SUB CATEGORIES Featured Story |  Straight Talk |  The Stage | 

Add value to your financial service practice

14 June 2011 Gareth Stokes
Gareth Stokes, FAnews Online Editor

Gareth Stokes, FAnews Online Editor

The FAIS Act has revolutionised South Africa’s financial services industry. Apart from setting standards for adviser / client interactions the various regulations and codes have forced independent financial services intermediaries to reassess the way they

We’re not tackling the succession planning topic today, but rather mentioning it as one of the ways to build value in a financial services practice. This was the topic covered by Ian Middleton, managing director of Masthead, at the recent Financial Planning Institute (FPI) 2011 Annual Convention. He kicked off his talk by asking the audience what they understood by the term ‘value’. “Value has different meanings to different people,” he said. “But when all is said and done the value or your business today is the compound picture of all the decisions you have made in the past!” He urged financial services intermediaries to realise that value was created over time...

Getting to grips with the value concept

There are many ways to look at value. If you try to define the term from a purely economic angle then you might end up with “a factor of production used to create goods and services…” A company adds value to basket of basic inputs in order to on-sell it at a higher price. In the property world we consider value to be the result of an investment growing over time, thanks to specific strategies. We control the value by making sure the initial investment is in the right area, by maintaining the asset once we’ve acquired it, and by building on to it over time. The goal is to sell the property at a later stage for more than we bought it, after accounting for inflation. “In each case we’re talking about something worth more at the end of a period than at the beginning,” said Middleton.

A practice owner has to be more pragmatic. When you’re talking about a small business the value is what someone is prepared to pay for it! So, ignoring all the theory, if nobody wants to pay the price you’re asking, then your asking price does not reflect your practice’s true value. By forcing you to take a closer look at your business the regulators have actually done you a tremendous favour. Because as a sole proprietor or independent intermediary everything you do to ensure that your practice complies with the Act contributes to its long-term value.

Why create value?

There are three main reasons an IFA seeks to build value in his/her business. The first is out of free choice. “We start doing things like creating a longer term plan and setting out specific objectives, such as creating a succession plan for someone to take over the practice at retirement,” said Middleton. “Your business is your retirement capital, so take control and achieve what you must to create sufficient income.” The second reason relates to pride, the desire to create and leave a legacy. The third arises out of need. But unfortunately you cannot create value out of a fire-sale situation!

If you accept the challenge to build value in your practice there are many things you must consider. Most importantly you must change from a ‘sales’ mindset to a ‘business owner’ mindset, because running your ‘own business’ is about taking responsibility beyond sales only! You will also have to learn to separate your key functions. Remember the sole proprietor or IFA has to wear three hats, as owner, key individual and representative. The problem is most sole proprietors end up spending 85% of their time as a rep, 10% as key individual and 5% as business owner. Middleton suggests a 70:15:15 split as closer to the optimum time allocation!

How to go about creating value

How do you maximise value in your business. On the financial side income is the most important part of the equation. You must consider the exact breakdown of all revenues to your business including up-front commissions, ongoing (trail) commission, renewal commission, fees on assets under management, or for performance etc. The annuity-type revenue has value which can calculated by discounting back to today – but if your business is built around once-off commissions you might struggle! Middleton stressed how important it is to diversify income streams and keep track of them. He said far too many practices couldn’t provide detailed breakdowns of their income streams two months after being requested to do so!

Non-financial aspects that add value include business processes and procedures. For example, you improve the marketability of your business by having a properly implemented client database. You should make sure all of your business processes are documented, including staffing plans and roles etc. You should also take care of risk management and compliance requirements to ensure minimal compliance risk in your practice. There is value in your client book, but often not as much as you think. You cannot expect a potential buyer to compensate you for a bunch of client files with no revenue streams, for example. The real value lies in your practice’s ability to retain customers.

If you can show diversified revenue streams, maintain your client database, keep your brand and reputation intact and prove you can retain clients you will secure maximum value for your practice!

Editor’s thoughts: Determining value can be a tricky business. The challenge in valuing your practice will be in stripping out the sentiment and considering the business from the purchaser’s perspective. And you can be sure annuity income will be top of mind! Have you ever valued your practice and were you satisfied with the outcome? Please add your comment below, or send it to

Comment on this post

Email Address*
Security Check *
Quick Polls


How confident are you that insurers treat policyholders fairly, according to the Treating Customers Fairly (TCF) principles?


Very confident, insurers prioritise fair treatment
Somewhat confident, but improvements are needed
Not confident, there are significant issues with fair treatment
fanews magazine
FAnews June 2024 Get the latest issue of FAnews

This month's headlines

Understanding prescription in claims for professional negligence
Climate change… the single biggest risk facing insurers
Insuring the unpredictable: 2024 global election risks
Financial advice crucial as clients’ Life policy premiums rise sharply
Guiding clients through the Two-Pot Retirement System
There is diversification, and true diversification – choose wisely
Decoding the shift in investment patterns
Subscribe now