This year we launched the ValidPath Succession Solution for Independent Financial Advisers (IFAs) to be an alternative to consolidation and provide a turn-key solution for IFAs to retire on their terms, access liquidity, continue to support clients in their best interest and transition ownership to the next generation of ‘Successor Managers’.

It is understood that trying to plan your retirement and exit from your business can be difficult, disruptive and time consuming. Alternatively, engaging with an IFA consolidator may be unappealing, especially if you value independence, as platform and product consolidation is core to their business model and the needs of clients and the aspirations of staff is not a priority.

This is why we created the ValidPath Succession Solution for Independent Financial Advisers. We provide the finance and manage the entire process from feasibility to diligence, valuation to transaction, and then financing and all ongoing deal administration.  Whether you are a single-adviser, multi-adviser firm, Appointed Representative or Directly-Authorised, ValidPath can support you with an independent succession solution.

Below we provide more context about options for IFAs wishing to exit and the ValidPath Succession Solution.

The Context

The average age of an IFA is almost 60 and over 50% want to retire over the next 10 years.  This means that over £500 billion of funds under management (FUM) will need a new adviser or financial organisation and hundreds or even thousands of business or client-book transactions will need to occur.

Retiring from a business while continuing to support staff and clients when successfully transitioning control of the business is a real conundrum for many advisers.  Put simply, the sale of an IFA business can be very personal, and its success can often come down to the people involved each which may have a unique perspective, different set of circumstances and alternative motivation. 

There are a number of different options, however, with any option the complexity of a deal and magnitude of the process cannot be underestimated.  While there are various hoops to jump through in order to get a deal done, it’s all about ensuring the process is managed by someone who is aligned in terms of outcome and with a buyer that shares common values and can support the mutual objectives.  So, what are the options for IFAs wishing to exit the market particularly those that value independence and the provision of independent financial advice for their clients.

Selling the business yourself i.e. the Do-It-Yourself (DIY) option

The first option is to try and sell the business yourself either via a trade-sale or internal management buy-out.  This may seem ideal, however, it can be very difficult, disruptive and time consuming. 

The real difficulties start on the financing side, as high-street lenders (and cashflow lenders) have limited or no financing options available for supporting IFA transactions.  The terms and structure of any finance can also be prohibitive with the requirement for a personal guarantee, equity injection and the kinds of debt-servicing challenges which can be created by amortising the finance over a relatively short time period.  It is for these reasons that MBOs can be difficult and why accessing an end-to-end succession solution can be beneficial. 

Secondly, the owner manager may be a very good financial adviser, but not be an ‘M&A’ expert, and this demonstrates the information disadvantage to both identify and negotiate with a sophisticated buyer, who are M&A experts or indeed when a broker is involved and their incentives are not entirely aligned.

Bottom line, it can take a lot of blood, sweat and tears for an adviser to achieve a management buy-out or trade sale and when you are managing the process yourself, there are no guarantees, and it can be disruptive for owners, staff and clients alike.

Industry Brokers

An alternative to doing it yourself is to work with a specialist broker or corporate finance house that can help you through the process.  But caveat emptor!  Transparency is key, and you need to fully understand the rules of engagement and who the corporate adviser is working for.  Do they have both a ‘buy side’ and ‘sell side’ mandate?  Are they taking commission from both sides? Are they working for a consolidator and therefore most likely focused on that long-term relationship and not the one with the seller?  If the answer is “yes”, then there is likely to be a conflict of interest and some blurred lines of who is the “client”.  If they are exclusively a ‘sell side’ adviser working to maximise the outcome for the owner manager, then this can be a positive for all sides of the transaction and buyers and sellers alike.

The IFA Consolidator route

With the expectation that over half of all financial advisers in the UK are set to retire over the next 10 years and that that hundreds of billions of FUM will need to transition to a new adviser or financial organisation, many private equity-backed consolidators are looking to capitalise.

