Boutique firms can boast of a number of attractions in relation to their larger peers: a more personalised service, continuity in management and an alignment of interest to name a few.
The downside for smaller outfits, however, is they can be more vulnerable if things go wrong. Whether it’s the loss of senior management or a big mandate; legal problems or falling into administration, small businesses need to have an exit plan ready to ensure their clients’ assets are protected.
Magnus Spence (pictured), a Wealth Manager cover star, knows this all too well. When Andrew Dalton, his Dalton Strategic Partnership co-founder, died unexpectedly in 2011, shutting down the wealth management business was floated as a possibility.
‘I recognise Andrew was really the driver of our wealth management business, and we lost some assets because of the relationships he had with clients – but it was completely understandable,’ Spence said.
Nonetheless, he believed that pushing on was the right thing to do, and instead, the business refocused its proposition.
For some wealth management businesses, shutting up shop can be the only option. A year ago, stockbroker Fyshe Horton Finney went into voluntary administration after a boardroom clash over the company’s future. What happened next serves as a stark reminder of the importance of having an exit plan in place. As the administrator worked to retrieve client assets, it identified a £1 million shortfall in client cash on their books
A new FCA consultation suggests in the case of insolvency, investors should get more of their money back than before, and more quickly.
‘We have recently consulted on rules to speed up distribution of client assets following insolvency, and would work with individual firms on a case by case basis to ensure consumers are appropriately protected,’ said an Financial Conduct Authority (FCA) spokesperson.
George Kirby, a consultant at Knadel, thinks the regulator’s next move will be to expand its attentions to smaller firms and what they are doing to safeguard clients’ assets.
Anecdotally, he believes not enough small companies think about what their next move should be if the worst happens.
‘I suspect it is probably not as formalised as it might be in a larger company, as a lot of the management are close to the business, and there is not a hierarchy,’ he said. ‘In practice, the remaining partners will manage the business and find the solution, but have not done a lot of formal planning.’
Kirby noted that it can take at least six months to find a new chief executive if anything happens to the existing team.
‘There is a message there that we need to communicate with our clients and let them know we have not lost the plot. We also need to have some sort of succession planning, and a contingency plan,’ he said.
Matthew Hunt, founder of Prospect Wealth Management, said his firm has a number of measures in place to make sure market risk is the only liability that clients have to worry about.
‘Client assets are held in custody by a third party so if anything was to happen to Prospect, they are in safe hands,’ he said.
Prospect has personal indemnity cover and compliance services via Raymond James, but Hunt thinks these safeguards are not necessarily the norm.
‘A client is taking the risk that somebody runs off with their money if there are not proper compliance controls in place. With us, that can’t happen. If a client is investing money with us they will write a cheque to the custodian, never to Prospect.’
Key man risk
Hunt is also mindful of diversifying away key man risk. ‘The other risk is that if you are a one-man band, and they go under a bus, you have to find another manager,’ he said.
‘We have a well-defined investment methodology. There are 11 people in the company with sufficient depth of talent to ensure the investment process continues.’
While no one likes to think the worst could happen to their business, especially if they have built it from scratch, the reality is that client money needs to be protected from bumps in the road.
If the FCA proposal concludes that tighter rules are needed, this goes some way to making sure investors get their money back if the business collapses. But the onus is also on individual wealth management firms to establish an exit plan that puts their clients’ needs first.