NEWS & OPINION
ALEX COOK CEO, GCI
30 November 2019
IFAs: Don’t sell your business, capitalise it and leave a legacy
Independent financial advisers, wealth managers and brokers need to find ways of turning their businesses into a source of annuity income for retirement. Selling it is not the answer, argues Alex Cook, CEO of GCI.
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ndependent financial advisers, wealth managers and brokers face one of their biggest challenges right at the end of their careers: how to turn their hard-won business into steady annuity income to ensure a financially stable retirement. The most common solution – selling the business and its client base – is the worst option. That’s because these businesses, by their very nature, are typically one- or two-man bands, and so the price they would command is relatively low. The usual formula is a multiple of the annual turnover: 1.5 or twice is usual. This will not generate enough capital to come even close to replicating the existing income stream. For example, an independent practice turning over R2m a year in fees could expect to fetch R3m to R4m in a sale. Presuming a prudent drawdown of 5%, the capital realised would generate in the region of R175 000 per annum (R14 500 per month) – a
RICHARD RATTUE Managing Director, Compli-Serve SA
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he Conduct of Financial Institutions Bill (CoFI) embeds the Treating Customers Fairly (TCF) outcomes, which means they will become binding in SA. Far from a passé acronym, fair treatment should be central to a firm’s culture, and products should actually meet the needs of consumers. As part of any TCF initiative, the Regulator expects FSPs to demonstrate that they are integrating TCF into their business through adequate resources, and this includes having appropriate Management FAIR TREATMENT Information (MI) measures in place. SHOULD BE These are to test CENTRAL TO A if TCF is being FIRM’S CULTURE applied and if all six of its outcomes are being achieved. MI is collected during a period of business activity and can come in many forms, such as reviewing customer feedback, or compliance reports. A typical approach to delivery of the TCF consumer outcomes involves developing responsibilities, processes, controls and standards. However, evidence is needed. For example, the statement that a process exists, or a control is in
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far cry from the income the previous owner had enjoyed. A reduction in income of this magnitude will inevitably have a drastic impact on the quality of anyone’s retirement, even if there is additional income from other investments. Another common – and equally unsuccessful – strategy is to ‘transfer’
FOLLOWING A DELIBERATE MERGER PROCESS DELIVERS GOOD RESULTS clients to another independent operator of similar size in return for a percentage of the continuing income stream. The drawback here is that smaller independents seldom have the time to service a number of additional clients, nor the compliance, finance and admin infrastructure to cope with a far larger client base. My experience is that the only reliable way to
turn your independent business into a substantial annuity income stream is to undertake a carefully structured merger with a bigger independent firm. If this process is done correctly, the clients can be effectively transferred over an extended period. During this time, the owner can slowly introduce his or her clients to new advisers or wealth managers, and allow for new relationships to develop. It’s a somewhat delicate process, and we at GCI have actually created a dedicated merger department to handle it. Our experience is that following a deliberate merger process delivers good results. The merged business actually grows because the team can dedicate its time to clients rather than running the business. This growth is good for all parties: clients receive better service and advice and, by becoming part of the GCI team, the advisors themselves earn more revenue. A healthy advisory sector is a national imperative as we attempt to help more people achieve financial stability and, crucially, a secure retirement. Providing a way for independent advisers to reap the rewards of their hard work, and ensure continuity for their clients, makes good sense. Achieving these goals, however, means looking beyond the obvious.
TCF MI – the blended acronym for the best outcome place, does not indicate it is followed all the time. MI should be produced and monitored regularly to avoid problems rather than commissioned in response to problems. In essence, you cannot do TCF if your MI is not up to scratch.
the firm about the consumer outcomes?’ rather than, for example, the performance of the firm. MI on customer satisfaction may be indicative of fairness. However, it does not demonstrate fairness as customers can be satisfied with unfair treatment and dissatisfied with fair treatment.
Good principles to follow • TCF MI should generally focus on how far a firm is delivering the TCF consumer outcomes rather than just measuring processes • TCF MI is more than just MI that indicates the status of a firm’s TCF initiative. TCF relates to the business activities that firms carry out now and MI on those activities can be regarded as TCF MI • Some TCF MI will already exist. TCF should not generally require the creation of substantial amounts of new information; relevant information may already be available in the form of current MI the firm collects.
An example of good vs. bad MI Good MI: Of sales last month, 35% were product x, 25% were product z, 20% were product y and the remainder made up of product w. Bad MI: From the financial ledger, the firm can prove it made 41 sales last month.
In many cases, an expansion of existing MI to include extra analysis may enable firms to demonstrate delivery of TCF outcomes. The difference may be the viewpoint with management considering ‘what is the MI telling
The good MI demonstrates detail in the information, enabling management to identify risks (for example, how sales of each product compare to marketing plans). This will illustrate delivery against TCF Outcome 2; that an appropriate product reached its target audience. The bad MI example does not contain enough detail to enable management to review sale trends by product. MI is not just about different parts of a firm telling each other things. It is about measuring performance and identifying potential risks, enabling management to spot patterns and make informed decisions for the betterment of a business.
