Teaming up with another business is an immense step for any adviser who has spent years building a single entity, says Mark Stokes, as he offers tips for other advisers based on his own recent experience
Any adviser looking to consolidate their business into a larger entity is facing a complicated market right now. Who wants to sell to a big provider at a time when the regulator is looking hard at anyone shoehorning clients into vertically integrated propositions for no apparent client benefit?
At the same time, at the smaller end of the food chain, some consolidators are deciding they do not want to buy firms outright but would rather take business into just one area - discretionary fund management, for example.
Before deciding which option to take, a business owner needs to decide whether to consolidate or not. Lawyers and accountants have the partnership route for bringing talent into the business and passing value to departing partners. I am not convinced that giving minority shareholdings to staff works well in a limited company adviser environment, so succession through consolidation can be a good option for business owners - if and when the time is right.
Whenever that time comes will vary from firm to firm, but advisers should certainly think about succession when they get to the point they are between five to 10 years from wanting to retire.
Advisers may also want to take the consolidation option if they find the day-to-day management of their firm is running away from them - whether it be because of business strains relating to regulation, technology, administration, the limits of their investment proposition or other factors.
Consolidation - with the right partner, of course - can bring massive benefits to clients and advisers working within firms. For advisers, consolidation creates national brands with cutting-edge technology that can be ready to compete with robo-advisers, providers going direct or whatever route to market the banks come up with next.
Clients will also benefit from being part of an organisation that can offer a more comprehensive, robust and cost-efficient investment proposition than a small firm ever can.
Having just been through the process of sifting through some of the consolidation options out there, what stands out to me is the importance of ensuring all stakeholders will be better after the change - and of communicating that message to them.
Clients must be better off as a result of the change, but they will only benefit if you partner with an organisation that shares your firm's existing philosophy. Your clients have stuck with you because of your values - you do not want to have to change your approach to them just because your new master tells you to.
Culture is something that comes from the top down. As such, anyone who has majored on the value of independence to their clients should therefore be very wary with tying up with an organisation that will force them to toe the company line when it comes to product selection. Why, for example, would a former life office be able to run an IFA business better than an IFA?
The importance of preserving your workforce's commitment to your firm cannot be underestimated. Hearing news your employer is being bought is unsettling for anyone - a lack of communication can lead to valuable human capital walking out of the door.
Ensuring this does not happen requires two things - speedy communication of the changes that are coming, and the development of a proposition for each member of staff that shows them a clear career development path beyond the earn-out period.
The consolidation due-diligence process is very revealing for all concerned. Every consolidator is going to ask you the basics - your last three years' accounts, the number and age of your clients, assets under management, complaints, any other skeletons in the closet, what capital you have and how you have complied with your regulatory capital adequacy requirements.
Ask them to give you the same information - and, if they struggle, then you will know they are probably not the firm for you.
Advisers looking at suitors obviously need to be wary of organisations that have been upsetting the regulator. They also need to take a good look at how much debt a consolidator has, and how likely it is that it will be able to pay out what it is supposed to when everyone else has been paid off. A consolidator also needs to own its own software and have an investment process that will enhance the adviser firm's ability to serve its clients.
Teaming up with another party is an immense step for any adviser who has spent years building a single entity. As with entering any relationship, it's a question of sticking to your guns and finding the right partner.
Mark Stokes is managing director of Lewis Chambers Independent Financial Advisers
Retired in 2014
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