have to be paid back if advisers left before a certain period.
Steve Fryett, managing director of Intrinsic’s Wealth Network, said: ‘Intrinsic offers the option of an allowance on joining the network in recognition of the business interruption costs incurred in the immediate period. This includes things like adviser training, stationery and marketing, compliance costs and the adoption of new processes and procedures. We ask for it to be repaid at market rates if they leave within the term of the contract.’
National firm Ascot Lloyd has also changed the way it treats IFAs at acquired firms. Chief executive Nigel Stockton (pictured above) said when it acquired advice businesses it was now normal for incentive programmes to be put in place.
‘Part of the consideration is put into a long-term incentive plan for any retained advisers, through a combination of equity and cash. Similarly for exiting advisers and principals, the terms of their non-compete clause is very clear,’ he said.
‘We aim for shared goals at the outset so that on acquisition a clear long-term integration plan for clients who have often been with a firm for decades is already in place.’
While they may have their own training programmes and can move personnel between offices, consolidators do not want to lose advisers and risk their clients following. But will financial incentives outweigh considerations such as culture, loss of independence and opportunities for succession that are lost to many non-shareholders when a firm sells up?