Industry officials are predicting consolidation and sale of IFA firms will increase substantially ov...
Industry officials are predicting consolidation and sale of IFA firms will increase substantially over the next two years if the FSA's depolarisation plans go ahead, however, valuing businesses will become complex because income streams will be difficult to calculate.
Richard Thompson, partner of valuations and strategy for financial services at PricewaterhouseCoopers, says more merger & acquisition activity is now expected in the IFA market over the next two years, but those buying a stake or a firm outright will find it difficult to realistically calculate what firms could potentially earn because only the few firms who are already doing fee-based business can be confident of their earnings potential.
According to industry experts, valuing an IFA firms is already complex because so much is based on conjecture, predicted earnings and public image.
A number of calculation methods normally have to be applied to try and assess what an intermediary's firm is worth, such as price-to-turnover multiples, price-to-consultant/adviser multiples, price-to-renewal income multiples, and price-to-sustainable ongoing earnings multiples.
These gather to generate the valuation potential of a firm, however, many other factors, such as product mix, quality and target of the client base and distribution flexibility and capability, will now have a much stronger place in whether or not an IFA company is worth purchasing.
Chase de Vere Investments, for instance, was sold to Bristol & West for £110m - a multiple of 45 times its historical published profit after tax - whereas Inter Alliance is trading, according to risk management reference guide Barra, at 23 times its forecast profit after tax for 2001.
However, depolarisation looks set to worsen the situation as the value of a firm will now depend on the type of clients they target and the number of products they are prepared to advise, in order to bring in the revenue stream, adds Thompson.
"Only a small proportion of IFAs make any more than £500,00 per year, so there is going to be a much smaller number of IFAs who can run very profitable businesses and have fantastic distribution capabilities. These IFAs will have the strength to target the 25% of the population who have the capacity to pay fees and buy products.
"But this will also affect the value of firms, because the IFA businesses have to balance their books. Firms with the strongest potential will be those which do not limit their product range and focus on clients which offer regular prospects," he continues.
At least in the short-term, earnings potential is expected to drop if polarisation rules are pushed through as the FSA plans because they may have to try and change their client base, and at a time when companies are more likely to consider consolidation.
However, Thompson says it is difficult to predict whether multi-tied agents will be affected less because they will be able to do the same levels of business without altering anything major except their title.
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