The approach of IFA consolidators by definition is to consolidate revenue, clients and FUM, generally into a single entity that operates in-house portfolios and platforms that increase margins overall and seeks to capture more value.  The business model is predicated on making a significant number of acquisitions each year and creating incremental value from increased earnings multiples and recurring revenue. Not all Consolidators are equal, and some are building large businesses and are a good home for some firms seeking an exit, however, a model that is not fundamentally ‘client-centric’ is increasingly being regarded as a negative by IFAs for a number of reasons that include:

• Consolidators generally seek to migrate FUM to their restricted portfolios and platforms, and this does not necessarily put the needs of customers first or optimise for ‘treating customers fairly’
• The transaction with a consolidator can be highly disruptive to the business philosophy and operations of the advice firm, and it may require staff to be subject to contractual restrictions that limit their ability to create value for themselves

Consolidators by definition seek to consolidate clients, revenues, and assets into their own products, onto their own platforms, and into their own portfolios, and that, by definition, may not be suitable for all clients. Some may say they don’t… but in the end, they do. The best argument for consolidation is to maximise efficiencies and the focus that can be applied to deliver value at each aspect of the financial advice process which can therefore deliver benefits to clients via cost savings and unified offerings. This is an ideal, and one that is maybe unattainable. It also creates an inherent conflict of interest for delivering the best client outcome and remaining truly client focused.

Consolidators can also be though of as a bit of a one-trick pony. They speak with the vendor, they do a transaction, and often the advisers and staff are ‘sold in’ as part of the deal and then locked in contractually. In this way, the next generation don’t have the opportunity to build value for themselves. Furthermore, once you have done the deal, you’re part of the consolidator, then what? For many business owners, this often does not pass the ‘lying straight in bed’ test in that they may not feel entirely proud with the outcome for staff or clients.

Accordingly, the consolidator route is seen by many IFAs as the ‘sell out’ option for clients and staff as it goes against their business philosophy and their approach of providing independent financial advice, and it is often a last resort as there has been no real alternative.

The alternative for IFA exit and succession

When thinking about an alternative for IFAs wishing to exit the market, a question to ponder is ‘do we need a faster horse?’  As context, Henry Ford, a pioneer of the automobile and manufacturing industry and indeed the global consumer economy itself, has been credited with saying when innovating the automobile: ‘If I had asked people what they wanted, they would have said faster horses’. 

There is a lot of capital entering the financial advice sector and implementing the same consolidation strategy.  A business model predicated on consolidating, retaining and growing FUM while locking in clients and advisers with minimal opportunity for the next generation to create value for themselves is why some feel this approach is unsustainable and analogous to a ‘one trick pony’ despite all the PE-backed ‘horses’ entering the race. 

In any case, the question to ask with IFA exit and succession options is do we need a better way of doing the same thing (i.e. a faster horse) or do we need a new approach?  Considering there are reportedly over 30 IFA consolidators operating today with minimal differentiated value propositions, it is clear that we need an entirely new approach and one that is a real alternative to IFA consolidators or DIY options. The alternative should be independent and client-centric and it should fully support the current generation of advisers to retire and the next generation to prosper.  Furthermore, the alternative should be aligned with and preserve what is in the best-interests of clients while also supporting the aspirations of successor managers. 

The ValidPath Succession Solution: the alternative to consolidation or DIY options

When looking the marketplace and what it means to be an independent financial adviser, this lead us to develop, fund and launch the ValidPath Succession Solution for IFAs as an alternative to consolidation and DIY options.  The entire process is managed from feasibility to diligence, valuation to transaction, and then all financing and ongoing deal administration so advisers can focus on what they do best: building their business and servicing their clients. ValidPath enables the firm to remain 100% independent as it is completely platform and provider agnostic, and it enables the vendor to access liquidity and retire on their terms while empowering the next generation of ‘Successor Managers’ to become business owners.

If you would like to learn more about the ValidPath Succession Solution, please contact ValidPath.