Why the RDR is good news for firms looking to sell
Sandringham Financial Partners, the new venture from SimplyBiz founder Ken Davy, is ready to take several new partners on board, and firms with more humble beginnings, such as London-based Serenity Financial Planning, are also on the acquisition trail. For others, without the financial might or distribution reach of the larger firms, the next 12 months looks more daunting. Many that have survived the retail distribution review (RDR) deadline are now looking for a sale.
Estimates in 2010 from Ernst & Young put a figure of 35% on the number of advisers expected to leave the industry as a result of the RDR reforms. It is too early to say whether its predictions are correct; but the figures so far available suggest a clear contraction in adviser numbers in the run-up to the implementation of the RDR.
Stephen Hagues works at Retiring IFA.
Not too late to exit
For an adviser who has prepared for the RDR but no longer wishes to operate, it may seem too late to turn back. But that is not the case. All the buyers I have spoken to are looking for good quality businesses, not a quick client injection.
Surviving the RDR will have put many firms’ houses in order. They are likely to be in better shape now than before the RDR, even if that means they will be more expensive to buy.
If you are selling, take heart that your effort has not been wasted. There are several areas where the RDR will have made the value of firms up for sale more certain. These are also areas acquiring firms should be asking questions about.
More facts for acquirers
A classic pitfall for acquirers pre-RDR was not knowing the content of client books. Firms that spent time preparing for the RDR will have analysed their client banks. This analysis will have identified who is lucrative, who is a good and loyal customer, who has brought more business to the firm and who has only conducted one transaction. It will also show which clients are no more than a name and contact details.
Acquirers should look at whether excess expenditure has been trimmed and any loose ends, such as income not claimed, credit owed and legacy business, has been tied up or at least recognised and earmarked for resolution. Having a clean, up-to-date data file is vital if you want to avoid sifting through piles of disorganised paperwork.
Around 10% of one network’s directly authorised investment advisers were no longer registered at the end of 2012.
Furthermore, a Financial Services Authority (FSA) survey indicated around 10% of advisers left financial services between the summers of 2011 and 2012.
Whatever the reasons people quit the profession before the RDR deadline – retirement, exams, gap fill, increasing regulatory levies or lack of a long-stop to liabilities – there are advisers running businesses right now who no longer wish to continue operating in the RDR world.
Key selling points
If you are tempted to sell, being level four qualified has not been a waste of time. If you prepared for the RDR, a potential buyer will be confident your firm came on the journey with you and will not present a potential liability.
Recurring income generated by commission was previously used as a key selling point when it came to estimating a firm’s turnover and profits. The shift to adviser charging has created a number of different fee models so a firm looking to be bought must keep carefully audited books, pinpointing everything from retainers to one-off fees.
A potential buyer must know the inherent value of a client book, assets under management or administration, introducer fees and client retention rates. These will all be taken into consideration when a valuation is conducted.
All adviser firms face challenges in the RDR world, and there will be more that cannot survive. But those that are determined can thrive: they can build a successful business, groom themselves for growth or a sale, and win, whatever path they choose.
Stephen Hagues is founder of Retiring IFA.