OpinionDec 16 2015

FCA has opened up consolidator hornet’s nest

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FCA has opened up consolidator hornet’s nest

The recent interest in the consolidator space by the regulator does seem to have opened a potential hornet’s nest.

Conversations I’ve had question suitability – but in my view there are two suitability areas in question.

The word has been used in the context of the buyer/consolidator “reviewing their suitability processes when acquiring businesses”; but isn’t this where the problems start?

If you have a model that aims for existing assets to be moved to the your own platform/series of funds then of course any suitability work is simply going to mean a check on whether there are sufficient assets (and the right type) to make any purchase viable.

But by default, it does of course mean that the game plan is to have assets moved and this is where the hornets really start to swarm – potentially far more damaging for the clients because each case is different. Commercially, the buyer wants a one size fits all approach, but I’m sure the clients would beg to differ.

As a firm that takes on retiring advisers to assist them with an ongoing retirement income, Nexus IFA finds itself in the consolidator box by default. However, if most cash consolidators stand in one corner of the room, we stand alone in another – the income corner.

We have never had the slightest interest in moving/changing/replacing any existing assets. It’s not that we’re naïve, but more importantly if one does then the ‘new client’ is immediately drawn into a discussion about whether his old adviser was ever really doing the right thing?

How sad that the past adviser, who has done a great job in helping a client build wealth, is then called into question.

I have said for years that the deal on the table for most consolidators is not the spicy part of the deal – it’s getting all those nice new funds onto their own platform/funds. Real money is made on those juicy basis points.

If you are looking to retire or exit, do not sell for cash.

Those are the sorts of deals that invariably pull you towards the consolidators with other intentions. You soon become that past adviser being questioned by your client.

Remember also that cash doesn’t mean what you think it means. Selling recurring income for 3x (typical) will probably mean you receive a third upfront with a further third payment one year hence and one year hence again. You’ve bought a three-year annuity and probably a reducing one at that!

Maintaining income is far more important and indeed lucrative for the retiring adviser. You also get the sleep at night factor – working with a firm on maintaining and indeed increasing income, rather than seeing your hard work of 20-30 years disappearing overnight.

The maths is simple – even the most basic of our ongoing income calculations shows that the value to yourself is increased by 66 per cent when compared to a typical 3x sale. Add in just a very small assumption on growth and the increased value is easily over 100 per cent.

Ian McIver is the development director at Nexus IFA.