The director of Kent-based Andrew Oliver & Co said growing regulatory pressure has created a buyer’s market in which sole traders are tempted to “take the money and run”, despite figures showing that multiples offered by acquirers on recurring income have hit a new low.
However, Mr Oliver said that acquisition terms were increasingly “stacked in the buyer’s favour”, as advisers feel pressured to keep servicing their clients for free to maintain the value of the client bank and ensure they receive their full payment.
Research published by the Cass Business School six months after RDR came into force found that 44 per cent of surveyed advisers said a small trader could expect 3.5 to 4x income in 2012, but expected valuations to drop after RDR.
Olly Laughton-Scott, managing partner of London-based IMAS Corporate Finance, agreed recurring income valuations were declining, with businesses no longer seeing high multiples as an “accurate reflection” of the firm’s profitability and advisers remaining in work.
IMAS figures on the numbers of approved persons in the advisory sector suggested a reluctance to leave, with numbers rebounding to 20,526, following a drop to 19,687 immediately after RDR.
Mr Oliver said: “The problem is that the adviser only receives half of the valuation, based on two to three times recurring income, upfront.
“Large wealth managers are tending to offer 25 per cent in 12 months’ time and a further 25 per cent in 24 months time, but the final payment could drop if recurring income has fallen, either because trail has stopped or service has suffered since the acquisition and the client bank has eroded.
“Advisers are then put in a bind because if they wish to keep servicing their clients to protect that recurring income, they have to work for free for up to two years, with the wealth manager taking the ongoing adviser charge.”
Steve Hagues, founder of advisory matchmaking service Retiring IFA, said he was seeing more acquirers undercutting their original offers when making deferred payments two years following the sale. He said: “This is a clever scheme on the part of acquirers because it forces advisers to take less upfront, while still making it quite an easy sale to secure.
“Advisers should watch out for buyers changing the goal posts as major structural changes to the offer, which alter the actual amount that advisers receive occur quite often.”
Brian Spence, partner at London-based advisory acquisition consultancy Harrison Spence Partnership, said advisers were increasingly spurning immediate offers in favour of “strategic partnerships” with acquirers, which see them defer sales in order to boost funds under management.
He said: “Many advisers see that the full value of their business cannot be realised now, but three or five years down the line. The downside is that there is no guarantee that there will be sale at the end of this agreement.”