CompaniesMar 24 2017

Platform offers exiting advisers help with management buyouts

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Platform offers exiting advisers help with management buyouts

Owners of financial advice firms are increasingly looking to sell their businesses to internal management when they retire, as scepticism about the motives of consolidators plagues the industry, according to Nucleus.

Succession planning has become a hot topic over the past few years, largely caused by rising regulatory bills and the surge in providers buying advice businesses. 

The growing number of advisers hitting retirement over the next few years also means more business owners are working out their exit options.

According to a survey of 200 advice firms, conducted by Nucleus, 30 per cent of business owners expect to sell their company internally.

This still outweighs the 40 per cent that would consider selling to another advice firm, but the platform pointed to evidence which suggests advisers are increasingly seeing internal succession planning as the best option.

If you were cynical, you would say the big consolidators are not expecting to be profitable through the advice businesses.Barry Neilson

The internal succession route means advisers are taken on board to run the management of the company, eventually buying out the original owner’s equity in the business.

Speaking to FTAdviser, Barry Neilson, business development director at Nucleus, said the poll of businesses conducted by his platform showed advisers were becoming less keen on selling to major consolidators such as Old Mutual, Succession and Standard Life’s 1825. 

Figures gathered by Nucleus showed that 13 per cent of advice firm would sell their business to a consolidator, and less than 2 per cent would sell to a product provider.

“There is scepticism developing around the success and motivations of the big consolidators," he said.

“If you were cynical, you would say the big consolidators are not expecting to be profitable through the advice businesses, it’s more through the manufacturing margin on their platform and investments.” 

This, he said, created a strong incentive for advisers to shoe-horn clients into those investment funds and platforms that create value.

The business development boss also pointed out that firms are beginning to be concerned that consolidation exit plans probably were not the best route for their staff and clients.

“For a lot of advisers, securing a deal is no longer about getting the best price,” he added.

In September last year, Standard Life’s proposal to purchase Almary Green fell through, with the advice firm claiming the decision to ditch the plan was in the best interest of both staff and clients.

In 2014, Bellpenny was embattled in a dispute with a group of advisers after the consolidator’s acquisition of an advice firm went wrong.

Mr Neilson said succession planning is straightforward, but urged advisers not to leave it until the last minute. 

“Many elements of a robust succession plan come to fruition over time and require long-term resource commitments, so the longer advisers wait, the fewer options they may have.” 

But he admitted it was a “tricky balancing act” between solving leadership issues, addressing the financial interests of the founder, protecting staff, and minimising disruption for clients.

Nucleus has launched a guide which gives advisers information on developing a succession plan, whether that is an internal strategy or an external sale.

The guide, titled ‘Planning your exit’, also outlines what the options and challenges are and how to execute an effective exit.

Rob Stevenson, director of business development firm the Kingmakers Group, said: “Once the sale process starts – particularly if it’s to an external buyer – advisers will want to have as much space and time as possible, as decisions come thick and fast and it can be exhausting.”

Dan Farrow, director of SBN Wealth Management said: “Too many financial advice firms have skeletons in their cupboards, so by maintaining some control of their own business they are keeping those skeletons from coming out.”

He also claimed some IFA firms are running cash cows, meaning the existing owners are unlikely to see much value in selling their firm for three times recurring income, which he said could easily disappear if the client bank isn't managed correctly.

Mr Farrow said some firms could be put off selling their business to consolidators because the owner is expected to work with them for two years even after the deal is complete.

"Basically the owners would be working for the consolidator for next to nothing," he said, adding: "Working for someone when you're used to being the boss is a nightmare."

katherine.denham@ft.com