A better way for independent advisors to realise the full value of their businesses

Independent financial advisors fail to reap the full benefits of their lifetime achievement by mistiming their exits from their businesses, says Alex Cook, CEO of GCI Wealth. GCI has put together an exit strategy for these professionals that will create an annuity income that better reflects the value of their businesses in terms of income generation.

“Independent advisors who have created excellent businesses with a solid client base and a growing income stream often end up selling those businesses when they want to slow down – but ultimately find themselves in a poorer financial position than they deserve,” he says. “The problem is that they are selling just as their business is reaching its most profitable stage, and they are at the height of their influence.

“There is a better way.”

Cook explains that the majority of advisors fall into the same age bracket as their clients, with both approaching retirement roughly within the same time frame. This is when those clients will be realising provident funds and other retirement savings in order to provide annuity income – in other words, their wealth is at its peak and their need for trustworthy advice is at its most acute.

At the same time, the advisor is at the peak of their ability to attract new business. They will have built up a certain reputation over the years within the industry and their clients’ networks.

“In short, there could not be a worse time to sell – the advisor would simply be forfeiting the additional income from managing a larger pot of investments and from a new client base,” Cook says. “In addition, the capital sum to be realised from the sale of the business would never be sufficient to replace the existing income stream, let alone the augmented one I have described.”

Most independent businesses of this nature sell for around twice the annual recurring income. A business generating R500 000 a year would thus sell for something like R1 million, a capital sum which could generate only in the region of R40 000 a year safely, he argues.

In response to this challenge, GCI Wealth has developed a methodology for incorporating the advisor into the company. This has the immediate advantage of freeing the advisor from the drudgery of running the business, effectively allowing him or her to act as a true business-owner, rather than chief-cook-and-bottle washer. He or she will be able to concentrate servicing his or her clients as they enter a phase of needing the most advice.

Thanks to economies of scale, GCI can perform these back-office tasks at a reduced rate, thereby making the original client book more profitable.

At the same time, the existing client base is gradually introduced to skilled wealth managers from within the GCI Wealth team, ready for the time when the original advisor is ready to retire. These advisors are chosen in collaboration with the original advisor to ensure the best possible fit with his or her clients. This is also good news for the clients because they are effectively being serviced by a team, and are assured of continuity.

In parallel, the original advisor leverages his or her network to acquire new clients which are passed onto these colleagues.

“We set this up so that the original advisor continues to receive an annuity income from the entire client base during retirement,” Cook says. “This annuity will be based on a capital sum that is typically eight to ten times the revenue of the advisor’s book, which would have grown since his or her partnership with GCI. Clearly, this annuity income would be substantially higher than could be generated from the capital generated by an outright sale, which is around twice the revenue.”

“This carefully phased methodology has proved to be a great way of helping independent advisors reap the full advantage from all their hard work and set them up for a financially secure retirement.”