More than a third of advisers are self-employed, which poses serious implications for the value of their business, Brian Spence has warned.
The latest Adviser Views survey carried out by Harrison Spence found that just under half of advisers were employed – 48 per cent – while 36 per cent were self-employed.
Mr Spence said the practice of being self-employed could be self-defeating when advisers come to sell their businesses.
The founding partner of Harrison Spence said: “We are shocked to see the high proportion of advisers that are self-employed - a situation which has serious implications for business owners.
“As the intrinsic value of most advisory businesses is its client base, it must be clear that clients are loyal to the firm, rather than to an individual adviser.
“This relationship – and the revenues linked to it - must be proven to be secure or any acquirer might as well be buying air.
“Even the most thorough due diligence is not a guarantee that acquiring firms will retain even their employed staff. The risk is greatly exacerbated when a purchase involves standalone, self-employed advisers and will be viewed as a recipe for outflows.”
Mr Spence said that in his experience the practice of being self-employed is declining, but not by as much as might be expected.
He said acquiring firms often take the view that a self-employed advice practice is “behind the curve” and that individual advisers will be personally driven, rather than company oriented.
Mr Spence added there may be a solution to the "‘self-employed’ conundrum".
He said: “There are simple restructuring strategies that can be explored especially at the early stages of any negotiations, but the potential problems must be addressed at the outset in an open and honest way.”
Alan Hudson, chief executive of consolidator AFH, said the ownership of any firm his company wanted to buy could affect the price and structure of the deal.
He said: “We would not discriminate by price or otherwise when acquiring a business with self-employed advisers. Clearly we would assess client ownership and restrictive covenants but only in order to decide upon the best deal structure and payment profile.
“Given that deferred consideration is linked to the on-going retention of advisers our view is that vendors are best placed to decide on whether the acquirer’s proposition will be attractive to their advisers or not.”
A Succession spokeswoman said: "Our continued acquisition of member firms allows our planners to decide the employment status that best suits their individual needs.
"What is really important is planners feeling fully part of the acquired business and being comfortable about the proposition. This good cultural fit is not determined by a planner's tax reporting status.
"This sounds more like a trust issue with acquirers using the employment status of its advisers to lock them in. Who would want to work for a company like that?"
Martin Dodd, financial adviser with Wolverhampton-based Midlands Investment Agency, said: "The smaller IFAs do have a potential exit problem in that I don't think it will be easy for them to get as much value out of the business.
"Smaller IFAs are built on a personal relationship so advisers really should be looking at how they transition out of the business and bring someone else in."
