The consolidation of Independent Financial Adviser (IFA) practices in South Africa appears to be the dominant theme in the retail financial services sector. Regulatory pressure and economics are encouraging entrepreneurs who have built these businesses to firstly adapt to the forces driving change and secondly to exploit the obvious opportunities that are emerging.
Merger and acquisition activity has never been higher and those practices with scale, efficiency and annuity income are acquiring practices, and client-books, of smaller, less efficient practices that are either seeking natural succession or simply sensing that the new business environment is threatening their sustainability.
Value curiosity
IFA’s are always curious about what their practices are worth and have realized that the recent unprecedented demand for their assets under management and their client bases has driven up the price of their books.
While this article explores the book buying activity currently seen in the market, the views and opinions of the authors have been shaped by the following beliefs:
• IFA practices that have a growing annuity revenue generated by assets under advice have more negotiating power than the asset managers, administrators and product providers;
• IFA practices that rely on front end commission will be acquired, returned to a tied structure, or will fail;
• Outsourcing portfolio construction to a multi-manager or discretionary fund manager is a sound strategy as it reduces risk, improves efficiency and provides scalability;
• Advice led IFA practices will thrive over product led ones;
•IFA’s who focus on an enhanced customer-experience on fewer, more profitable clients, will thrive; and
• As retail asset management fees reduce, advisory fees will increase.
Factors influencing value
The imbedded value of an IFA practice, focused on investment-based business and yielding an annual commission fee, is dependent on a number of internal and external factors.
Internal factors include:
• the size of the book;
• the certainty and “stickiness” of the recurring income often determined by the nature of the investment business (compulsory or voluntary investments);
• the historic and forecasted growth of the practice;
• the dependency of the clients on the owner of the business (especially when an exit is imminent);
• the tenure and quality of the people in the business;
•the profile of the client base and in particular the number of exceptionally large clients that have skewed the turnover;
•the customer-experience delivered - based on a sound advice process that is aligned to the investment solutions recommended and implemented;
•the efficiency of the back office processes and systems;
•the age and effectiveness of technology; and
•the implementation of risk management and compliance procedures.
External factors include:
• the economic environment;
• the perceived impact of regulations on revenue-earning capability;
• the effect that retirement reform has on the retail product opportunity-set;
• the demand for investment advisory services by generation X, Y and millennials; and
• disintermediation by robo-advisors.
The case of Perfect Practice (Pty) Ltd
In the case of Perfect Practice (Pty) Ltd, the focus should be on the nine points below to ensure maximum value when preparing for a sale:
1. Ensure that the leadership become less involved in the day-to-day financial planning role;
2. Establish an effective team that is committed for the long term;
3. Improve the efficiency in the business by outsourcing the full investment process to a Discretionary Fund Manager;
4. Ensure a well-defined advice process is aligned to a suitable investment solution;
5. Increase the total revenue by increasing advice fees (Cat I) - due to a differentiated offering - coupled with the ability to earn additional revenue at fund management level (Cat II);
6. Deliver an exceptional customer experience to the client segment that generates 80% of the revenue;
7. Implement a robo-advice solution for the remaining clients;
8. Accelerate conversion of the life assurance investment products that are cost-heavy and often without an annuity fee, into lisp-based fee-earning products; and
9. Implement an acquisition-strategy that is client centric and free of conflict of interest.
The bottom line
While all of the aforementioned is critical to the valuation of any practice, valuation itself remains a subjective process that is a blend of science, art and the negotiation skills of the buyer and seller.
Ultimately, the factor that will have the largest impact on any IFA business valuation is the party that acquires or invests into the business. Those IFAs who acknowledge that consolidation is the dominant theme will find many willing buyers and sellers, all with a different perspective on valuation. This will determine widely different values, all of which will be explored in the second part of this article.
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